The issues of valid SMSF administration actions and binding death benefit nominations were tested in a recent court case. Peter Townsend examines the facts of the case and what the decisions handed down mean for SMSFs.
The court’s decision in Re Narumon Pty Ltd (2018) QSC 185 was handed down in August 2018 and involved a number of issues – including the validity of binding death benefit nominations (BDBN) – relating to SMSFs. Here we try to summarise the important parts of the case.
The facts of the case
John Giles died in June 2017 aged 80. He was survived by his second wife, Narumon Giles, his son with his second wife and four adult children from his first marriage.
The SMSF was established in 1992 and at the time of his death the fund had three members, being Mr Giles, Mrs Giles and Mrs Keenan – the sister of Mr Giles, with a corporate trustee, Narumon Pty Ltd.
As a result of the death of Mr Giles, the fund had only two members and the directors of the corporate trustee were Mrs Giles and Mrs Keenan. Mrs Keenan later resigned as a director and her small member account balance was paid out, leaving Mrs Giles as the only member of the SMSF and as the only director of the corporate trustee.
While Mr Giles left a comparatively small estate (about $200,000), the bulk of his wealth was contained in the fund, which had an accumulation account of about $1 million and a lifetime complying pension, the capital value of which was about $3 million.
The case commenced as a result of the trustee seeking declaratory relief from the court as to three legal issues that had arisen in relation to the administration of the SMSF and the application of the death benefit of Mr Giles. The first of those issues was which trust deed contained the current terms of the SMSF, the second was whether the complying lifetime pension was reversionary and the final being which of the BDBNs made by or in respect of Mr Giles applied.
First issue: which deed?
This issue is important as it determines not only whether the SMSF permitted BDBNs and what requirements must be satisfied for the nomination to be binding, but also the default allocation rule that applies if there is no BDBN.
While the fund was established in 1992, there had been amendments in 1995, 1999, 2004, 2007 and 2014. Each of the amendments, apart from the one made in 2014, completely replaced the previous provisions with a new set of provisions.
The 2014 amendment deed was not a replacement deed: rather it purported to “cure” the invalidity of the 2007 amendment deed. The invalidity of the 2007 amendment was due to the requirement that an amendment had to be made by deed and the 2007 amendment was not in the form of a deed. In the 2014 deed, the trustee sought to retrospectively ratify its execution of the 2007 amendment deed as to apply the amendments proposed to be made by the 2007 amendment deed from its date of execution being 29 June 2007.
The court held that while the 2014 deed could not effect a ratification of the 2007 deed (and have the 2007 changes apply from 29 June 2007), it could apply from 22 August 2014 (being the date of execution of the 2014 amendment deed). This conclusion was reached as the 2014 amendment deed was an effective exercise of the amendment power contained in the 2004 deed.
The critical issues to determine whether an amendment deed is valid are:
- whether the amendment power was actually conferred on the trustees, and
- whether the manner of exercise of the power satisfied the terms of the amendment power.
Simply misidentifying the amendment power (say, rule 7 instead of rule 5) does not, of itself, mean the amendment power has not been validly exercised.
Second issue: was the lifetime complying pension reversionary?
This issue arose because no documentation could be located as to the issue of the complying lifetime pension.
While there was no primary evidence of the issue of the pension, for example, pension documents and trustee minutes, which could be located, the court held there was compelling secondary evidence of the issue of the pension; the secondary evidence being the audited financial statements of the SMSF, the fund annual reports and the existence of actuarial reports in respect of the pension. Importantly, these secondary evidence documents involved third parties (auditor and actuary) and were contemporary with the continuance of the pension.
As to whether the pension was reversionary and, if so, to whom, the actuarial reports provided compelling secondary evidence that the pension was reversionary as the life expectancy of Mrs Giles was used to value the pension liabilities. Clearly this meant the pension was reversionary to Mrs Giles.
Third issue: which BDBN?
Mr Giles over the course of three years made five BDBNs. Additionally, his attorneys signed a document on 16 March 2016 purporting to ‘extend’ the last death benefit nomination made by Mr Giles. Also on 16 March 2016, the attorneys signed a BDBN that was materially identical to the last nomination made by Mr Giles.
Fortunately the court accepted that the last nomination made by Mr Giles on 5 June had the effect of revoking all of his previous nominations. Consequently the relevant issues were whether the 5 June 2013 nomination was binding, whether the extension was effective and whether the replacement nomination was effective. The 5 June 2013 nomination was subject to a three-year time limit, hence, the need for the extension.
Mr Giles died on 14 June 2017. Upon his death, the trustee had to determine which nomination, if any, applied: the 5 June 2013 nomination (as extended) or the 16 March 2016 nomination? If neither nomination applied, then the default allocation rule would apply.
Was the 5 June 2013 nomination valid?
The validity and application of a nomination are separate issues. A nomination may be valid but not applicable to a death benefit as the member may have died more than three years after the making of the nomination.
The validity of the nomination depended on whether it satisfied the requirements specified in the trust deed and the requirements (if any) a nomination must satisfy set out in the Superannuation Industry Supervision (SIS) Act.
Did the nomination have to satisfy the requirements of superannuation law?
The simply expressed text “some other form that complies with the superannuation law” is ambiguous.
The court held that SIS regulations 6.17A(4) and (6) do not apply to SMSFs. This is the same conclusion reached in Munro v Munro and by the full court of the South Australian Supreme Court in Cantor Management Services Pty Ltd v Booth.
A nomination may be valid but not applicable to a death benefit as the member may have died more than three years after the making of the nomination.
The court also dismissed the argument that the SIS regulation 6.17A requirements had been imported into the trust deed by means of a definition of superannuation law that was defined to be the “SIS Act, SIS regulations and any other laws or regulations that the fund must comply with to be a regulated superannuation fund”. The court preferred the reasoning of Munro v Munro to that of Donovan v Donovan: SIS regulation 6.17A is not a provision of the SIS regulations with which an SMSF must comply and, consequently, it does not fall within the definition of superannuation law.
Is the 5 June 2013 nomination invalid because it nominates a non-dependant?
The court held the nomination was partially invalid to the extent of Mrs Keenan’s nomination. The court adopted a “practical and purposive approach” to hold that the preferable construction of rule 12 was that the notice is binding on the trustee to the extent that person or persons nominated are the legal personal representative or a dependant.
In summary, the 5 June 2013 nomination was valid but not binding on the trustee, solely because the trust deed required the nomination to be made within three years of the death of the deceased member. The nomination was made four years before Mr Giles’s death and, therefore, was not binding.
Was the 5 June 2013 nomination validly extended?
On 16 March 2016 (within three years of the making of the 5 June 2013 nomination), Mrs Giles and Mrs Keenan in their capacity as attorneys for Mr Giles signed a document called “extension of binding death benefit nomination” (the extension document). This document purported to confirm the 5 June 2013 nomination and extend its operation for a further period of three years, presumably from the date of the document.
Was this document legally effective? Could a nomination be extended under the provisions of the trust deed and, if so, did the attorneys have the power to extend the nomination and, if so, were they permitted by the Powers of Attorney Act 1998 (Queensland) to extend a nomination where they directly benefited from the nomination?
The court noted that neither the 2004 rules nor the 2014 rules expressly dealt with a nomination being extended before its expiry. As neither the 2004 or the 2014 rules permit nominations to be ‘extended’, the effect of the extension document made on 16 March 2016 and of the new nomination also made on 16 March 2016 depends firstly on whether the extension document and the 16 March 2016 nomination satisfy the requirements of rule 31 of the 2014 rules and, secondly, on the scope of the attorneys’ powers.
Does the extension document satisfy the requirements of rule 31.4?
Strangely, while this issue was raised by the court, there is no discussion of whether the extension document satisfied the requirements of rule 31.4.
Given the 2014 rules specify only four substantive requirements, it seems the 5 June 2013 nomination would satisfy all of those four substantive requirements. The fact the 5 June 2013 nomination satisfies additional requirements that are not inconsistent with the four substantive requirements of rule 31.4 is not relevant.
Did the attorneys have the power to make the extension document?
The court concluded there is no restriction in the SIS Regulations preventing an attorney under an enduring power of attorney from signing a BDBN on behalf of a member.
Equally, the 2014 rules expressly provide that an attorney under an enduring attorney can exercise any right conferred on a member by the trust deed in rule 5.4.
The only issue is whether the attorneys are precluded from exercising the member’s right to make a BDBN by reason of the provisions of the Queensland Powers of Attorney Act. Under the act, the enduring attorney can exercise any right conferred on the principal that can be delegated, so long as the exercise of the right is either not excluded by the power of attorney or the right is a “special personal matter”, such as “making or revoking a will, making or revoking a power of attorney, exercising a right to vote in political elections, marriage, adoption”. In particular, making a BDBN, or altering or revoking or extending a BDBN, is not a special personal matter as it is not a testamentary act.
The court held the right to make, vary, extend or revoke a BDBN for a member while not within the listed items of financial or legal matters would nevertheless be within the general scope of financial and also legal matters. The court noted the listed items are not exhaustive and, therefore, do not limit the meaning of the provision.
The next issue is whether the actual exercise of the power of attorney is defective due to the personal interest of the two attorneys. Attorneys must avoid conflict transactions unless they are expressly authorised by the principal to undertake conflicted transactions. The authorisation could be set out in the terms of the power of attorney (for example, expressly authorising the attorney to make a binding nomination under which they are a beneficiary). Unfortunately, the power of attorney granted by Mr Giles did not have a relevant express authorisation permitting the attorneys to exercise the right to make a BDBN.
The court accepted the argument that the making of the extension document was to ensure continuity of Mr Giles’s estate planning arrangements, which he had created, and it was those estate planning arrangements that are the source of the benefits of the two attorneys. Consequently, the exercise of the power of attorney to effect the extension of the 5 June 2013 nomination was the implementation of a transaction that the principal had authored and therefore authorised.
While the 16 March 2016 nomination was materially the same as the extension document, the court held that, in the absence of the express authorisation within the power of attorney, the 2016 nomination could not be accepted as a valid exercise of the power of attorney.
The extension document was held to constitute a valid BDBN. However, the 5 per cent gift to Mrs Keenan was ineffective because she was not a dependant of Mr Giles. This 5 per cent gift would fall to be allocated by the default rules applying to death benefits, which are typically a discretion to be exercised by the trustee.