The BDBN landscape post-Hill v Zuda

By William Fettes on 25/10/2022 in SMSF deeds, SMSF strategy, Succession planning, Trustee education

This article examines the legal landscape of binding death benefit nominations post-Hill v Zuda Pty Ltd [2022] HCA 21 (Hill v Zuda) — the recent landmark High Court decision on non-lapsing nominations.

Indefinite and non-lapsing BDBNs post-Hill v Zuda

A binding death benefit nomination (BDBN) is a direction made by a fund member to a superannuation fund trustee compelling the trustee to pay the member’s death benefits in a certain way to:

the member’s dependant(s); and/or
the member’s legal personal representative (LPR).

The LPR in this context is typically the executor/executrix of the deceased member’s will or otherwise an administrator appointed under letters of administration where a fund member has died intestate (ie, without a will).

An exciting development in the BDBN space has been the recent confirmation by the High Court in Hill v Zuda that BDBNs made in respect of self managed superannuation funds (SMSFs) can last beyond 3 years.

What Hill v Zuda means in relation to the applicability of the BDBN rules in the superannuation legislation

The option of making indefinite non-lapsing BDBNs is not widely available for other types of funds, such as large APRA-regulated funds. This is because BDBNs for non-SMSF funds are generally subject to the onerous restrictions in reg 6.17A of the Superannuation Industry (Supervision) Regulations 1994 (Cth) (SISR). Such BDBNs must typically be renewed every 3 years to remain valid and binding on the trustee.

Although the outcome in Hill v Zuda was consistent with the Commissioner’s view in SMSFD 2008/3, and prior decisions of various state supreme courts (subject to the SMSF deed not expressly or impliedly importing a lapsing position based on the SISR rules), Hill v Zuda nonetheless represents a landmark decision as it provides strong confirmation of the legal position in support of SMSF BDBN strategies on an Australia-wide basis.

A likely consequence of the case is that future litigation concerning the validity of SMSF BDBNs will be more confined to core issues, such as proper execution and construing purported BDBNs in accordance with the terms and conditions of the SMSF deed, etc, rather than disputes about the applicability of s 59 of the Superannuation Industry (Supervision) Act 1993 (Cth) and reg 6.17A of the SISR.

Notably, the High Court declined to engage with the severe criticisms made by Blue J in Retail Employees Superannuation Pty Ltd v Pain [2016] SASC 121 (REST) of the BDBN rules in the Superannuation Industry (Supervision) Act 1993 (Cth) and the SISR as being fundamentally flawed. Blue J’s criticisms had caused some concern in the industry that the existing legislative framework was not workable and would need to be recast to provide better certainty. However, it would seem that the High Court was unmoved by these criticisms at least insofar as SMSF BDBNs are concerned where the BDBN is not subject to reg 6.17A of the SISR.

BDBN strategies depend on the fund’s document trail

Fundamentally, the decision of Hill v Zuda highlights the fact that SMSF BDBNs are, in both form and substance, a creature of the relevant SMSF deed.

In other words, the ability to make a BDBN that is binding on the trustee (and not subject to trustee discretion) for an indefinite period, and the particular formalities that must be observed to have a valid a BDBN, depend on the governing rules of the fund.

Thus, the option of making an effective BDBNs will not be available where a fund is operating on an outdated deed that does not contain appropriate and robust BDBN rules and powers.

Where an SMSF has multiple deeds (most longstanding SMSFs will have more than one trust deed) this in turn depends on the integrity of the fund’s overall document trail because all fund documents can impact the effectiveness of subsequent documents.

All deeds of variation in a fund’s document trail must comply with the variation power in the prior deed, with any relevant consents and notifications obtained, and any other appropriate legal formalities complied with.

If the applicable formalities are not complied with in relation to each document comprising the fund’s document trail, the fund’s latest deed may not be valid and effective. The implication of this is that BDBNs and other strategies undertaken on the basis of flawed documents may be rendered shaky and possibly invalid.

Even a well-drafted BDBN instrument that has been diligently prepared on the basis of a fund’s latest trust deed may not necessarily be effective if the fund’s document trail has deficiencies that give rise to serious legal uncertainties, including questions regarding which deed contains the operative governing rules.

Accordingly, SMSF trustees and members who wish to implement succession planning strategies that rely on BDBNs should ensure that any older or outdated deeds they may have in place are reviewed and updated with an appropriate deed that supports indefinite non-lapsing BDBNs.

Also, the fund’s full document trail should ideally also be reviewed to ensure there are no deficiencies or problems that need to be addressed. Identifying potential issues and taking remedial steps in a timely manner is generally more cost and time effective than the alternative of litigating a legal challenges from an aggrieved beneficiary where the fund document trail is uncertain.

SMSF BDBNs should be regularly reviewed

Notwithstanding the High Court’s confirmation on non-lapsing BDBNs, it is important to emphasise that BDBN strategies should not be implemented on a ‘set and forget’ basis.

DBA Lawyers recommends that SMSF members should review their BDBNs at least every 3 years or sooner if the member’s circumstances change, eg, in the event of:

a death of the family;
separation or divorce or
there being a new partner/spouse on the scene for the member.

The ongoing appropriateness of a BDBN should also be considered with regard to alignment with the member’s estate plans, and in particular, the terms of their will.

In summary, expert advice should be sought to ensure that the BDBN reflects the member’s current circumstances in conjunction with the member’s estate planning documents.

Conclusions

BDBNs can be a powerful and important tool in a member’s succession planning toolkit, however, caution should be exercised by advisers and SMSF members about being complacent in relation to BDBN strategies.

Although the High Court decision in Hill v Zuda was a positive development, the decision highlights the importance of the fund’s document trail in relation to having effective BDBNs. Accordingly, SMSF members who wish to implement succession planning strategies involving a BDBN should have their SMSF deed reviewed and updated, where relevant. As noted above, ideally a full document trail review should be undertaken to ensure that the BDBN and latest SMSF deed is not based on a shaky foundation.

In particular, we recommend that SMSF deeds and related legal services are obtained from a quality law firm that has expertise in the field of SMSFs, succession planning and tax. Unless you are obtaining documents and advice from an SMSF law firm, there are numerous risks for an adviser and end-user client.

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