WA's highest court rules it's possible for Binding Death Benefit Nominations to last longer than 3 years - Hill v Zuda

The recent WA Supreme Court of Appeal case Hill v Zuda Pty Ltd 2021 WASCA 59 confirms that regulation 6.17A of the SIS Act does not apply to self-managed super funds and therefore a binding death benefit nomination (BDBN) that purports to be non-lapsing is not constrained by the requirements of that section. This means that all non-lapsing BDBN's do not expire after 3 years and that this is the case until the HCA rules otherwise. This article summarises the facts of the case and explains the reasoning behind the decision and its effect on all jurisdictions in Australia.

The article also outlines what it means for Cleardocs BDBNs, including that the fact this issue remains regularly litigated, favours a conservative and clear approach.

Facts

Mr Sodhy and his de-facto partner Ms Murray, the Respondent, were the members of an SMSF. The Appellant, Ms Hill, was Mr Sodhy's only child.

Mr Sodhy passed away in 2016, leaving his dependants Ms Hill and Ms Murray behind.

In 2011, the SMSF's trust deed had been amended to include rules annexed to the deed which governed what happened upon a member's death (Rules). The amended trust deed stated that the trustee holds the assets on trust and applies them in the manner set out in the Rules. Clauses 5 and 6 of the deed of variation read as follows:

• "Despite anything else in the trust deed or Rules, if either of Alec Kumar Sodhy or Jennifer Patricia Murray dies, then the Trustee must distribute the whole of the deceased Member's Account Balance to the other Member and may pay any part of the benefit as a lump sum or as a pension as the Trustee considers appropriate."

The deed of variation expressed this clause to be a Binding Death Benefit Nomination for the purposes of the Rules.

Ms Murray, as sole director of the trustee, determined that the entire death benefit would be paid to her in accordance with Clauses 5 and 6 of the deed. Ms Hill, as a dependant of Mr Sodhy, argued that these clauses were invalid and did not amount to a BDBN for various reasons including:

• it had ceased to have effect because Mr Sodhy died more than 3 years after the deed of variation was signed - so it expired; and
• it was not signed by 2 witnesses.

Namely, her argument relied on the fact that regulation 6.17A of the SIS Act applied to SMSFs and therefore any BDBN had to comply with the requirements of that regulation. If this was correct, it would mean that the death benefit had to be paid out to Mr Sodhy's dependants in accordance with Rule 5.6 of the Rules pursuant to which Ms Hill would have received a share of the death benefit.

Rule 5.6 of the Rules annexed to the deed of variation read as follows:

• "If in relation to any part of the [death benefit]:
  the Trustee does not hold a current Binding Death Benefit Nomination; or
  the nomination cannot be followed for any reason
  the Trustee must pay that part of the benefit to any or all of the Member's Dependants and legal personal representative in the proportions that the Trustee decides."

The WA Supreme Court decided against Ms Hill, and therefore Ms Hill appealed the decision to the WA Court of Appeal.

The problem historically

Historically, there have been a number of cases which have determined that the regulation 6.17A does not apply to SMSFs[1] The confusion about whether or not that regulation applies to SMSFs was brought about by the way the legislation was drafted, particularly the confusion about sections 59(1) and 59(1A) of the SIS Act.

It is a well-established principle that an intermediate appellate courts and trial judges in Australia should not depart from decisions in intermediate appellate courts in another jurisdiction on the interpretation of Commonwealth legislation or uniform national legislation unless they are convinced that the interpretation is plainly wrong[2]. Accordingly, the Court felt bound to follow the earlier decision of the Full Court of the Supreme Court of South Australia in Cantor Management Services Pty Ltd v Booth (Cantor)[3].

The Court of Appeal decision

Accordingly, the WA Supreme Court of Appeal held that the earlier decisions of the court in Cantor were not plainly wrong (as was submitted by Ms Hill) and it was therefore bound to follow their reasoning that regulation 6.17A did not apply to SMSFs and that the terms of the SMSF's deed govern the form in which the BDBN must take.

As such, until the matter was to be decided by the High Court of Australia, the status quo remains where State Courts will most likely feel compelled to decide that regulation 6.17A of the SIS Act does apply to SMSFs.

Given the Court decided that the form requirements in regulation 6.17A did not apply to SMSF's it determined that the clauses in the trust deed amounted to a BDBN and therefore Ms Hill was not entitled to any share of Mr Sodhy's death benefit.

What does it mean for BDBNs and SMSF deeds?

The decision confirms that the form requirements don't apply to SMSFs and therefore the deed of variation in this case did amount to a BDBN.

As the case law stands currently, a BDBN does not lapse after 3 years - however this could be overruled by the High Court of Australia.

Until the HCA decides on the same question (or the legislation is amended to clarify the issue), we won't have an answer for certain therefore a more conservative approach is favoured. It is good practice for SMSF deeds to require BDBN's to be signed by 2 witnesses and to be expressed as lapsing after 3 years. The Cleardocs BDBN expires after 3 years however 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 until the member revokes it or replaces it.

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:

• Superannuation Contributions - A Guide
• Superannuation Contributions and Income Tax - for Self-Managed Superannuation Funds
• Understanding - Contributions, Contributions Caps and Reserves

Order related document packages

• SMSF Minutes and Resolutions Package
• SMSF Pension Commutation
• SMSF Pension Pack
• Superannuation Trust (SMSF)
• Update to SMSF

[1] Munro v Munro [2015] QSC 61, Cantor Management Services Pty Ltd v Booth [2017] SASCFC 122 and Re Narumon Pty Ltd [2018] QSC 185.

[2] Farah Constructions Pty Ltd v Say-Dee Pty Ltd [2007] HCA 22.

[3] Cantor Management Services Pty Ltd v Booth [2017] SASCFC 122.