The real estate market in Australia is soaring to greater heights; that’s why many Australian investors are setting their sights on overseas properties to explore opportunities that are friendlier to their pockets. Self-managed super fund (SMSF) investors may find the real estate arena on international grounds more appealing for their investment portfolio, but it’s important to consider the logistics and other practicalities that come with making international investments.
Aside from the complexities of international real estate deals, laws and policies vary from place to place; this is why investors must familiarise themselves with these aspects before investing in offshore properties and businesses.
Australia has signed double tax agreements with most countries. These agreements provide exemptions for residents of those countries to earn income in Australia without paying Australian income tax. With that in mind, here are critical factors you should consider when buying overseas property:
Tip #1: Do Your Research on Tax Laws in Australia and the Country Where You're Planning to Purchase the Commercial Property
SMSF investors planning to buy a property overseas should note that tax laws apply to all Australian residents and their assets, regardless of whether they are based in Australia or abroad.
Moreover, you may be subject to several foreign taxes even if the foreign assets are not in your name. With all the complexities of tax laws, it helps to consult with investment management firms as they are experts in managing international investments, especially since they have the know-how and resources to help investors capitalise on opportunities in the global market.
In Australia, investment management firms are classified as Approved Deposit Funds (ADFs), deposit-taking institutions seeking to generate income. An ADF’s investments are meant to be held for a period of no less than one year to ensure that their investors are not subjected to any immediate tax liabilities.
Tip #2: Don't Forget to Check Your Trust Deed as an SMSF Investor
Many SMSF investors who invest in properties overseas are unaware that their assets are subject to a trust deed. As a trustee, you will be appointed by a licensed super fund to manage the assets held in your SMSF.
Your trust deed sets the rules for your SMSF, including the asset classes you can invest in. This is why it is essential to familiarise yourself with your trust deed to determine whether you can invest in international property. Some trust deeds may impose obligations to pay tax on a wider range of your foreign assets than other types of investments.
As a self-managed super fund investor, you are expected to recognise the tax liabilities you need to pay on top of your annual contribution limit. You should also be mindful of any trust deed you have signed with your licensed super fund, which may impose an obligation to pay tax on a wider range of your foreign assets than other types of investments.
The rules on commercial properties for SMSF trustees may be different too, so it's a good idea to contact your licensed super fund to further educate you on these matters and ensure you get approval from the ATO to take part in international real estate deals.
Tip #3: Consider the Foreign Exchange Risks Involved with Investing in Overseas Property
The Australian dollar is one of the strongest currencies globally, but many factors can affect its exchange rate. A weak Australian dollar can significantly increase the cost of buying property overseas and the cost of borrowing funds.
As a foreign property investor, you also need to pay attention to the ongoing costs of maintaining your overseas property. Maintenance fees, utilities, and travel costs for visits to the property can significantly increase the overall cost of ownership.
Tip #4: Be Sure to Check the Legal Compliance Involved in Buying Commercial Property Overseas as an SMSF Trustee
In some countries, a property is owned by the title holder, but the property’s rights are held by the government or a trust. In these cases, you should be aware of any land regulations to ensure that you don’t violate any laws.
You will also need to consider whether the proposed property is compliant with Australian laws. This can be difficult to determine since legal compliance can be subject to interpretation. There are various laws in place to ensure that private and public property owners meet certain levels of safety, be it for sanitation, structural integrity, and more.
These laws may also vary depending on the type of property you buy and the country you are purchasing it in. There are also financial considerations to consider when planning to buy property overseas. An SMSF trustee needs to ensure that they have the reliable financial security to meet their obligations and liabilities and the ability to finance the project back in Australia.
The Bottom Line: What You Should Consider When Purchasing Commercial Property Overseas as an SMSF Investor
Overseas real estate is more affordable now because the Australian dollar is stronger than it has been in many years, making an international property more attractive on a cost basis and generating a high capital growth in the meantime. However, there are plenty of compliances, tax laws, logistics, and other practical factors you need to understand to ensure you're putting your money where it's worth without running into legal complications down the line.
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