SMSFs investing in property overseas must use specific internal structures within the fund for it to remain compliant and not breach the in-house asset rules, a technical expert has noted.
Heffron senior SMSF technical specialist Annie Dawson said the ability of fund trustees to select their own investments extended to property in another country, but they should be aware of restrictions on who can own assets and how they can be held by non-citizens.
“Some countries may permit foreign investment, but require ownership to be via a foreign corporation controlled by the investor. This may be a deal-breaker for an SMSF,” Dawson said in an update on the administrator’s website.
“Its investment, [that is] shares in a controlled company, will be an in-house asset of the fund unless the foreign company qualifies as a non-geared company or 13.22C entity, and this may be difficult to do.”
A key issue flagged by Dawson was that a 13.22C entity can only hold a bank account with an authorised deposit-taking institution, which is a status that applies to banks operating in Australia but not those in other countries.
“If a foreign bank account is maintained in the company to collect rent and pay expenses in the local currency, it will not qualify as a 13.22C entity and the fund’s investment will be an in-house asset,” she said.
She added that even where a fund was able to hold property and meet the in-house assets test, it would face ongoing challenges in providing suitable evidence as to the value of the investment each year.
“If the fund invests in direct property, does the country maintain official records such as a land registry where a title search can be undertaken to evidence ownership and no charges against the fund’s asset?” she said.
“Will evidence of comparable sales be accessible on online databases or will trustees be able to engage a local valuer or real estate agent to provide evidence of the investment’s market value?
“And, of course, trustees will need to ensure the investment is consistent with the sole purpose test. This means the sole purpose of the foreign investment must be to provide retirement benefits only.
“Members and their related parties would not, for example, be able to rent the fund’s overseas residential property if they happened to be passing through.”
