Superannuation in Australia is governed by the Superannuation Industry (Supervision) Act 1993 (Cth) (SIS Act) and Income Tax Assessment Act 1997 (Cth) (ITAA 97).

Superannuation is a tax-effective way to save for your future. The SIS Act provides for the formation of a Self-Managed Superannuation Fund (SMSF). These funds are subject to strict compliance requirements. However, SMSFs also allow members flexibility and control over the choice and management of their investments.

The potential benefits of having an SMSF cannot be achieved without sound planning and administration. This includes having in place a valid Binding Death Benefit Nomination (BDBN). This is often overlooked by fund members resulting in unintended and undesired consequences after the member’s death.

What is a Binding Death Benefit Nomination?

A BDBN is a direction to the trustee of your superannuation fund to pay your death benefits to an eligible beneficiary or beneficiaries, or to your estate. A valid BDBN overrides the decision of the trustee so that benefits are paid in accordance with your wishes rather than at the trustee’s discretion.

Superannuation does not automatically form part of your estate so without a BDBN, the beneficiaries would otherwise be decided by the trustee under the terms of the fund and relevant legislation.

Fortunately, most funds allow you to nominate your intended beneficiaries provided the nomination complies with the legislation and provisions of the trust deed.

The SMSF trust deed can include provisions allowing members to make BDBNs. Many trust deeds already have these provisions in place, however if not, your lawyer can assist to formally amend the trust deed to allow for a BDBN.

A BDBN can also be tailored to take account of various contingencies. They can have cascading provisions which provide for an alternate beneficiary if one or more beneficiary predeceases the fund member, identify a specific asset for a beneficiary and, where permitted, nominate how benefits are to be paid such as by lump sum or pension.

Who can I nominate?

Death benefits can only be paid to a dependant of the fund member or to the member’s legal personal representative (the executor or administrator of the estate) to form part of the assets of the fund member’s deceased estate.

A ‘dependant’ includes a spouse (including a de facto partner of same or opposite sex), a person with whom the fund member had an interdependency relationship, a child under the age of 18, or a person who is financially dependent on the member. A child includes a biological child, adopted child, step child and ex-nuptial child.

A ‘dependant’ under the ITAA 97 (unlike the SIS Act) does not include financially independent adult children. This means that although adult children can be paid from the fund, they may be taxed higher than other beneficiaries. The choice of beneficiary is therefore an important consideration when making a BDBN. The overall estate must be considered – sound financial and legal advice can make a big difference in the tax consequences to the person inheriting.

What is a valid BDBN?

The SIS Act and Regulations provide rules for making BDBNs which generally include that:

• members are given sufficient information to understand their rights to require the trustee to provide the benefit;
• trustees must pay the benefit in accordance with the nomination provided those nominated are a member’s dependant/s or legal personal representative;
• the rules of the fund must allow members to make a nomination;
• the nomination must clearly indicate the portion of benefit payable to each beneficiary;
• the nomination must be in writing, signed and dated by the member and witnessed by two adults (who are not beneficiaries) who must declare that the nomination was signed in their presence;
• a member giving notice may amend, revoke or affirm the notice after it is made;
• the nomination lapses after three years.

It is generally accepted that not all of these rules apply to SMSFs, although there has been uncertainty surrounding this issue for some time. Accordingly, when preparing a BDBN for a SMSF it is necessary to ensure that:

• the trust deed has provisions allowing members to make BDBNs;
• the BDBN is prepared in conformity with the trust deed and complies with the relevant SIS Act and Regulations.

Your lawyer can review the trust deed to ensure that the appropriate provisions are included and that the proposed BDBN will be effective.

Non-SMSF BDBN can last for a maximum of three years before the need to be renewed. Subject to the SMSF’s governing rules, a SMSF BDBN can be non-lapsing. However, it is highly recommended that all BDBNs be reviewed at least annually and in the event of a significant change in personal or financial circumstances (of both the member and anticipated beneficiaries).

Case studies – the importance of estate planning and reviewing a BDBN

It cannot be over-emphasised how important it is to regularly review your estate plan –including your Will, SMSF, and BDBN. It’s hard to imagine the difference that one document, often only one page in length, could make to the distribution of your estate.

Katz v Grossman [2005] NSWSC 934

The leading case of Katz v Grossman [2005] NSWSC 934 highlights the consequences of leaving the distribution of your superannuation funds to your trustee’s discretion and the importance of preparing a BDBN in accordance with the governing rules of the superannuation fund and the SIS Act.

In this case, the deceased’s Will provided for equal distribution of the estate to his son and daughter. Considerable assets were held in an SMSF of which the daughter was a trustee. The daughter and her subsequently appointed co-trustee husband disregarded the non-binding nomination and paid the entire SMSF balance (approximately $1 million) to the daughter rather than dividing it with her brother.

The brother challenged the appointment his sister and her husband as trustees of the fund and their decision to disregard the nomination.

The Court determined that the daughter (a trustee and dependant under the SMSF) and her husband (co-trustee) were validly appointed as trustees, and that their decision to pay superannuation death benefits to the daughter was valid under the terms of the fund’s trust deed.

Ioppolo & Hesford v Conti [2013] WASC 389

More recently, in Ioppolo & Hesford v Conti [2013] WASC 389, unintended consequences were the result of not considering an overall estate plan and the interplay between a Will and superannuation fund.

Mrs Conti and her husband were trustees of an SMSF with considerable assets. In her Will, the late Mrs Conti left her superannuation benefits to her children. Mrs Conti specifically stated that her husband, Mr Conti, was not to benefit from her interest in the SMSF, but she did not leave a BDBN.

After Mrs Conti’s death the trustee was replaced with a corporate trustee (a company controlled by the husband) which paid the deceased’s benefits to the husband.

Mrs Conti’s children made a claim against Mr Conti and the corporate trustee.

The Court found against the children’s claim to the funds. The Court held that the appointment of the new corporate trustee and the payment of the death benefits in favour of Mr Conti was valid.

Conclusion

Unless specific directions are made through a BDBN for the payment of your death benefits, the beneficiary of your superannuation fund could be determined by a trustee and a contrary direction in your Will may be ousted.

Regular review of your SMSF with your financial and legal advisors can assist in achieving maximum benefits from your fund. Just like having a routine health check-up, your SMSF should be monitored, analysed, and, if necessary, adjusted to achieve optimum performance. This includes having in place a BDBN that accurately reflects your testamentary wishes and reviewing it regularly to ensure it takes account of your changing financial and personal circumstances.

If you or someone you know wants more information, or needs help or advice, please contact us on 02 8332 6126 or email info@legallysmart.com.au