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Annie Dawson
Senior SMSF Technical Specialist
There are plenty of complexities and potential challenges to be navigated when investing overseas. Trustees will certainly want to make sure they “look before they leap”.
An SMSF trustee has all the choice (and all the responsibility) to decide what to invest in. When determining the fund’s asset allocation (how much to invest into cash, property, equities etc), trustees will need to work out to what extent they invest in Australia versus internationally. And whilst it’s common for SMSFs to invest internationally via ETFs and managed funds, other types of assets such as listed & unlisted shares, foreign currency and direct properties may also be permitted.
Does investing overseas add complexity? Sure can. There are additional risks to weigh up and trustees will want to do their homework upfront to check they are going to satisfy regulatory requirements.
Some risks will be common to all types of foreign investments – take currency risk for example. Changes in exchange rates will impact the value of the investment as well as any income received. Specialist advice may be needed to determine whether it’s a good idea to hedge a currency.
It will be important, particularly with direct investments, for trustees to understand the laws of the country they propose to invest in. There may be restrictions around who can own assets and how these investments must be held. In some countries, for example, a trust structure is not recognised. In these situations, legal advice may be required to determine whether ownership by the fund will be able to be established and asserted.
Some countries may permit foreign investment (in say direct property) but require ownership to be via a foreign corporation controlled by the investor. This may be a deal breaker for an SMSF. Its investment (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.
For instance, a 13.22C entity is only permitted to have a bank account with an authorised deposit-taking institution (a status given to banks operating within Australia). If a foreign bank account is maintained in the company, (say 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 (and likely well above the permitted 5% limit).
Another complication is that the SMSF trustee is usually going to be in Australia. Will they need to engage others to attend to matters on their behalf in the foreign country? For example, if the fund invests in foreign property, will they have a reliable property manager that is bilingual (if relevant), able to find tenants, negotiate rent & arrange local tradespeople to attend to repairs etc.
Trustees also need to be aware that they may be subject to additional taxes and levies, along with additional reporting (such as filing a tax return in the foreign country). When it comes to the fund’s year end reporting in Australia, the fund’s administrator will need to undertake additional work such as converting foreign income to AUD, determine a fund’s entitlement to foreign tax credits and accounting for foreign gains and losses. Documentation not written in the English language will need to be translated by an approved translator and records kept in Australia.
Trustees should also verify whether suitable evidence can be obtained to demonstrate the investment complies with the super laws. For example, 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? 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.
SMSFs certainly enjoy a lot of freedom when it comes to determining the fund’s investment strategy. Investing in foreign investments will introduce complexities and it’s important that trustees do their homework before investing overseas.
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