SMSF wills ‘no safer than BDBNs’, SMSF warned

This will be a critical judgment, said Mr Figot, as it will provide clarity on whether a binding death benefit nomination (BDBN) can last either indefinitely or a maximum of only three years.

Mr Figot said that some in the SMSF industry have suggested that Hill v Zuda proves that BDBNs are too risky and an SMSF will is the way to obtain certainty and avoid the pitfalls of a BDBN.

“[However], an SMSF will is not necessarily safer than a BDBN. In fact, in many circumstances, an SMSF will can be just as risky, if not more risky, than a BDBN,” he said.

The term SMSF will, Mr Figot pointed out, does not really have a fixed meaning and will typically be based on what the governing rules of the SMSF define the term to be.

“Accordingly, different SMSF governing rules might have different definitions of ‘SMSF will’,” he explained.

“However, generally speaking, we would expect ‘SMSF will’ to be defined as something along the lines of a document from an SMSF member accepted by the SMSF trustee binding the trustee as to, among a range of other things how to pay that member’s superannuation death benefits.”

Mr Figot outlined that if the High Court decides that the BDBN rules in the SISA and SISR apply to SMSFs, a court might also decide that these rules apply to an SMSF will.

“Interestingly, the BDBN in the Hill v Zuda case was wording hard wired into the SMSF deed rather than a separate form of BDBN that was founded on the BDBN power in the deed,” he explained.

“Naturally, the drafters of SMSF will provisions might try to draw some sort of technical distinction between a BDBN and an SMSF will.”

However, Mr Figot pointed out the Superannuation Industry (Supervision) Act 1993 (Cth) (SISA) does not use the term BDBN. Instead, it uses the term “notice given to a trustee of the entity in accordance with the regulations, to require a trustee of the entity to provide any benefits in respect of the member on or after the member’s death to a person … mentioned in the notice …”

“Ask yourself: is the substance of an ‘SMSF will’ that it is a ‘notice given to a trustee of the entity in accordance with the regulations, to require a trustee of the entity to provide any benefits in respect of the member on or after the member’s death to a person … mentioned in the notice …’? Presumably you have answered this question with a yes,” he said.

“It is possible that a court would answer this question with a yes too. Afterall, courts tend to prefer to look to the substance of an issue, rather than form.”

This means that while an SMSF BDBN currently has uncertainty as to whether it can last three years or indefinitely, an SMSF will may have this uncertainty as well, he warned.

Mr Figot also stressed that SMSF will documents are just as liable to uncertainty as BDBN documents.

“‘SMSF wills’ are whatever the current set of governing rules defines them to be. This means that if the current set of governing rules is invalid, then presumably so is the SMSF will,” he stated.

He referred to the case of Re Narumon Pty Ltd [2018] QSC 185, which looked at whether a 2007 document purporting to be a deed implementing a new set of governing rules was valid.

“That document was signed by Mr John Giles. He was both the trustee company’s sole director and secretary. However, the document stated that he was signing on behalf of the company as its ‘authorised representative’. The document did not state that he was signing in his capacity as director and secretary of the company,” he explained.

“The document therefore failed and thus the set of governing rules it was trying to implement failed.”

While a BDBN suffers from this weakness as well, the same is true of SMSF wills, he said.

“Further, it is not just the set of the governing rules under which the SMSF will is made that might be attacked. It is every aspect. For example, in Munro v Munro [2015] QSC 61 a BDBN failed because it nominated the ‘trustee of my estate’, instead of ‘executor of my will’. Accordingly, an ‘SMSF will’ might similarly be attacked for some seemingly trivial failure,” he cautioned.

“SMSF will” might require that a trustee “accept” the “SMSF will” in order for it to be valid, he noted.

“In Cantor Management Services Pty Ltd v Booth [2017] SASCFC 122 the Full Court considered whether a BDBN had been ‘given’ to an SMSF trustee. The document had been left at the accountant’s office but the director of the trustee did not have actual knowledge of the document,” he said.

“One can easily imagine an ‘SMSF will’ being challenged by a disappointed potential recipient asserting something along the lines of that the ‘trustee did not properly accept the SMSF will’, ‘the member did not properly give the SMSF will’, etc.”

Mr Figot also pointed out that the growing body of jurisprudence regarding BDBNs allows practitioners some degree of certainty as to where things stand.

“Naturally, soon this body will be significantly larger when the High Court hands down their decision,” he noted.