The recent High Court decision in Hill v Zuda considered binding death benefit nominations (BDBN) in relation to a self-managed super fund and whether the trustee of an SMSF has a requirement to comply with certain superannuation regulations. It is also a good reminder that the key aspect of an effective BDBN is complying with the terms of the SMSF deed, and that a one size fits all approach for BDBNs is a recipe for disaster.
Mr Sodhy died in 2016, leaving a de facto partner and his only child from a previous relationship.
Over three years before he died, his SMSF trust deed was amended to include a binding death benefit nomination clause, directing that if either he, or his de facto partner died, the trustee was to distribute their balance to the survivor.
His daughter commenced proceedings on the basis that the BDBN was not enforceable as it failed to comply with regulation 6.17A of the Superannuation Industry (Supervision) Regulations 1994 (Cth) (Regulations) in its form and timing.
Relevantly, regulation 6.17A of the Regulations provides in relation to death benefits, that the:
- trustee must give the member information;
- trustee must follow a nomination if made in the prescribed form;
- member must give written, signed, and dated notice to the trustee;
- notice must be witnessed by two people; and
- nomination will only last for three years.
The High Court of Australia unanimously held regulation 6.17A does not apply to SMSFs.
The High Court held that the purposes of the regulation are to enable members to compel trustees to distribute death benefits in accordance with their wishes and to ensure members have adequate information.
Given all members of an SMSF are also trustees or directors of the corporate trustee for the SMSF, the High Court considered these requirements redundant in the context of SMSFs.
While there are a number of commentators making noise regarding the enormity of this decision by the High Court, this position is consistent with the position that we have taken for a number of years, including since before the decision in Munro was made. For more detail, see our earlier article, ‘Another binding nomination bites the dust’.
The decision solidifies our understanding and position that regulation 6.17A does not apply to SMSFs, unless required by the specific SMSF deed. It reinforces that SMSFs are not automatically exempt from the regulations and that the application of the regulations is dependent on the SMSF deed. Given this, it is critical that advisers check the SMSF deed to ensure that the deed does not import requirements under regulation 6.17A. If the deed does, then those requirements must be followed.
It is a good reminder that the key aspect of a valid and effective BDBN is making sure the BDBN complies with any requirements of the SMSF deed. Advice should be taken to ensure the BDBN is valid and effective and cannot be challenged if there is a dispute. This should be done as part of a broader succession planning review to make sure the BDBN, Will and enduring power of attorney documents are aligned to provide the best outcome.
This article was written with the assistance of Jessie Langhammer, Law Graduate.