Retiring to the South of France, or that favourite beach hideaway is a dream many professionals share.
Given the constant pressure of maintaining the standards that society places of all those who call themselves "Professionals", it is often that picture of retirement that is the light at the end of the tunnel.
The dream of retirement, a beautiful property and the desire for financial security leads many to ask the question. Can my SMSF invest in overseas real estate ?
A strong Australian dollar couple with financial stress in Europe, United States, Japan and England following the Global Financial Crisis has lead many SMSF trustees to contemplate the merits of acquiring overseas based rental properties.
The Superannuation Fund legislation and regulations do not specifically prohibit SMSF's from investing in overseas based properties. But before jumping on a plane to purchase that dream property, trustees must consider the investments rules and restrictions that may apply.
There are no special rules within the Superannuation Legislation which provide specific guidance on the types of property that trustees are entitles to purchase. That being said there are certain practical and commercial considerations that need to be considered.
So 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 no doubt that the recent Global Financial Crisis has created financial pain for many, however for the astute investor it may also be a once in a lifetime opportunity to acquired highly desired assets. But when your SMSF is involved in the process understand the importance of doing it the right way.
If you have any doubts, David Darrant of the Poole Group is only a phone call away 5437 9900.