Matthew Burgess, Director at View Legal, shares an overview on SMSFs and non-lapsing BDBNs in light of the recent decision in Hill v Zuda Pty Ltd [2021] WASCA 50. In this article, he examines the history on SMSFs and BDBNs, r 6.17A(7) of the SISR, and s 59 of the SISA.
Context
The decision in Hill v Zuda Pty Ltd [2021] WASCA 59 further reinforces the often cited mantra in relation to all trusts – and particularly self managed superannuation funds (SMSFs) – to: Read the Deed.
In this case the Federal Court confirmed that s 59 of the Superannuation Industry (Supervision) Act 1993 and regulation 6.17A of the Superannuation Industry (Supervision) Regulations 1994 (SISR) do not apply to SMSFs.
This meant, in this case, that the failure of the binding death benefit nomination (BDBN) to comply with regulation 6.17A (in that it was made more than 3 years before the death of the member and was not witnessed by 2 witnesses) was irrelevant to whether it was binding on the trustee of the SMSF.
History
For many years there was a level of debate about whether SMSFs were permitted to offer BDBNs and if so, whether any such BDBN would automatically lapse after 3 years.
A similar level of confusion existed in relation to the form of a nomination, for example if witnesses are needed, how many should there be.
The ATO ultimately answered the question succinctly in SMSF Determination 2008/3, where they confirmed that s 59 of the Superannuation Industry (Supervision) Act 1993 and regulation 6.17A of the Superannuation Industry (Supervision) Regulations 1994 (SISR) do not apply to SMSFs.
This means that 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.
Read the Deed
According to regulation 6.17A(7) of SISR, a BDBN regulated by that provision lapses:
- at the end of the period of 3 years after the day it was first signed, or last confirmed or amended, by the member; or
- if the governing rules of the fund fix a shorter period — at the end of that period.
Despite the above comments however, the effectiveness of a purported BDBN will depend entirely on its compliance with the trust deed of the SMSF. Thus, as 1 critical example, a significant number of trust deed providers (perhaps a vast majority) will mandate that any BDBN must be signed, and dated, by the member in the presence of 2 witnesses, each of whom has turned 18 and neither of whom is a person mentioned in the BDBN. Requirements analogous to the valid signing of a will.
Non-SMSFs
Similarly, the position in relation to non lapsing BDBNs for non-SMSFs (eg retail, industry, corporate and small APRA funds) has also been the subject of long standing debate.
The approach that appears generally accepted for non-SMSFs and BDBNs can be summarised as follows:
- “standard” BDBNs are lapsing and will comply with s 59(1A) of SISA. This means they will also be regulated by regulation 6.17A (7) SISR (as set out above);
- it is possible however for non-lapsing BDBNs to be created under s 59(1)(a) of SISA. This section is not caught by regulation 6.17A (7) SISR and therefore any BDBN made pursuant to this section does not automatically lapse. Arguably the key aspects of ensuring the non-lapsing BDBN is in fact valid are that the trust deed for the fund must permit the approach and the trustee of the fund must consent to the nomination and the form it can be made in (for example, including the number of witnesses);
- in contrast, standard lapsing BDBNs do not require the consent of the trustee.
Section 59
For ease of reference the provisions of s 59 of SISA are set out in full below.
Section 59 SISA – Exercise of discretion by person other than trustee
(1) Subject to subsection (1A), the governing rules of a superannuation entity other than a self managed superannuation fund must not permit a discretion under those rules that is exercisable by a person other than a trustee of the entity to be exercised unless:
(a) those rules require the consent of the trustee, or the trustees, of the entity to the exercise of that discretion; or
(b) if the entity is an employer-sponsored fund:
(i) the exercise of the discretion relates to the contributions that an employer-sponsor will, after the discretion is exercised, be required or permitted to pay to the fund; or
(ii) the exercise of the discretion relates solely to a decision to terminate the fund; or
(iii) the circumstances in which the discretion was exercised are covered by regulations made for the purposes of this subparagraph.
(1A) Despite subsection (1), the governing rules of a superannuation entity may, subject to a trustee of the entity complying with any conditions contained in the regulations, permit a member of the entity, by notice given to a trustee of the entity in accordance with the regulations, to require a trustee of the entity to provide any benefits in respect of the member on or after the member’s death to a person or persons mentioned in the notice, being the legal personal representative or a dependant or dependants of the member.
(2) If the governing rules of a superannuation entity are inconsistent with subsection (1), that subsection prevails, and the governing rules are, to the extent of the inconsistency, invalid.
Matthew Burgess co-founded View in 2014, having been a partner and lawyer at one of Australia’s leading independent law firms for over 17 years.
Matthew’s passion is helping clients to successfully achieve their goals.
Matthew specialises in tax, estate and succession planning, providing strategic advice to business owners and high net worth individuals, and has been recognised in the ‘Best Lawyers’ list since 2014 in relation to trusts and estates and in ‘Doyles’ either personally or as part of View since 2015 in relation to taxation. In 2017 he was also nominated as Tax Partner of the Year (Lawyers Weekly).
While a significant focus of Matthew’s practice is on small to medium enterprises and private business owners, the growth in this area in recent years has meant that he also regularly works on transactions with listed companies.
In part leveraging off the skills he has developed working in the SME market space, Matthew has been the catalyst in developing a number of innovative legal products for advisers and their clients.
As an author, Matthew is widely recognised as an expert in his field, who constantly creates bespoke revenue related strategies for the growth, management and protection of wealth.
Matthew is regularly published in Australia’s leading monthly tax journal, The Tax Institute’s Taxation in Australia (11 articles since 2012) and the leading weekly tax journal, Thomson Reuters’ Weekly Tax Bulletin (20 articles since 2012).
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