{"id":9099,"date":"2019-01-23T13:18:22","date_gmt":"2019-01-23T02:18:22","guid":{"rendered":"http:\/\/www.dbalawyers.com.au\/?p=9099"},"modified":"2021-11-25T11:36:20","modified_gmt":"2021-11-25T00:36:20","slug":"the-legal-minefield-of-bdbns-updated","status":"publish","type":"post","link":"https:\/\/www.dbalawyers.com.au\/smsf-deeds\/the-legal-minefield-of-bdbns-updated\/","title":{"rendered":"The legal minefield of BDBNs (updated)"},"content":{"rendered":"

By Daniel Butler (<\/em>dbutler@dbalawyers.com.au<\/em><\/a>), Director, <\/em>and William Fettes<\/em> (<\/em>wfettes@dbalawyers.com.au<\/em><\/a>), Senior Associate, DBA Lawyers<\/em><\/p>\n

(This article is an updated version of an article originally published <\/em>here<\/em><\/a>. The article has been significantly revised to account for the most recent case law in relation to binding death benefit nominations.)<\/em><\/p>\n

\"\"There are numerous pitfalls that can upset a binding death benefit nomination (\u2018BDBN\u2019) and render it invalid. To help navigate this difficult terrain, we examine the major risks to be identified, managed or avoided.<\/p>\n

Essentially, a BDBN is a direction made by a member to the superannuation fund trustee requiring the trustee to pay the member\u2019s death benefit to the member\u2019s dependant(s) or their legal personal representative (\u2018LPR\u2019) (ie, the executor\/executrix). BDBNs are a creature of the particular fund deed, and in large funds, the mandated requirements of the Superannuation Industry (Supervision) Act 1993<\/em> (Cth) (\u2018SISA\u2019) and Superannuation Industry (Supervision) Regulations 1994<\/em> (Cth) (\u2018SISR\u2019), especially reg\u00a06.17A, must also be satisfied.<\/p>\n

A BDBN should only be made where it is appropriate and should not be undertaken lightly. However, a BDBN based on a strong deed foundation, which is properly implemented with all due formalities, can play an important role in successful succession planning. To help illustrate the significance of BDBNs in this context, we briefly consider some relevant scenarios.<\/p>\n

BDBNs \u2014 A useful tool for the right situation <\/strong><\/h2>\n

You may wish to avoid your estate <\/strong><\/h2>\n

A BDBN in favour of a member\u2019s dependant(s) may be a sensible precaution to take where a member\u2019s deceased estate could face legal challenges, such as testator\u2019s family maintenance claims or similar challenges. In such cases, directing the trustee to pay the member\u2019s death benefit directly to their dependant(s) avoids claims against the estate (subject to NSW\u2019s notional estate provisions), as well as any legal costs borne by the estate.<\/p>\n

Similarly, an insolvent member may wish to consider making a BDBN directly to their dependant(s) to protect their superannuation from creditors against their deceased estate. Making a BDBN may be a prudent strategy to increase certainty in relation to a death benefit being beyond the reach of creditors, notwithstanding the fact that superannuation has certain bankruptcy protection under s\u00a0116(2)(d) of the Bankruptcy Act 1966<\/em> (Cth).<\/p>\n

You may wish to pay your benefit to your estate<\/strong><\/h2>\n

Conversely, a member\u2019s family situation may warrant making a BDBN to pay death benefits in favour of the member\u2019s estate (via their LPR). For example, if a member has concerns about entrusting their children or surviving spouse with their superannuation benefit, leaving the decision to the trustee\u2019s discretion will not prevent this outcome.<\/p>\n

Enduring Powers of Attorney (\u2018EPoA\u2019)<\/strong><\/h2>\n

Where a member wants to ensure that effective nominations can be made in the future in the event of loss of capacity, having appropriate rules in the SMSF deed to authorise an attorney appointed under an EPoA to make and revoke BDBNs provides a potential solution.<\/p>\n

Different legislation in each state and territory governs EPoAs, so care must be taken to ensure that the specific power of dealing with superannuation is supported by the EPoA, and that the power falls within the general scope of powers (ie, financial or property) in the particular jurisdiction.<\/p>\n

Only the Powers of Attorney Act 2000<\/em> (Tas) expressly recognises the power of an attorney under an EPoA to exercise any power of the donor\/principal with respect to superannuation. Accordingly, there is a question of whether making, revoking or renewing a BDBN falls within the scope of general financial powers for EPoAs made outside of Tasmania.<\/p>\n

The main legal authority with regard to this point is Re Narumon Pty Ltd<\/em> [2018] QSC 185 (\u2018Re Narumon<\/em>\u2019). In Re Narumon<\/em>, the court held that exercising a member\u2019s rights in relation to BDBNs for an SMSF fell within the scope of a financial matter for the purposes of an EPoA made under the Powers of Attorney Act 1998<\/em> (Qld). Bowskill J held ([69]):<\/p>\n

\u2026It is difficult to see why the exercise of a member\u2019s right under a self-managed superannuation fund deed, to require the trustee of the fund to pay benefits, after their death, in a particular way would not be \u201ca matter relating to the [member\u2019s] financial \u2026 matters\u201d. Given the breadth of meaning of the word \u201cfinancial\u201d (of, pertaining, or relating to finance or money matters) such an act does fall within the meaning of this term.<\/p>\n

[Citations omitted]<\/p>\n

Accordingly, in Queensland and Tasmania there is authority for the proposition that making a BDBN falls within the scope of an EPoA authority, subject to the SMSF deed and the appointment documents. DBA Lawyers considers that courts in other jurisdictions may also follow the reasoning in Re Narumon if this matter was considered where similar legislation applies. In any event, express wording should ideally be included in the EPoA appointment documents to cover this point.<\/p>\n

The SMSF deed is also critically important, as the deed must authorise the attorney to exercise member rights and entitlements under the governing rules of the fund. In the absence of express power in the super deed, an attorney may not have the requisite power to act (refer McFadden v Public Trustee for Victoria [1981] 1 NSWLR 15 and Re Application by Police Association of South Australia (2008) 102 SASR 215 where nominations in respect of interests in respect of trusts were not property of the individual beneficiary). DBA Lawyers therefore provides express power in its SMSF documents to expressly authorise, among other things, an attorney to act for a member.<\/p>\n

Of course, it should also go without saying that having a trusted person is absolutely critical, as the attorney will have considerable power.<\/p>\n

Problems and pitfalls<\/strong><\/h2>\n

For these reasons and others, BDBNs can be a powerful and important tool in a member\u2019s succession planning toolkit. However, a word of caution is warranted here because BDBNs are a relatively new legal instrument. The law in respect of them continues to develop and evolve over time, and many pitfalls exist for the unwary. Keeping pace with these developments and seeking appropriate advice from expert advisers is critical. Indeed, cases such as Munro v Munro<\/em> [2015] QSC 61 and Wooster v Morris<\/em> [2013] VSC 594 show that effecting a valid BDBN is no simple task. More specifically, as BDBNs are a creature of the particular deed, the process of effecting a valid BDBN depends on a number of inter-related factors.<\/p>\n

SMSF deeds that include SISR BDBN regulations<\/strong><\/h2>\n

Many SMSF deeds import the BDBN provisions in the SISA and SISR through wide deeming provisions of regulatory compliance, often inadvertently. A notable example of this occurred in the case of Donovan v Donovan<\/em> [2009] QSC 26.<\/p>\n

In Donovan v Donovan<\/em>, Fryberg J found that a letter given to the trustee asserting a \u2018wish\u2019 to pay the member\u2019s death benefit to the LPR did not bind the trustee. However, the judge also made comments by way of non-binding obiter dicta<\/em> about the effect of the deed\u2019s reference to \u2018Statutory Requirements\u2019 on the formalities required and the duration of any valid direction binding the SMSF trustee. The judge remarked that the language in cl\u00a011.4 of the SMSF deed caused the BDBN requirements in SISR reg\u00a06.17A to apply to the SMSF. One reason he stated this was that:<\/p>\n

The legislation governing superannuation in Australia is notoriously convoluted\u2026 It is very easy for trustees and members to make a mistake about the requirements applicable in their particular case. It is very understandable that a deed should specify a requirement in effect to comply with the form described in reg\u00a06.17A(6) out of an abundance of caution. The alternative would be to require the trustees or the member to take legal advice about the answer to the first question posed to me, and to run the risk that their advice might turn out to be incorrect. Such an approach is uncommercial and unlikely.<\/p>\n

Therefore, one important lesson to take away from Donovan v Donovan<\/em> is that the presence of a broad deeming clause can have far-reaching consequences such as including the 3-year limitation. Accordingly, having a quality deed is of paramount importance. If there is any ambiguity, expensive and protracted legal action may determine the outcome. However, subsequent cases have since clarified the 3-year rule in respect of SMSFs as discussed below.<\/p>\n

The case of Retail Employees Superannuation Pty Ltd v Pain<\/em> [2016] SASC 121 (\u2018REST decision<\/em>\u2019) has also called into question whether importing the SISA and SISR BDBN requirements may give rise to even bigger problems than an inability to implement non-lapsing BDBNs.<\/p>\n

More specifically, the court in the REST decision<\/em> identified significant problems with the SISA and SISR provisions and called for legislative reform in this area, noting that ([512]):<\/p>\n

The structure and drafting of sections 58 and 59 of the SIS Act and regulation 6.17A of the SIS Regulations give rise to ambiguities, uncertainties and potentially unintended consequences \u2026 It is highly desirable that those provisions be reviewed by the Commonwealth and recast.<\/em><\/p>\n

The analysis was also confirmed in the recent case of H.E.S.T. Australia Ltd v Inkley<\/em> [2018] SASC 127.<\/p>\n

Accordingly, BDBNs used in conjunction with deeds that rely on the SISA and SISR provisions may not be legally effective.<\/p>\n

Excluding the SISR BDBN requirements<\/strong><\/p>\n

The ATO in SMSFD 2008\/3 considers that s\u00a059(1A) of the SISA and reg\u00a06.17A of the SISR have no application to SMSFs, subject to the terms of the SMSF deed. Accordingly, an appropriately drafted SMSF deed should expressly exclude these provisions to avoid the problems identified in the REST decision<\/em>, and to allow for an indefinite, non-lapsing BDBN to be made in respect of death benefits in an SMSF.<\/p>\n

While an SMSF determination is not law and is not binding on the ATO, it is nonetheless useful from the standpoint that the ATO is regulator of SMSFs. Additionally, the ATO\u2019s reasoning in SMSFD 2008\/3 on this issue has subsequently been approved of by the courts in Munro v Munro <\/em>[2015] QSC 61 and Cantor Management Services Pty Ltd v Booth<\/em> [2017] SASCFC 122 (\u2018Cantor decision<\/em>\u2019).<\/p>\n

Therefore, there is Supreme Court authority for this position in Queensland and South Australia, and these cases are likely to be persuasive and followed by Supreme Courts in other jurisdictions.<\/p>\n

Sloppy wording<\/strong><\/h2>\n

Note that SMSF deeds are not a generic product and many SMSF deeds are unsatisfactory in this regard. SMSF deeds from many suppliers rely on a 3-year BDBN, regardless of their clients\u2019 needs, and many of these are easily challenged due to poor wording such as \u2018the BDBN is only binding if it\u2019s to the trustee\u2019s satisfaction\u2019. This type of wording can easily give rise to argument if, say, the trustee is the second spouse who decides to reject the BDBN when their spouse dies.<\/p>\n

The perils of using foundations made of straw<\/strong><\/h2>\n

Despite the apparent emphasis in this article on the current deed, it must be said that consideration of the most recent deed \u2018on file\u2019 is not all that counts for a BDBN to be valid and effective. The most recent deed must have been varied in accordance with the prior variation power, the relevant consent of each party to effect a variation must be obtained, and relevant notifications under the deed made and any other appropriate legal formalities complied with. Also, all or some deeds may have required stamping in accordance with the relevant state\/territory stamp duty legislation. All these formalities must have been complied with in the document trail or the fund\u2019s latest deed may not be valid and effective. This, in turn, results in BDBNs and other strategies undertaken on the basis of a \u2018faulty\u2019 deed being rendered shaky and possibly invalid.<\/p>\n

Regrettably, and despite the critical importance of the deed foundation, most SMSF deeds these days are varied without proper checks on the prior document trail, including conditions and consents that must be satisfied.<\/p>\n

If the SMSF has existed for some time and undergone variations from time to time, particularly without using experienced SMSF lawyers, a deed history review<\/a> may be warranted. Such a review should encompass the original deed of establishment, any subsequent deed of variation, and any deeds of change of trustee, as well as any other document that may have varied the deed (eg, trustee resolutions). Moreover, the review should be conducted by an experienced adviser, preferably an SMSF lawyer, to see if remedial work is required to help ensure the SMSF\u2019s \u2018deed chain\u2019 is as resilient to challenge as possible. Remedying any issues in a timely manner is generally far more cost effective than being exposed to future legal challenge.<\/p>\n

Drafting a BDBN notice \u2014 near enough is not good enough<\/strong><\/h2>\n

The case of Munro v Munro <\/em>provides a useful cautionary tale regarding the problem of using imprecise wording in a BDBN. In Munro v Munro<\/em>, the nomination of the \u2018trustee of his deceased estate\u2019 gave rise to a number of legal hurdles. Broadly, these included:<\/p>\n