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Munro v Munro illustrates how long a binding death benefit nomination can last for … and the answer is not what everyone expected!

binding death benefit nominationThe recent case of Munro v Munro [2015] QSC 61 illustrates how long a BDBN in an SMSF can last for … and the answer is not what everyone expected!

Background

Section 59(1) of the Superannuation Industry (Supervision) Act 1993 (Cth) provides that generally only a trustee can exercise discretions under a super fund’s governing rules. Therefore, a BDBN appears to be not allowed because it involves someone other than a trustee (ie, the member) exercising a discretion (ie, to whom a death benefit will be paid upon death). It must be noted that s 59(1) expressly only apples to superannuation entities other than SMSFs.

There is an exception to s 59(1), which is contained in s 59(1A). Section 59(1A) provides that a super fund’s governing rules can allow a discretion to be exercised by someone other than the trustee in respect of paying out of death benefits, provided that the applicable regulation is complied with.

The applicable regulation is reg 6.17A of the Superannuation Industry (Supervision) Regulations 1994 (Cth). This contains a number of conditions in order for someone other than the trustee to exercise discretion in respect of death benefits. One condition is that any such notice (eg, a BDBN) can only last for a maximum of three years (reg 6.17A(7)).

Therefore, for all non-SMSF superannuation funds they can generally only have BDBNs that last for a maximum of three years. However, many argue that because reg 6.17A(7) applies to s 59(1A) and because s 59(1A) is an exception that applies to s 59(1) and because s 59(1) never applied to SMSFs, therefore reg 6.17A has no application to SMSFs.

However, there is controversy because reg 6.17A itself states that it applies to all regulated superannuation funds (ie, including SMSFs).

The ATO position

The ATO have released SMSFD 2008/3. This states that (SMSFD 2008/3 [1]):

Section 59 … and regulation 6.17A … 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

Many incorrectly believe that SMSFD 2008/3 settled the debate, with the conclusion being that reg 6.17A has no application to SMSFs and therefore that SMSF governing rules can allow members to make BDBNs that last for more than three years (eg, indefinitely).

However, it must be remembered that an SMSFD is not law. It does not bind the courts, tribunals, super fund trustees, members, or anyone else. In fact, as each SMSFD warns in its preamble, an SMSFD does not even bind the Commissioner.

Accordingly, until Munro v Munro [2015] QSC 61, the importance of SMSFD 2008/3 was limited to it being authority for the following proposition: the Commissioner is unlikely to view an SMSF trustee as having breached s 59 if the trustee treats a BDBN that does not comply with reg 6.17A as being valid.

However, Munro v Munro [2015] QSC 61 has changed things.

Munro v Munro [2015] QSC 61

Munro v Munro involved an SMSF where a member signed form entitled ‘Binding death benefit nomination’.

After the death of the member, a dispute arose and a number of questions required determination.

One question was whether, in order be to a BDBN, did the deceased’s nomination have to comply with the requirements of reg 6.17A.

In handing down her judgment, Mullins J wrote:

Although SMSFD 2008/3 is not binding on the court (or the Commissioner of Taxation) it sets out a logical approach to the construction of s 59 of the SIS Act which I consider correct and adopt for the purpose of determining the applicability of reg 6.17A of the SIS Regulations to the fund.

Accordingly, Munro v Munro held that the approach set out in SMSFD 2008/3 is correct.

In short, there is now judicial comment that it is possible for an SMSF BDBN to last indefinitely … if the SMSF deed allows for this.

(For completeness, it should be noted that Munro v Munro only constitutes the law in Queensland, however, it would definitely be persuasive in all other jurisdictions.)

Practical implications

There are still many deeds out there that either expressly limit BDBNs to only last for three years or are ambiguous. Members of SMSFs that have such deeds should strongly consider updates so that they can have BDBNs that last indefinitely.

BDBNs are only a partial solution as we recommend clients focus on who has control ‘of the purse strings’ upon death and loss of capacity and succession to that control first. This is illustrated by Wooster v Morris [2013] VSC 594. In Wooster v Morris the deceased had made a BDBN in favour of his two daughters from a previous marriage. However, his second wife was left controlling the SMSF. Despite the existence of the BDBN, the second wife determined to pay the deceased’s benefits to herself. If the fund were not an SMSF, the daughters might have been able to go to the Superannuation Complaints Tribunals. However, the Superannuation Complaints Tribunals has no jurisdiction for SMSFs. Rather, the appropriate forum is the relevant Supreme Court. Naturally, matters in a Supreme Court are expensive and time consuming. Ultimately the daughters won. However, the following comments from McMillan J are critical to note:

… To the extent that the [daughters] are unable to recover the amount due to them from the Morris Family Superannuation Fund, the shortfall was ordered to be paid by the estate of [the second wife, who herself died in the course of litigation].

… the shortfall will not be recovered by the [daughters]

… [the second wife’s] estate intended to file for bankruptcy.

In short, even a valid BDBN does not ensure that the right people will get the money in an efficient and prompt manner. This is why I always caution to not place too much value in a BDBN.

That being said, BDBNs are conceptually straight forward and there is a lot of merit in the KISS principle and so I think BDBNs will be the preferred vehicle for SMSFs for many years to come. Accordingly, if using BDBNs, the SMSF’s deed should be checked to ensure that it allows for BDBNs that last indefinitely. If the deed doesn’t allow for indefinite BDBNs — and there are many that don’t — a deed update should be strongly considered.

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This article is for general information only and should not be relied upon without first seeking advice from an appropriately qualified professional.

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