Two ways SMSFs can invest overseas — and they’re very different
There’s a big difference between indirect and direct SMSF overseas investment, and it matters.
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Indirect investment through ETFs or managed funds
This is relatively straightforward – your fund buys units in a product that’s typically listed on the ASX, priced in Australian dollars, and managed by a fund manager who handles all the underlying complexity. From a compliance perspective, it’s not much more complicated than buying Australian shares. -
Direct investment is a different story
If you’re thinking about buying a property in Bali, shares in a private company based in the UK, or some other asset held outside Australia, you’re taking on a whole new layer of complexity — legal, tax, administrative and practical. It’s certainly possible, but you need to go into it with your eyes wide open.
Direct SMSF overseas investment can come with added risk
Here are some of the extra risks and rules to take into consideration:
Currency risk
Exchange rate movements can impact the value of an international investment along with any income earned. It may be worth seeking specialist advice to decide if it’s a good idea to hedge a currency (this will help to make sure an investment doesn’t decrease in value due to changes in exchange rates, but it may also mean it won’t increase in value either).
Possible legal implications
If you are considering direct investments, such as property, it’s important to understand the laws of the country where you’re looking to invest. There may be restrictions around who can own assets or how these investments must be held. For example, some countries don’t have “trusts” like we do – where assets are legally owned by one entity (in this case, the trustee) but they own it for someone else (in a super fund this is the members). That can make it impossible for title of the asset to be recorded in the name of the trustee for the fund. In some countries, the solution is for the property to be owned by a foreign company controlled by the investor. But this isn’t always possible in an SMSF because there are strict rules around what this company can do.
Logistics – distance and language barriers
Another complication is that you’re usually going to be in Australia. If you invest overseas, you may need local help managing the asset. For example, if your SMSF invested in foreign property, will you be able to engage a reliable property manager that is bilingual (if relevant), able to find tenants, negotiate rent & arrange local tradespeople to attend to repairs?
Extra taxes, reporting and compliance
Investing overseas could also mean your fund pays foreign taxes and levies and has additional reporting (such as filing a tax return in a foreign country). There could also be extra costs for preparing the fund’s year end reporting in Australia.
As an SMSF trustee you need to be able to show the fund owns its assets and what the market value of the assets are. When investing overseas, it may be harder to obtain the information and documents needed.
For example, if the fund owns foreign property, can you undertake a title search in the foreign country to confirm the fund owns the property? And will be it possible to get valuations or data about comparable sales? Documentation may need to be translated if not written in English. It’s not enough that you can read the document – it’s important your accountant and auditor can too.
And of course, you would need to be able to show that any SMSF investment is consistent with the sole purpose test. This means the sole purpose of the foreign investment must be to provide retirement benefits only. You and your relatives would not, for example, be able to use or rent the fund’s overseas residential property.
SMSFs certainly enjoy a lot of freedom when deciding on the fund’s investment strategy but investing overseas adds extra complexities. It’s important you do your homework before investing overseas.
