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SMSF investment in US property carries risks
The strength of the Australian dollar and low US house prices has encouraged offshore investment by self-managed superannuation funds (SMFSs), but Super Concepts has warned trustees that US taxation laws do not recognise SMSFs as an investment structure.
Super Concepts technical services specialist Nicholas Ali said despite having the ability to borrow money to make an investment overseas, SMSFs and promoters are "overlooking" important taxation issues.
According to Super Concepts, US companies pay tax on a graduated scale, which means the actual level of tax paid may be higher than the Australian company rate of 30 per cent.
"SMSFs will have no entitlement to any credit on the tax the company has paid in the US, which can lead to an ineffective tax investment structure," Super Concepts stated.
Ali said one way to manage US taxation laws is to purchase property through a limited liability corporation.
"The SMSF would buy shares in the corporation and provide the finance to enable the purchase of the property," Ali said.
"As long as there is no gearing in the corporation and the corporation does not invest in any other assets (apart from maintaining a bank account), then the superannuation rules are being complied with.
"However, finding an arm's length lender willing to enter into a limited recourse loan for overseas real estate might be problematic," he said.
Along with the logistics of managing the investment overseas, Super Concepts said the maintenance of proper kept records was also a challenge for Australian SMFSs.
If mortgage foreclosure registration has not been properly recorded, it may be unclear who actually owns the property. Furthermore, sale proceeds may also be liable for withholding tax where the property owner is not a US resident, Super Concepts stated.
Ali said before trustees contemplate using an SMSF to purchase property in the US, they should seek specialist taxation advice from advisers who specialise in US taxation law.
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