SMSF and investing in the US property market

The attractiveness of investing in the US with the current low property prices is obvious. What steps do you need to take to invest in your SMSF and not fall foul of the SIS Act and the ATO?

A US property must be purchased using a US resident entity and we suggest either a Limited Liability Corporation (LLC) or a C-Corporation.  A LLC is similar to a Pty Ltd Company, where owners have limited personal liability but it provides the flexibility of a partnership by allowing the taxation to be passed on to the members of the LLC. A C-Corporation, on the other hand is comparable with our Pty Ltd Company and taxed on its income separately to its shareholders.

Regardless of which entity you chose, we must undertake the following steps to ensure the SMSF stays within the rules of the SIS Act and remains a complying fund. If the SMSF falls foul of the rules and regulations the ATO will deem the Fund to be non-complying and the SMSF will be subject to tax at 48.5%, being the highest marginal rate, instead of the concessional rate of 15%.

COMPLIANCE CHECKLIST

1. Ensure the purchase is consistent with the investment strategy of the SMSF;
2. Meet the sole purpose test. In other words, it is important that as the SMSF Trustee (or Director of the Trustee Company), you believe that by acquiring the property, you are meeting the core purpose of the Fund being to provide retirement benefits to members;
3. Provide the fund’s auditor documentation to verify the existence and the ownership of the asset;
4. Consider the potential risk and return of the investment and the cashflow needs of the Fund.
   For example, consider the exchange rate between the Australian and the US dollar, the US agency costs, the cost of flights to inspect the property etc.
5. Consider asset protection by ensuring the other assets within the SMSF are not exposed or at risk. Ensure your structure before the purchase is robust.
6. Structure the deal so the In house Asset Rules are not contravened by:

(a) Not using the property as security for the purchase in the name of the LLC or C-Corp;
(b) Ensuring the bank account in which the rental income is deposited or expenses are paid is in the name of the SMSF and not the LLC or C-Corp;
(c) Not renting the property to anyone that is related to the trustee or members of the SMSF.

BORROWING TO FINANCE THE DEAL

A SMSF can purchase the property either by an outright purchase (no borrowings), or by using borrowings via a bare trust. If you choose the finance the deal there are a few more considerations to be aware of:

1. Structure the deal using a Bare Trust, but be careful when pulling the deal together not to trigger the In House Assets rules as described above. This is tricky, so please get some professional advice before signing the contract;
2. Hold at least 35% of the property value in the SMSF. A bank will only approve a 65% LVR on this type of deal;
3. Allow for the additional costs of financing through the SMSF. The interest rates on the borrowing usually run at +2% of normal variable rates because of the inherent risk and the set up costs can be anywhere from $8,000 to $15,000 depending on the complexity of the purchase;
4. When renovating a property under finance, the funding for the renovation needs to come from the SMSF existing assets or members as additional contributions.

Being a highly attractive investment opportunity, it is highly recommended that before you proceed that you obtain professional legal and accounting advice to ensure that the SMSF does not contravene the SIS Act and fall foul of the ATO.

For more information please contact Azure Group.

This article is intended to provide general information only, and is not to be regarded as legal or financial advice. The content is based on current facts, circumstances, and assumptions, and its accuracy may be affected by changes in laws, regulations, or market conditions.  Accordingly, neither Azure Group Pty Ltd nor any member or employee of Azure Group or associated entities, undertakes responsibility arising in any way whatsoever to any persons in respect of this alert or any error or omissions herein, arising through negligence or otherwise howsoever caused. Readers are advised to consult with qualified professionals for advice specific to their situation before taking any action.