Hello Jan
Thanks for an interesting question.
There are no SIS Act/SIS Regulation prohibitions in relation to an SMSF undertaking such an investment.
Given that the investment is in an overseas jurisdiction there are a range of tax/accounting/audit issues. Whilst not a full list, consideration will need to be given to:
- Is there a need for the translation of contracts/titles and other key documents into English
- What challenges are posed in relation to testing and valuation
- Foreign exchange translation being correctly dealt with
- What is the actual asset being acquired? From the description it is a 30-year lease over real property and not the actual property itself?
- Is there an acquisition of an interest in a legal entity that owns the lease or is the acquisition of the lease itself?
- It is assumed that at the end of 30 years the lease has expired and the investor’s asset has ceased to exist?
The amortisation matter goes to the net carrying value of the investment. Whilst appreciating that it is assumed to have a nil value at the end of the 30-year period, it is also assumed it is capable of being sold at any time up until the end of the 30-year period. If that is the case, the issue is then what is the appropriate market value of the lease at each 30 June/year end.
For example, if the rental returns on a yearly basis are very strong, it could be the value is not declining on a strict straight-line basis. The market value at year end might even be increasing in some years if the actual returns are genuinely “multiple times the initial investment”.
However, from a tax perspective the lease is a CGT asset and it is not until its expiry that CGT event C2 would occur. At which point a capital loss may be claimable assuming the lease has no residual value at expiry. Meaning there is not a capital loss/tax deduction on a yearly basis in relation to amortisation (which may occur from a financial accounting perspective).
Is the cash received during the construction phase a return of capital invested or a return on capital? It is sounding to me like a return on capital. If that is the case, it is assessable on revenue account.
It would be advisable to have some form of financial accounts or summary provided on a yearly basis, for the purpose of ascertaining the yearly return/income and the valuation of the asset.
Best regards
The Auditors Institute