Should your SMSF invest in US property?

September 2015 

If you're considering investing in US property via your SMSF, there are some hidden traps you need to consider to avoid being double-taxed.

One of the most common questions from clients with a Self Managed Superannuation Fund (SMSF) is this: "Can I buy property?" This is quickly followed by: "Can I buy property in the United States?"

Buying property in the US can present some genuine returns, however it is not without its traps. 

Australian SMSFs can purchase property in the US if it is correctly structured (you will need good legal and structuring advice).  The question is, should you invest your retirement savings in a market where you have limited visibility or knowledge? 

The rules of buying property for your SMSF

SMSFs provide investment flexibility for those that understand the rules.  They can also be a significant liability if you get it wrong.  

In general, there are a few key things to check before purchasing a property:
  • The SMSF's investment strategy and trust deed must allow for the purchase you are contemplating.  
  • You can't purchase property from a related party (for example a relative or spouse) unless the property qualifies as business property (business real property to use the technical term).
  • When you are exploring the viability of the property purchase, be aware that the SMSF cannot lease the property to a related party (again, unless it is business real property). For example, you can't have your kids living in the property even if they pay market rate rent.
  • Your SMSF needs to have the cashflow and liquidity to purchase the property. 
  • Factor in transaction costs such as stamp duty into your planning.
In-house asset rules

For example, usually an SMSF does not acquire US property directly but instead would structure the property investment through a Limited Liability Company (LLC), where the SMSF (and any associates) own and control the majority of the 'membership' (shares). 

The main advantages for such a structure is to obtain asset protection and a bank account.

There are, however, issues around LLCs that you need to consider. As the actual investment the fund holds is the interest in the company (with the company owning the property), there are in-house asset issues to factor in. 

One issue is that the company bank account needs to be with an entity that is classified as an Authorised Deposit Institution (ADI) - not all foreign banks are.  Fail this criterion and the investment held by the SMSF may become an in-house asset and require the fund to sell the asset.

Potential double taxation

Net rental income of a non-resident alien is regarded as effectively connected to a US trade or business and therefore subject to US tax. The US would appear to treat an Australian super fund as a grantor trust, which is broadly a trust under which the controller retains certain powers and benefits but no distributions of current profit. This means the US rental income is attributed to the individual members of the super fund. 

However, the super fund is the taxpayer is Australia and this causes an economic double taxation.

Need further guidance on the buying US property and its associated risks? Contact our team on 02 9957 4033 to discuss how it will benefit or impact your business. 

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This article is provided for information purposes only and correct at the time of publication. It should not be used in place of advice from your accountant. Please contact us on 02 9957 4033 to discuss your specific circumstances.

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