SMSF - BINDING DEATH BENEFIT NOMINATIONS

Are They Bound by SIS Legislation?

What are SMSFs, and what do the SIS Act and SIS Regulations require?

 

As per s 17A of the Superannuation Industry (Supervision) Act 1993 (‘SIS Act’), self-managed super funds (SMSFs) are those with fewer than 5 members, where each member is a trustee of the fund or the members form a corporation and they are the directors of this corporation. As there are more than a million Australians who are members of SMSFs, the question of whether superannuation regulations apply to them is a crucial one for many Australians.

The superannuation industry is governed by two key pieces of legislation –

  • the SIS Act; and
  • the Superannuation Industry (Supervision) Regulations 1994 (‘SIS Regulations’).

This legislation, in part, concerns binding death benefit nominations (BDBNs) in that they determine the manner and form they should take, which beneficiaries are entitled to be nominated, and the expiry period of BDBNs.

NB: BDBNs are a written instruction from the member to the trustee of the superannuation fund as to how the lump sum balance of the fund remaining at the member’s date of death should be distributed. If valid, this overrides any disposition of that superannuation in the member’s last will and testament.

 

In general, BDBNs:

  • must be in writing,
  • signed and affirmed by 2 adult witnesses,
  • must be renewed every 3 years; and
  • only “dependants” as defined and legal personal representatives may be nominated as beneficiaries under them.

Are these requirements binding on an SMSF?

In general, no…

The 2020 Western Australian case of Hill v Zuda Pty Ltd [2020] WASC 89 found that s 59 of the SIS Act and regulation 6.17A of the Regulations are not binding on SMSF BDBNs. In reaching his decision, Master Sanderson relied on several key cases from the Queensland Supreme Court.

In the Queensland decision of Munro v Munro [2015] QSC 61, Justice Mullins used the (non-binding) ruling of the Commissioner of Taxation in 2008. In this ruling, the Commissioner outlined why, in his view, the SIS Act and Regulations would not apply. Justice Mullins decided that because s 59(1) of the SIS Act explicitly excluded SMSFs, and therefore the rules which flowed from that section, section 59(1A) and regulation 6.17A of the SIS Regulations also did not apply since they set out the conditions for applying s 59(1) with regard to lump sum payouts following the death of a fund member; i.e. “death benefits”.

This approach has been applied in the cases of Donovan v Donovan  [2009] QSC 26, Re Narumon Pty Ltd [2018] QSC 185 and Cantor Management Services v Booth [2017] SASCFC 122.

Therefore, the requirements placed on an SMSF BDBN will flow from the trust deed itself and not the SIS Act or Regulations. As such, SMSF BDBNs do not, by default, require renewal every 3 years, nor the writing and witnessing requirements imposed by the SIS Act and Regulations.

But take care, the wording of the trust deed may import these requirements…

Example 1: Donovan v Donovan

 

In Donovan, Ronald and his wife, Helga, were trustees (via a corporation of which they were directors) and members of an SMSF. After Ronald’s death, a dispute arose between Helga and Lynda (his daughter from a previous marriage). His BDBN left everything to his “legal personal representative” (Lynda). Lynda, therefore, wanted to uphold his BDBN, while Helga sought to invalidate it. 

The trust deed of their SMSF required a member to simply designate a dependant or legal personal representative as their beneficiary in writing and give notice to the trustees. Also, it stated that valid BDBNs must be made in the form to ‘satisfy the statutory requirements’. The deed defined statutory requirements broadly.

Since Ronald’s deed did not satisfy regulation 6.17A of the SIS Regulations (it was simply a written notice, and not witnessed), Helga sought to argue that the Regulations did apply to this BDBN and therefore its failure to comply rendered it an invalid BDBN. Justice Fryberg concluded that while the Regulations do not ordinarily apply to SMSF BDBNs; in this case, the trust deed imported those requirements via its general wording of requiring the BDBN to comply with ‘statutory requirements’. As such the trust deed incorporated those form requirements and the BDBN was held to be a non-binding BDBN.  In other words the trustee of the fund has a discretion whether or not to follow it.

Example 2: Munro v Munro

Mr Munro was a trustee and member of an SMSF with his wife Mrs Munro. He also had two daughters from an earlier marriage. All three were named as executors in his will. As in Donovan, Mr Munro’s BDBN did not follow regulation 6.17A.

Justice Mullins followed the principle in the Donovan decision, i.e. that an SMSF BDBN was not required to follow these regulations. He then looked to see if the SMSF trust deed had imported them. The trust deed required that the BDBN should conform with ‘relevant requirements to gain tax concessions’. His honour said that the SMSF trust deed did not incorporate the SIS Act or Regulations since it was clearly aimed at maximising tax concessions and was not worded generally.

However, Mr Munro’s BDBN left everything to his ‘estate’. The trust fund deed required that the nominated beneficiary be a spouse, child, financial dependant or executor of his estate (similar to regulation 6.22 of the SIS Regulations). Because of this, the trust deed had effectively incorporated regulation 6.22 of the SIS Regulations and therefore it was invalid for Mr Munro to nominate his ‘estate’ as his beneficiary. The BDBN was non-binding. In other words Mr Munro should have used the wording “my legal personal representative” or “the executor/s of my estate” in his BDBN.

Conclusion

Therefore, a properly worded BDBN under an SMSF trust deed will allow a member to avoid the form requirements under the SIS Act, as well as the 3-year expiry date. This provides flexibility to members of SMSFs to design their trust deeds in a way that allows them to nominate their beneficiaries without having to comply with the strict requirements of the SIS Act and Regulations, in particular regulation 6.17A. However, lawyers, accountants and other financial advisers need to take particular notice of the wording of such trust deeds to ensure that the member’s BDBN complies with the trust deed and does not render the BDBN invalid or non-binding, and therefore exposing a member’s wishes to being set aside or merely at the discretion of the super fund trustee.

 

This publication contains general information and does not constitute legal advice. It is intended to provide a summary of the subject matter and is not intended to be comprehensive. You should seek specialist legal advice on the subject matter before acting.