Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 127

SMSFs investing in overseas real estate

A question I am often asked is whether SMSFs can invest in overseas real estate?

Under the superannuation law, whether SMSFs invest in properties situated in Australia or overseas, the legal requirements are the same. For example:

Sole Purpose Test: The property investment must be made solely to provide retirement benefits for members and cannot be for private use or for use while holidaying in the foreign country.

Trust Deed and investment strategy: The property acquisition must be allowed by the SMSF’s Trust Deed and be consistent with the SMSF’s investment strategy.

Arm’s-length transactions: The purchase price for the property and rental income from the property must be at the market rate.

Related-party acquisitions: The property should not be acquired from members or related parties of the members unless it meets the legal definition of a ‘business real property’.

In-house asset rules: The purchase of the property and leasing of the property must comply with the in-house asset rules under the law.

Borrowing: If borrowing is required, it must be a legally complying Limited Recourse Borrowing Arrangement (LRBA).

Understand the ownership laws in the foreign country

If the laws and customs of the foreign country allow a foreign investor (ie the SMSF) to invest directly in real properties (without a local entity intermediary), then the SMSF will not have a problem as long as it satisfies all the requirements of the superannuation law. The SMSF trustee will need to maintain documentary evidence as proof that the SMSF owns the overseas property and that the ownership is recognised in the foreign country.

In many countries, however, a foreign entity cannot hold a property directly. Therefore, an SMSF may need to establish a local entity which buys the property for the SMSF, with the SMSF owning all the interest in the local entity. The local entity may also need to be a taxpayer in that foreign country. As a result, indirect investment in overseas real estate can be a problem for SMSFs.

I have encountered transactions where the SMSF trustees needed to establish a Limited Liability Company (LLC) in the foreign country with its own bank account. The SMSF then invested in the shares of the LLC which then used the capital to finance the acquisition of the overseas property. The LLC is used as a flow-through vehicle for tax purposes. Any tax paid by the LLC may be eligible to be claimed back as a credit in Australia under the double tax agreement.

Watch the ‘in-house asset’ test

The problem with this requirement is that the investment by the SMSF in the LLC is treated as an ‘in-house asset’ under the superannuation law. The law only allows an SMSF to invest in a related entity and for the related entity not to be treated as an in-house asset, if the related entity is a non-geared entity. One of the requirements of a non-geared entity is that it does not have a loan with another entity unless the loan is a deposit with an authorised deposit taking institution which falls within the auspices of the Banking Act 1999. Unfortunately, overseas bank accounts do not comply with our banking legislation and therefore the SMSF investment in the LLC would be considered an in-house asset. This means the SMSF is restricted to an investment in the LLC of 5% of the total value of its assets.

An SMSF trustee would also need to consider the risks associated with fluctuations in foreign currency and exchange rates. All superannuation assets need to be converted into Australian dollars for financial statements. The dollar variations could affect other calculations in SMSFs such as member balances and minimum pension payment requirements.

If an SMSF needs to enter into a LRBA to acquire an overseas property, it may have difficulties finding a lender, as the lender would be lending money to the SMSF to acquire shares in the LLC. Most banks will not lend if the security on the LRBA is overseas shares. If a foreign bank provides the loan to an SMSF, the documentation on the loan may not be consistent with the LRBA requirements under the superannuation law and the nature of the loan may, therefore, not be limited recourse.

Overseas investments can be complex and also come with higher risk due to the laws and customs of the foreign country. SMSF trustees need to consider overseas investments very carefully.

 

Monica Rule is an SMSF specialist and author, see www.monicarule.com.au. This article is general education only and readers should seek specialist advice before taking action.

 

RELATED ARTICLES

Navigating SMSF property compliance

The mechanics of the $3 million super tax must be fixed

Valuable super contribution changes are now law

banner

Most viewed in recent weeks

Raising the GST to 15%

Treasurer Jim Chalmers aims to tackle tax reform but faces challenges. Previous reviews struggled due to political sensitivities, highlighting the need for comprehensive and politically feasible change.

7 examples of how the new super tax will be calculated

You've no doubt heard about Division 296. These case studies show what people at various levels above the $3 million threshold might need to pay the ATO, with examples ranging from under $500 to more than $35,000.

The revolt against Baby Boomer wealth

The $3m super tax could be put down to the Government needing money and the wealthy being easy targets. It’s deeper than that though and this looks at the factors behind the policy and why more taxes on the wealthy are coming.

Meg on SMSFs: Withdrawing assets ahead of the $3m super tax

The super tax has caused an almighty scuffle, but for SMSFs impacted by the proposed tax, a big question remains: what should they do now? Here are ideas for those wanting to withdraw money from their SMSF.

Are franking credits hurting Australia’s economy?

Business investment and per capita GDP have languished over the past decade and the Labor Government is conducting inquiries to find out why. Franking credits should be part of the debate about our stalling economy.

Here's what should replace the $3 million super tax

With Div. 296 looming, is there a smarter way to tax superannuation? This proposes a fairer, income-linked alternative that respects compounding, ensures predictability, and avoids taxing unrealised capital gains. 

Latest Updates

Investment strategies

9 winning investment strategies

There are many ways to invest in stocks, but some strategies are more effective than others. Here are nine tried and tested investment approaches - choosing one of these can improve your chances of reaching your financial goals.

Planning

Super, death and taxes – time to rethink your estate plans?

The $3 million super tax has many rethinking their super strategies, especially issues of wealth transfer on death. This reviews the taxes on super benefits and offers investment alternatives.

Taxation

Raising the GST to 15%

Treasurer Jim Chalmers aims to tackle tax reform but faces challenges. Previous reviews struggled due to political sensitivities, highlighting the need for comprehensive and politically feasible change.

Shares

The megatrend you simply cannot ignore

Markets are reassessing the impact of AI, with initial euphoria giving way to growing scepticism. This shift is evident in the performance of ASX-listed AI beneficiaries, creating potential opportunities.

Gold

Is this the real reason for gold's surge past $3,000?

Concerns over the US fiscal position seem to have overtaken geopolitics and interest rates as the biggest tailwind for gold prices. Even if a debt crisis doesn't seem likely, there could be more support on the way.

Exchange traded products

Is now the time to invest in small caps?

With further RBA rate cuts forecast this year, small caps may be key beneficiaries. There are quality small cap LICs and LITs trading at discounts to net assets, offering opportunities for astute investors.

Strategy

Welcome to the grey war

Forget speculation about a future US-China conflict - it's already happening. Through cyberwarfare and propaganda, China is waging a grey war designed to weaken democracies without firing a single shot.

Sponsors

Alliances

© 2025 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.