SMSF practitioners should be aware the effectiveness of a binding death benefit nomination (BDBN) is defined by a fund deed and not the law, but minor references to it can still make it applicable, a superannuation lawyer has noted.
DBA Lawyers lawyer Nick Walker pointed out while the operation of a BDBN in an SMSF was settled in case law, specifically Hill v Zuda Pty Ltd [2022] HCA 21, legislation was still applicable where a deed referred to it.
“There is legislation that deals with BDBNs, in section 59 of the Superannuation Industry (Supervision) (SIS) Act and SIS Regulations 6.17A and B, and these require the BDBN to be in writing, signed in the presence of two witnesses, with a three-year sunset clause,” Walker said during a recent online briefing.
“You might be forgiven for thinking: ‘It’s in the law so we are bound by it,’ but there has been a plethora of case law over the years that clarified the BDBN is the product of the SMSF deed. It is not a product of the legislation and you can choose to opt out of it.
“The difficulty comes in the drafting of a deed and some, either expressly or implicitly, bring in the legislation and force a three-year lapsing concept into the BDBN.”
He gave the example of a deed that contains a clause that states the member may at any time nominate which dependants they would like the trustee to pay any death benefit to or they can direct that payment to their legal personal representative.
However, a sub-paragraph added that if at the time of death there was a BDBN that was in accordance with the provisions of the law, the trustee shall act in keeping with that action.
“Is that going to be a non-lapsing BDBN? We would need more information and have to review the entire deed before answering, but we came across this clause elsewhere stating the parties intend the provisions governing the fund to conform with the requirements of the [SIS] Act,” Walker added.
“In the case of Donovan v Donovan [2009] QSC 26, the question was raised as to whether this provision was enough to drag in those legislative requirements and make the BDBN lapse after three years.
“The short answer is that the provision does enliven the three-year sunset clause. So even if a BDBN itself states it is non-lapsing, as most do, you have to look at the deed and this could be a seemingly unexpected result.
“It’s quite understandable an SMSF should have a requirement that all of the relevant super law and regulations apply out of an abundance of caution, but there can be serious consequences if the SMSF deed also doesn’t have appropriate provisions.”
