Binding death benefit nominations & SMSFs
When a member of a super fund dies, including of a self managed superannuation fund (SMSF), their benefits need to be dealt with. Those benefits (called “death benefits”) can be paid to a range of persons and do not necessarily get paid to the estate of the member such that their Will may have no relevance to how the death benefits are dealt with. Eligible recipients include the spouse, child, financial dependant of the member or their estate.
Binding death benefit nominations (BDBNs) are a tool used in estate planning designed to give certainty to a member by directing the trustee of a superannuation fund as to the payment of a member’s death benefits after the member’s death. Without a BDBN or other form of binding direction, the trustee has discretion as to where the death benefits are paid amongst eligible recipients.
For most retail and industry superannuation funds, the rule set out in regulation 6.17A of the Superannuation Industry (Supervision) Regulations 1994 (SISR) applies regarding the requirements for a binding death benefit nomination, including:
- That the nomination must be signed and dated by the member in the presence of two independent, adult witnesses (who also sign and date the nomination declaring that it was signed by the member in their presence).
- That after a period of three years has elapsed from the member signing or confirming the nomination, it will cease to have effect.
Despite all of that, it has been widely accepted that regulation 6.17A of the SISR does not apply to SMSFs. This has been accepted in various court decisions and also in SMSFD 2008/3 by the Australian Tax Office (ATO) which provides:
“… the governing rules of an SMSF may permit members to make death benefit nominations that are binding on the trustee, whether or not in circumstances that accord with the rules in regulation 6.17A of the SISR”.
So, does regulation 6.17A of the SISR apply to SMSFs?
The question of whether or not a self managed superannuation fund’s governing rules can circumvent regulation 6.17A of the SISR is a live issue at the moment as we await the High Court of Australia providing its decision in an appeal from the decisions in Hill v Zuda Pty Ltd [2020] WASC 89 (and [2021] WASCA 59).
In Hill v Zuda Pty Ltd, the Supreme Court of Western Australian first heard that the deceased died in 2016, and was survived by his de facto partner, and his only child.
In 2011 – importantly more than three years prior to his death – the deceased signed a document stated to be a binding death benefit nomination in favour of his partner.
Following his death, the deceased’s daughter brought an action in the Supreme Court of Western Australia claiming the nomination had ceased to have effect under regulation 6.17A of the SISR, given more than three years had elapsed since it was signed.
The Supreme Court of Western Australia in the first instance confirmed the position that regulation 6.17A of the SISR does not apply to SMSFs. The Court of Appeal confirmed the same, citing case law from South Australia as the basis for its decision.
There is no specific case law on this point here in Victoria. The High Court appeal for Hill v Zuda Pty Ltd will provide certainty across all jurisdictions in Australia as to application of regulation 6.17A to SMSF. This will directly impact the ability of a member in an SMSF to make a non-lapsing BDBN but may also restrict BDBNs to strict compliance with regulation 6.17A. That could mean the ability to build in rules into SMSF deeds in relation to permitting directions to the trustee around death benefits is curtailed, and result in members who had relied on the law to date having to reconsider their position.
Key takeaway
The decision of the High Court is not expected before March 2022.
If the decision of the Western Australian Court of Appeal is not upheld, this will likely be cause for members of self managed superannuation funds to review their existing nominations and ensure they are compliant, and potentially require a reconsideration of estate planning strategies.
For those members who have lost capacity, there will be additional complications.
How we can help
For expert advice or guidance regarding Estate Planning and self managed superannuation funds, please do not hesitate to contact us.
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