clearlaw

High Court rules on SMSF binding death benefits

On 15 June 2022, the High Court[1] unanimously dismissed an appeal from the recent WA Supreme Court of Appeal decision in Hill v Zuda Pty Ltd 2021 WASCA 59. The High Court granted special leave to appeal and confirmed the prevailing view that regulation 6.17A of the Superannuation Industry (Supervision) Regulations (SIS Regs) does not apply to binding death benefit nominations (BDBNs) in SMSFs, meaning that requirements, like lapsing after three years and having two independent witnesses, do not apply unless imposed by the trust deed or the BDBN itself states that it lapses after a specific time.

The article outlines the case and what it means for Cleardocs BDBNs.

Renay Sumercan, Maddocks

Facts of the case

  1. Zuda Pty Ltd (Zuda) is the trustee of an SMSF. The two directors of Zuda were both members of the SMSF, and were de facto partners. The governing trust deed of the SMSF included a BDBN clause, which required Zuda to distribute a deceased member’s entire balance in the fund to the surviving member.
  2. Following one member’s death, his daughter brought proceedings in the Supreme Court of Western Australia, claiming that the BDBN was of no force and effect because it was not made in accordance with reg 6.17A of the SIS Regs.
  3. The ‘sole substantive issue’ was ‘whether reg 6.17A applied to the Fund as an SMSF’. Our earlier article on the WA Supreme Court of Appeal decision, a more detailed summary of the facts and a summary of the historical issue on whether regulation 6.17A applied to SMSFs can be found here.

The Court of Appeal and High Court decision

The WA Supreme Court of Appeal initially dismissed the proceeding on the basis that regulation 6.17A did not apply to the Fund as an SMSF by adopting a construction of regulation 6.17A that it was bound to follow the “seriously considered dicta” of an appellate court unless convinced that the other courts reasoning was “plainly wrong”.

On appeal, the High Court held that regulation 6.17A, properly construed, did not apply to an SMSF. The High Court concluded that this construction was consistent with the extrinsic materials and the purposes of the regulation.

The prevailing view

The ATO’s SMSF Determination SMSFD 2008/3 states that, because:

  1. subsection 59(1A) is framed as an exception to subsection 59(1), which specifically does not apply to SMSFs;[2] and
  2. reg 6.17A was made for the purposes of s 59(1A);[3] and
  3. the exchange of information between trustees and members required under 6.17A ‘has little relevance to the administration of SMSFs, whose management and membership are essentially the same people’[4] then:

subsection 59(1A) has no application to SMSFs and consequently the requirements prescribed in regulation 6.17A of the SISR for the making of binding death benefit nominations do not apply to SMSFs.[5]

What does it mean for BDBNs and SMSF deeds?

The rules for making BDBNs in SMSFs are imposed by the SMSF trust deed and therefore the requirements in regulation 6.17A do not have to be complied with, unless imposed by the SMSF trust deed. In practice, the decision confirms that BDBNs in SMSFs can remain binding for more than three years, subject to the terms of the SMSFs governing deed.

Importantly, BDBNs for SMSFs do not need to be renewed to remain binding (cf. reg 6.17A(7)) and so a non-lapsing and binding nomination can be made if it is done properly, being in accordance with the governing rules of the SMSF’s deed.

This decision serves as a reminder to review existing BDBNs and SMSF deeds to ensure that they provide for Non-Lapsing BDBNs and to ensure, including when creating new BDBNs, that they are valid, bind how the trustee deals with superannuation death benefits in an SMSF and accurately reflect an individual’s circumstances.

The Cleardocs BDBN has been drafted so that it expires after 3 years. However, if you have a Cleardocs SMSF deed you can also choose to purchase a Death Benefit Agreement from Cleardocs. This document achieves the same result as a BDBN but does not lapse after 3 years and remains in force and binding unless and until the member revokes it or replaces it. If you do not have a Cleardocs SMSF deed, then you can purchase the Update to SMSF product to change your existing deed to a Cleardocs deed and then purchase the Death Benefit Agreement product.

More information from Maddocks

For more information, contact Maddocks on 03 9258 3555 and ask to a member of the Commercial Practice Group.

More Cleardocs information on related topics

You can read earlier ClearLaw articles on a range of topics, such as:

Order related document package

[1] Hill v Zuda Pty Ltd as Trustee for the Holly Superannuation Fund & Ors [2022] HCA 21

[2] SMSFD 2008/3 at [13].

[3] Ibid at [14].

[4] Ibid at [14].

[5] Ibid at [15].

Last revised on : 28-07-2022
 

Lawyer in Profile

Daniel Hui
Daniel Hui
Senior Associate
PH: 61 3 9258 3563

Daniel is a Senior Associate in the Maddocks Tax & Revenue team.

Daniel advises extensively in the following areas:

  • structuring of businesses and transactions;
  • mergers and acquisitions;
  • corporate reorganisations;
  • sale of businesses; and
  • joint ventures and property developments.

His advice covers both direct and indirect tax considerations.

Prior to joining Maddocks, Daniel worked at a Big Four Chartered Accounting Firm focusing on tax consulting for mergers and acquisitions.