How To Diversify Your SMSF Portfolio With Overseas Property?
How To Diversify Your SMSF Portfolio With Overseas Property?
Investing in property through a self-managed super fund (SMSF) can be a rewarding strategy.
However, for those looking to expand their portfolio, overseas property investment comes with several additional considerations.
As the awareness about SMSF grows, more trustees are exploring options outside Australia.
So we decided to share a blog that breaks down the key aspects of how to diversify your SMSF portfolio with overseas property while staying compliant with superannuation laws.
Understanding The Basics
Before diving into international real estate, it’s crucial to understand that the same rules governing Australian property investments in SMSFs apply to overseas properties.
This means residential properties can’t be transferred from personal ownership to your Self Managed Super Fund, even at market rates. However, commercial properties offer more flexibility, as trustees or related parties can lease them from the SMSF.
Key Steps To Diversify SMSF Portfolio With Overseas Property
Let’s have a quick look at ways to diversity with overseas property:
1) Review Your Trust Deed And Investment Strategy
The first step is to ensure your SMSF’s trust deed allows for international investments. Most trust deeds are flexible, but it’s important to ensure that the deed does not restrict investment in foreign assets.
Moreover, your investment strategy must explicitly allow for property investment, particularly overseas. The strategy should take into account the risks of overseas property, liquidity issues, and how they fit into your overall SMSF portfolio. Trustees need to regularly review and adjust their investment strategy to ensure it aligns with the fund’s objectives and the risks of overseas property.
2) Compliance With Superannuation Laws
SMSFs are subject to strict rules under Australian superannuation law. Purchasing overseas property means trustees must ensure compliance with these laws.
Here’s a breakdown of the major rules:
| Key Consideration | Details |
|---|---|
| Related Party Transactions | Property cannot be acquired from a related party unless it qualifies as Business Real Property (BRP). Residential property does not qualify. |
| Ownership of the Property | The SMSF trustees must hold the legal title of the property unless purchased through a Limited Recourse Borrowing Arrangement (LRBA). |
| In-House Asset Rule | Property must not be treated as an in-house asset (IHA), meaning trustees or related parties cannot stay or use the property unless it’s BRP. |
| No Charge Over Property | The property must not have any existing charges, liens, or mortgages that conflict with SMSF requirements. |
3) Set Up Correct Entity
Few countries recognize Australian SMSFs. You will likely be obligated to set up a local vehicle, like an LLC, from which you make the purchase. Your SMSF would invest in that vehicle. Note, though, this structure must be carefully structured so as not to breach Australian superannuation laws-particularly, the ‘non-geared entity’ rules.
4) Address Legal And Administrative Issues
It is much more complicated to invest in overseas property compared to local property purchases, given the difference in legal systems and different property regulations. For instance, most countries would not recognize the SMSF structure, and it requires the setup of a local entity-a Limited Liability Corporation-to hold title to a property. The setup of an LLC for the purpose of acquiring overseas property has to satisfy non-geared entity rules under Australian superannuation law.
This includes the fact that the income earned should be deposited in a bank account controlled by APRA, and failure to do so may attract some penalties. Another key issue that a trustee would consider is the issues of sovereign risks of holding property abroad-for instance, changes in the regulations of foreign governments, which might adversely affect your investment.
5) Currency Risks And Fluctuations
Large currency fluctuations can significantly highlight the difference in returns from each overseas property investment. Each transaction in SMSF that pertains to an overseas property must be converted to Australian dollars. This can further lead to higher administration costs and, at times, unexpected losses.
While the property’s value may increase, the rate of exchange dampens such gain. The trustees have to take into consideration the currency risks in the framing of their investment strategies and decisions based on whether the risks are worth the probable returns that will come.
6) Understand Local Laws And Regulations
Each country has its own property laws and regulations.
Research the following aspects of your target market:
| Aspect | Considerations |
|---|---|
| Property Ownership | Can foreigners own property directly? |
| Tax Implications | Local property taxes, rental income taxes |
| Legal Requirements | Need for local entity creation (e.g., LLC) |
| Currency Restrictions | Rules on moving money in and out of the country |
7) Dealing with Related Parties
If the overseas property is being acquired from a related party, it must satisfy the Business Real Property (BRP) test to comply with superannuation laws. Only BRP can be leased or used by a related party, and it must be used strictly for business purposes. The market rate rent must be paid for the use of such property.
Residential property, even overseas, cannot be transferred to the SMSF if it is used for personal purposes, even for a short period. Any use of the property that violates these rules could result in the property being classified as an in-house asset (IHA), which would likely breach the SMSFs 5% IHA limit.
Key Things to Consider Before Investment
Before making that commitment to invest in an overseas property, ask yourself:
- Is this investment in line with the long-term objectives of my SMSF?
- Do I understand the local property market and its risks?
- Will my SMSF be able to bear the higher costs and added complexities of an international property investment?
- Do you have a Plan B should things not turn out as expected with regard to investment performance?
- Do you have professional advice on SMSF and international property?
Diversify your SMSF portfolio by adding an overseas property. At KPG Taxation, we assist you through each step of SMSF investment, ensuring full compliance and offering expert advice on acquiring international property.
Whether it be in structuring your investment strategy or even managing all the legal and tax requirements, our team will be there to support you through every step. Let us support you in making appropriate choices that meet your retirement goals. Contact KPG Taxation today and take the next step toward building a diversified and profitable SMSF portfolio.
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