Q: Since we can now use super to purchase real estate, is this also true for property in the United States? Can you provide me with some guidance on how I could find out the process and correct entities to establish in order to do this? Thanks.
A: Before I answer your question, I need to clarify your comment about now being able to use a super fund to purchase real estate. Superannuation funds, including self-managed super funds (SMSF), have always been able to invest in property directly
The big change is that, since September 2007, the federal government now permits SMSFs to use a special type of structure to invest in property which means in certain circumstances, a SMSF doesn’t need the full purchase price (that is, use some borrowed monies) to invest in real estate, or to invest in any other allowable investment.
A SMSF can in invest in all types of property such as indirect property investments (for example, listed property trusts and managed property funds), direct Australian property (residential, commercial, industrial and rural) and property located overseas.
Anyone considering such an investment should seek out professional advice, and if a SMSF is considering a particularly complex strategy, then perhaps a call to the technical experts at the ATO may be in order.
In theory, there are no special rules applicable to direct overseas property but a few issues come to mind, including the following:
- Documentary evidence that an SMSF owns the overseas property, and that the SMSF ownership is recognised in the country where the asset is located.
- Any investment must still be consistent with the sole purpose test, which means, for example, a residential property located in the United States could not be leased to a fund member or relative of a fund member.
- Any investment needs to be considered against the potential risk and return of the investment, and the cash flow needs of the fund. For example, a viable return for such an investment would also need to take into account the exchange rate between the Australian and US dollar, the cost of any flights to inspect the property. You would also need to consider the risk that such overseas trips may be more closely investigated by the ATO as a possible breach of the sole purpose test.
- A fund’s approved auditor may need special documentation to verify the existence and ownership of the asset
You also ask for some information on the process to purchase overseas property and the entities necessary to proceed with such an investment. Our website cannot provide you with a list of overseas property specialists located in Australia, or located overseas. As a preliminary step, I suggest you speak with a financial adviser or an accountant who knows a lot about SMSFs to confirm that your fund is in a position to consider such an investment, and to review the compliance process involved from a SMSF point of view.
For more information about property and super, check out the following SuperGuide articles: