A superannuation specialist has cautioned against SMSFs investing in property located overseas as these investments often introduce substantial additional risk into a fund and the trustee may have to manage a dual set of contradicting laws and regulations.
“An SMSF isn’t specifically prohibited from purchasing a foreign property, but I personally don’t think it’s a good idea for a range of reasons,” BT Financial Group technical consultant Matt Manning told attendees of a webinar held by his firm today.
“[For example], we’ve got the standard risks and considerations [of complying with Australian law and regulations], so they can’t go on holidays and stay there or anything like that, but there’s also many other [considerations], including sovereign, statutory and currency risk.
“There’s always going to be the risk of the government of any country confiscating assets without compensation or [another entity] may do that and the government either won’t or can’t enforce property rights. It’s a subjective judgment and in some countries there’s a likelihood those [actions] would be more common than others.
“As far as statutory risk, with any jurisdiction, including our own, it’s possible that the legislation could change and may have an adverse impact on the investment, [for example], the tax system in the country that the property is located is changed.”
Manning pointed out the investment may not actually be permitted within the laws of the country the property is located in as some jurisdictions place restrictions on foreign investment and how the assets can be held.
He noted all SMSF assets must be clearly identified as being owned by the SMSF within Australia, a requirement that may clash with the laws of overseas jurisdictions.
“In Australia, we know no matter what the state, we allow an SMSF to own a property, but in other countries, do they actually have that as an ownership type? Because if you can only put the individual’s names down, then it’s going to be hard to justify that’s it owned by the SMSF.”
Beyond these restrictions, he noted the investment may not be approved by an auditor as many countries do not have a publicly accessible database for property ownership data.
“How does the SMSF prove it has not created a charge or encumbrance over the property? With great difficulty I imagine because, as I understand, it’s an auditing requirement to ensure that the asset hasn’t been charged, or if it has, it’s under the complying limited recourse borrowing arrangement,” he said.
“There’s a real concern if the auditor can’t guarantee that you haven’t put an encumbrance on this property, then how are they going to complete the audit report without issuing a contravention?”
