SMSFs and overseas property: what to check first

Nothing in Australian superannuation law says a self managed super fund cannot hold an offshore asset. That is the easy part, and it is where most conversations start and stop. The harder part is that an unlisted hotel or resort interest sits at the awkward end of almost every SMSF rule at once, and the trustee has to satisfy all of them at the same time, every year, for as long as the fund holds it.

None of what follows is a reason to say no. It is the ground an adviser has to cover before the answer means anything.

1. Start with the deed and the investment strategy

The trust deed has to permit the investment, and a surprising number of older deeds are narrower than trustees assume. The investment strategy then has to actually contemplate it. Regulation 4.09 of the SIS Regulations requires the strategy to address diversification, liquidity, the fund's ability to discharge its liabilities, and risk against the members' circumstances.

A strategy that lists "property" and nothing else will not carry a single illiquid offshore holding through an audit. Update it first, document why the allocation is appropriate for these members at this stage of life, and keep the reasoning on file. Doing this after the fact reads exactly like doing it after the fact.

2. Establish what is actually being acquired

The fund cannot hold what nobody can describe. Ask precisely what the SMSF would end up owning. A registered interest in real property, units in a unit trust, shares in a company, a contractual right to a share of income, or something else again. Each of these is treated differently under the SIS Act, and the difference decides which of the rules below even apply.

Foreign land ownership rules also matter here, because they shape the structure. Get the legal chain written down, from the member's fund to the building, with every entity in between named. If that chain cannot be produced on request, stop there.

3. The sole purpose test, and the trap inside it

Section 62 of the SIS Act requires the fund to be maintained solely to provide retirement benefits. A resort suite creates an obvious temptation, and this is where these arrangements most often come undone.

No member stays there. No relative stays there. Not at a discount, not at full market rate, not for one night in the off season. A booking made by a related party is enough for the Commissioner to argue that a collateral benefit exists, and the consequences of losing complying status are severe enough that no holiday is worth it. If the offer includes any owner-stay entitlement, however it is dressed up, that entitlement is a problem for a super fund even where it is perfectly fine for an individual investor.

4. Related parties and the in-house asset rules

If the structure involves a unit trust or company, work out whether the fund or its members could control it, or whether the fund would be acquiring the interest from a related party. Section 66 restricts acquisitions from related parties, and the in-house asset rules in Part 8 cap investments in related entities at 5% of fund assets.

Ordinary arm's length investments alongside unrelated third parties usually sit outside all of this. The point is to confirm it rather than assume it, and to re-confirm if the ownership of the structure changes later.

5. Everything at arm's length

Section 109 requires dealings to be on arm's length terms. The non-arm's length income provisions then sit behind it, and income from a non-arm's length dealing can be taxed at the top marginal rate rather than the concessional rate.

In practice that means the acquisition price, the management fees, any related services and any exit arrangement all need to be on commercial terms, with evidence retained at the time rather than reconstructed later. Where a related party of the member is involved anywhere in the chain, this becomes the central question rather than a formality.

6. Annual valuation, which is where the real difficulty is

Regulation 8.02B requires fund assets to be reported at market value each year, and the auditor has to be satisfied with the evidence behind that value. For a listed security this takes a minute. For an unlisted interest in a single offshore building it is genuinely hard.

Ask early, and in writing, who will provide the annual valuation, what methodology they use, whether they are independent of the promoter, and whether the trustee will receive it in time to meet lodgement. An arrangement that cannot answer this is going to cause an audit qualification every year, and eventually a contravention report. This one question filters out more offers than any other.

7. Liquidity, especially in pension phase

A fund paying an account based pension has to meet minimum drawdowns in cash, every year, whatever the market is doing. A member approaching retirement will need liquidity on a known timetable. Where a death benefit has to be paid, it may be needed on no timetable at all.

Model the fund's cash position with the holding in place and the illiquid portion assumed unsellable. If the fund can still meet its obligations from other assets, the allocation is sized correctly. If it cannot, it is not, and no amount of enthusiasm about the project changes that arithmetic.

8. Fund residency, foreign tax and reporting

The fund must remain an Australian superannuation fund for tax purposes, which is a question about where the fund is established, where central management and control sits, and the active member test. Holding a foreign asset does not disturb this on its own, though trustees who spend long periods overseas should look at it carefully.

Separately, work out how income and gains will be characterised, what foreign tax is withheld at source, whether the relevant double tax agreement applies, and whether foreign income tax offsets are available to the fund. Also confirm the trustee will receive statements in a form the fund's accountant can actually use. Offshore structures are often perfectly legitimate and still report on a timetable and in a format that make Australian compliance painful.

9. Borrowing, if it comes up

An SMSF can only borrow through a limited recourse borrowing arrangement under section 67A, with a single acquirable asset held in a separate holding trust. Whether a foreign interest can be structured to satisfy that, and whether any Australian lender will fund it, are two separate questions. In most cases the practical answer to the second one is no, so plan on the acquisition being unleveraged.

10. The Indonesian fact pattern, specifically

Most general guidance on SMSFs and overseas property stops at the rules. It is worth going one step further, because Bali projects have a recognisable shape and that shape interacts with three of the rules above in a way advisers do not see coming.

Foreigners cannot hold Indonesian freehold title. A project therefore reaches an Australian investor through a long lease, a registered right of use, or shares in an Indonesian company, sometimes with an Australian trust layered on top. Three consequences follow.

• A company shareholding is where the in-house asset rule can bite. If the fund holds shares in the entity that owns the property, ask who else holds shares and whether the fund and its members could together control it. A widely held structure alongside unrelated investors is a different answer from a small one, and the answer can change later without anybody telling the trustee.
• A rental pool with owner-use nights is where the sole purpose test bites. Many hospitality offers include an entitlement to stay a set number of nights a year. For an individual buyer that is a feature. For a super fund it is a problem, and it does not stop being a problem because the member pays the going rate or gives the nights away to a friend. Ask whether the entitlement can be waived in writing at acquisition.
• A lease term makes the valuation move on its own. A leasehold interest is a wasting asset. Even if the resort trades exactly as it did last year, a shorter remaining term is worth less, so the annual market value the auditor needs is a moving figure. A valuation methodology that ignores the run-down of the term will not hold up.

None of this is a reason for a fund to say no. It is the reason a generic checklist is not enough on its own, and it is what to ask the promoter about on the first call rather than the fourth.

What a clean file looks like

• Deed reviewed and, where needed, updated before the investment.
• Investment strategy updated, dated, and reasoned against these members.
• The full ownership chain documented, entity by entity.
• Written confirmation that no owner-stay or personal-use entitlement attaches.
• Evidence of arm's length terms, retained at the time of the transaction.
• A named, independent annual valuation source with a stated methodology.
• A cash flow projection showing the fund meets its obligations without this asset.
• Advice from the fund's accountant on the foreign tax treatment.
• The auditor consulted before the transaction rather than after it.
• Indonesian legal advice on the structure, where that is where the asset sits.

Where I fit

I am not the fund's adviser, auditor or accountant, and I do not take that role. What I can do is supply the material this checklist demands, which is the ownership chain, the operator information, the structuring documents and a straight answer on personal use, so that the adviser can form their own view with something solid in front of them. There is no cost to the practice.

If a client has raised a Bali project and you would rather ask than research it from scratch, a short call is the fastest way through.