Overseas investment property via SMSF without borrowing - Questions

Skyblues

Skyblues

Member
Hi,
Just trying to understand the rules and opportunities with regards to overseas investment properties via SMSF...

With small amounts in the SMSF, I have been reviewing the opportunity to utilise the SMSF for a right-off purchase of an investment unit in Europe, instead of going through all the hoops to be able to borrow money into SMSF for an investment property in Oz.

They would only give you the door of a house for $50k in Oz, and we would have to borrow for say an $350k investment property. But a $50k overseas investment unit, as I calculated right now, has the potential to produce at least AUD$4k annual rental income in our country/city of choice. This is obviously already a better investment return than a cash account in Oz, and that we would own that unit right away, and have the potential to start producing passive income right away.

Contrary to the belief of most people, it is actually possible for $50k to buy a good unit in some of the local cities in Europe - in a non-English speaking country. I speak the local language as well, we have local knowledge, local contacts to help manage the property, so this would not be a blind investment...

If we were to look into investing in real estate in Oz, would have to establis a bare trust for this, as hiho advised, going through all sort of lending procedures and possibly costs that amount to $5k-10k.

So we are evaluating the option to use the SMSF for an overseas investment unit(s) - keeping the unit occupied with good tenants etc won't be very problematic for us, we know that we can rent it out to families because of the city's characteristics and the demographic profile of the region/country.

Will greatly appreciate your time in regards to 3 questions about this:

1-) Can an SMSF company with corporate trustees do a right-off overseas property purchase as long as the trust deed and documentation were setup correctly? Even though there won't be a need to borrow/loan, would we still have to establish a bare trust for this too? What should be taken into account, what we should be careful about while planning this?

2) Is this very problematic in practice in terms of compliance? Could you please point out the most preferred practical approach in terms of making the right off purchase...

For example, will we need to establish a bank account in the name of the SMSF Company or corporate trustees or would even an individual bank account in the name of a trustee suffice? Not sure how that $50k transfer from Oz to overseas and into the bank account of the seller will need to happen...So, in short, who/what can do what in terms of the transactions between the SMSF bank account in Oz and a potential SMSF bank account overseas? (this is not gonna be easy to establish, if required) and the bank account of the seller...

3-) What if, say, you buy the overseas investment unit in 2-3 years...Continue living & working in Oz for another 15 years and are around 50-55 years of age (so, not qualified yet, it is 60 for us)...Then what happens if you stop being an Australian resident for tax purposes by basically starting to live in another country all year long? What happens to SMSF, should how you manage the overseas property on behalf of the SMSF change?...Of course, I dont mean to move into the investment unit itself, but to that country...

When we stop being a resident for tax purposes, we wouldnt have to continue doing individual income tax returns but will we still have to do SMSF tax return/SMSF audits etc, and what are the implications of not being an Australian resident for tax purposes on overseas investments/property...

In short, how does the leash around the neck of your SMSF and overseas investments (real estate or otherwise) tighten or loosen when you stop being a resident for tax purposes..


Thanks, much appreciated.
 
That is an excellent question, I too would really appreciate it if someone could shed some light on this. Have been looking at some commercial property in Asia which if I have done my numbers right, should be around $100k and positively geared.
 
Skyblues - great idea. Good to get some input here, but you'll have to discuss it with a solicitor (which you probably know already). :)
 
willrocks said:
A very quick google revealed this doc: http://www.superguide.com.au/diy-superannuation/smsfs-and-overseas-property
Click to expand...


Thanks but all 'very quick googles' usually tend to produce generic information unfortunately...I had already found and archived that article...She doesnt really answer the question re the process/entities etc and just write about the sole purpose test, which is very generic.

Would be great to hear from the members of the forum whom I truly respect, re the specific aspects of my questions.
 
Skyblues said:
willrocks said:
A very quick google revealed this doc: http://www.superguide.com.au/diy-superannuation/smsfs-and-overseas-property
Click to expand...

Thanks but all 'very quick googles' usually tend to produce generic information unfortunately...I had already found and archived that article...She doesnt really answer the question re the process/entities etc and just write about the sole purpose test, which is very generic.

Would be great to hear from the members of the forum whom I truly respect, re the specific aspects of my questions.
Click to expand...

You can do it but I would question if you have gone to the trouble to set up an SMSF why you would want to invest in something where you are going to have to rely on someone else managing your investment.

One of the major reasons that so many choose to switch to an SMSF has to do with controling your investments. I guess because I own and run my own businesses that is just me. I like to be the captain of my ship good fortune.

When investing in overseas property you are faced with different tax laws, in Europe tenants often have greater rights, then there is the currency risks, legal liability especially in the states, dealing with agents who may not take an interest in your property the same way you would.

We looked at investing super money into New Zealand real estate because no capital gains, no land tax, etc, etc but again the distance and trying to manage it from here was too much a negative for us.

Kind Regards
non recourse
 
Answers to your three questions.

1) You don't need a bare trust unless you're borrowing.

2) You'd need to engage a trusted conveyer/solicitor in the country where you're purchasing. They can guide you through the intricacies of the purchase, including opening accounts etc.

3) An Australian citizen who moves overseas permanently cannot access super benefits unless they satisfy a condition of release.

DYOD
 
I found some point lets look at some of these issues:

Investment Strategy - The trustees of the SMSF must be able to articulate why the particular property purchase is consistent with the investment strategy of the fund. When doing so that should be able to demonstrate an understanding of how the risks, diversification, return and liquidity issues associated with the fund are impacted by the investment in question.

Sole Purpose Test - The trustees of the SMSF must be able to show that the investment is being made solely for the purpose of providing retirement benefits for members, Investing overseas raises a number of issues regarding sole purpose especially if for instance members are investing in a villa in the south of France for there future retirement.

Related party acquisitions - The property should not be acquired from a related party unless it is business real property. I have had associates in the past who have wished to acquire a French farmhouse from a family member, before proceeding I asked them to look closely at the definition of a related party prior to considering whether to proceed or not.

In-house asset rules - Accountants and lawyers like to complicate things and this is the same the world over. This may be an issue if the SMSF trustees are not purchasing the property directing but via a company and or trust. In the USA it is common for property to be acquired by a "LLC" a Limited Liability Company, such an action may be fine in the USA but breach the In-house asset rules in Australian
No Borrowing or charges - Generally a superfund is prohibited from borrowing and from placing a charge over assets unless it is exempt under section S.67a and 67b. Obtaining finance from an overseas bank familiar with these specific regulations can be very problematic.

Arms Length Transactions - Any purchase and subsequent rental of property must be on an arm's length basis. Arms length is not defined in the act, but a useful test is to ask yourself whether a prudent person, acting with due regard to his or her own commercial interests, would have agreed to the terms if this arrangement.

Travel costs reimbursed by SMSF - The trustees have an obligation to manage the investments of the superfund in a way that maximises the retirement benefits of members. With that in mind there is a compelling argument that supports s the notion that SMSFs can pay or reimburse the travel cost that trustees incur whilst inspecting overseas property. However it would be naive not to recognise the ATO's reluctance to accept these arrangements, As such it is highly recommend that the trustees apply a number of test before paying or reimbursing costs. These tests hinge around, what the trust deed allows, Is the expense necessarily incurred, is the expense reasonable, is the cost whole incurred in carrying out the trustees duties to name a few. The rule here is seek advise before proceeding.
 
There is also the question of how an Auditor based in Australia can be satisfied all the rules regarding Super can be satisfied for a significant asset when it is located overseas and it sounds like many documents will not be in English. How do they check everything is correct?

Are you going to fall foul somehow of foreign income rules of taxation or lose a margin on profit through currency conversion?

Consider too that the more complex the situation, the more complex the reporting and the more complex the ATO will make things for you .

Seek professional advice. But it is an area worthy of investing if you are confident of a return.
 
As you can see i'm fresh on this forum and happy to admit I am a SMSF Registered Auditor and SMSF Administrator (Redwood Advisory) sorry if that breaks the rules in naming my firm. Enjoying the topics, especially as many of my clients invest in Gold Bullion and I have the fun task of auditing similar funds too.

Without answering each question, overseas investment in SMSF is extremely popular and not only in foreclosed houses in the US but in developing countries also. If you are purchasing a property outright, its much easier, and renting in a developing country (say Turkey), you would want to have a good rental agent over there, to ensure the property is maintain effectively.

Believe you mentioned residency, many of my clients are miners and and overseas for significant periods of time and can become a non resident important to seek advice and put a power of attorney in place.

Seanbraun2 raised some excellent points, you need to ensure your structure is right to meet you personal circumstances, i.e corporate trustee is preferred for my clients and ensure your trust deed and investment strategy is up to date.

A tip to all you SMSF members going through the 30 June 2013 audit, your investment strategy needs to include consideration of 'life insurance' for members, this is a new requirement. Without it you are at risk of failing audit.

Any specialised audit questions i'm happy to help!
 
redwood - firstly welcome. As to your question about disclosure - I personally don't think there is any issue with you disclosing your firm's business.

To be completely honest I think you should include a mention of this in your signature when you post. If you are going to comment on a forum where you have a business interest then it is only fair forum members are aware of this to avoid any perception of a conflict of interest.

But in saying all that it is good to have someone from the biz prepared to post in this sub forum.
 
boyracer said:
redwood - firstly welcome. As to your question about disclosure - I personally don't think there is any issue with you disclosing your firm's business.

To be completely honest I think you should include a mention of this in your signature when you post. If you are going to comment on a forum where you have a business interest then it is only fair forum members are aware of this to avoid any perception of a conflict of interest.

But in saying all that it is good to have someone from the biz prepared to post in this sub forum.
Click to expand...

Hi Boyracer,

Thanks for the note, my username gives it away, i'm from Redwood Advisory (www.redwoodadvisory.com.au), give myself/ our firm a bit of a plug, we do SMSF set up, admin and compliance plus we are registered auditors. We have a heap of clients with precious metals in their SMSF so a client recommended this forum to comment etc. given our specialty in precious metals.

Re signature, I tried upon joining however i'll give it another shot. Look forward to chatting with other members about precious metals, property, admin providers, audits and other stuff.

I'll try to be as independent as possible. I will also say that I deal with ASIC regularly and have a fair idea of where they are heading.

Of course, i'm happy to hear about anyones experiences with SMSF and any existing clients of Redwood Advisory, be free to feedback here and we will take it on board.

We are independent, not backed by a corporate and nor do we want to be, I will in my posts outline benefits/ weaknesses of providers and please take my posts constructively given I mentioned we are a independent firm - we take on the big boys who are spending millions on the SMSF market.

Happy to answer audit questions, as we are ASIC registered auditors and many auditors have different views on auditing physical gold as an example.

Again, anyone has an issue with the disclosure in this post let me know.

Happy posting

Ivan Filipovic
Redwood Advisory (username Redwood)
 
Regarding a signature I believe it may not be an option in the 1st 2x weeks of forum membership as a 'New Member'
 
You must log in or register to reply here.
Back
Top