Lessons for SMSF practitioners in watershed case

• An ageing population and issues of control of the SMSF when a member looses capacity;
• The noticeable absence of a complete and accurate SMSF document trail,
• More conflicted blended families holding SMSF balances,
• The growing amount of superannuation assets relative to estate assets, and
• The desire by some beneficiaries to pull the super assets to the estate where they can more effectively be challenged 

The facts

• Mr John Giles operated a single-member SMSF that was established in 1992;
• In June 2013 Mr Giles’ mental health began to deteriorate to a point where in November 2013 his psychiatrist declared him as an incapable of making financial, health and lifestyle decisions. From this time on, Mrs Giles and her sister-in-law Mrs Keenan acted as replacement directors of the corporate trustee pursuant to Mr Giles enduring power of attorney. They also became members of the fund around this time;
• Mr Giles died in June 2017 aged 80;
• He was survived by his wife Mrs Narumon Giles, his son Nicholas aged 16 and four adult children from a previous marriage;
• At the time of his death the super fund had an accumulation account balance of about $1 million and a lifetime complying pension worth about $3 million;
• Mr Giles left a Will appointing his wife Mrs Giles and his sister Roselyn Keenan as executors although they renounced their right to hold the office as executors following Mr Giles death;
• A family provision claim was made against the estate worth approximately $200,000 by one of Mr Giles adult daughters;
• There were a number of administration issues of the fund that prompted Mrs Giles to make an application to the court to seek directions. In particular:-
• Whether the deed of variation of the trust deed in 2007 was valid;
• the consequence of missing documentation relating to the establishment of the complying lifetime pension and whether Mrs Giles was to receive the benefit of a reversionary pension; and
• whether a binding death benefit nomination signed by Mr Giles attorneys in 2016 was valid and binding.

Presumably, these issues would impact on whether any of the SMSF assets became part of an estate in dispute.

Issues arising from the case

The validity of deed updates

It was apparent in this case, consistent with the earlier cases of Perry -v- Nicholson and Moss Super Pty Ltd -v- Hayne  that a court will first review the history of old deed updates before reviewing any current documents on questions relating to death benefit nominations or reversionary pension documents.  Any technical defect in the process of upgrading a trust deed or a deed appointing  a new trustee can invalidate subsequent documents created from a defective changing deed such as binding death benefit nominations or reversionary pension documents.  In this case the court reviewed the history of 5 trust deed variations that changed the appointment of trustee and updated the trust deed and found them to be valid and effective.

Improper signing of documents

One of the issues in this case was that in June 2007 the trust deed was upgraded by a Deed of Variation that was signed by Mr Giles “as its authorised representative”.  The deed was not signed by Mr Giles in his capacity as director and secretary of the company (which he was) as required by section 127 of the Corporations Act.  It was argued that the deed upgrade was invalid because of its improper signing  and the court agreed with this argument.  However, the court also agreed that a subsequent deed of variation made in 2014 purporting to ratify the 2007 deed, by reference to the powers of an earlier deed made in 2004 was valid and effective.

Missing pension documents

Typical with many clients who have SMSF’s in retirement  phase,  at the time of Mr Giles death there was reference in the financial statements to Mr Giles receiving a  lifetime complying pension however the original pension documents had gone missing and could not be located.  The financial statements also made reference to Mrs Giles being nominated as the reversionary beneficiary.  There were no documents found relating to the establishment of the pension although there was correspondence between Mr Giles and a former adviser going back to 2000 containing advice regarding the commencement of a pension with the nomination of Mrs Giles of that pension income.  There was also evidence of an actuarial certificate in April 2007.  Further, there was there no evidence of any change of the pension.  The court found that despite the absence of the original documentation there was sufficient extrinsic evidence of the establishment of the complying pension and the nomination of Mrs Giles as the reversionary beneficiary of that pension.  As a result, Mrs Giles was entitled to receive the benefit of the $3 million reversionary pension.

Defective binding death benefit nominations- Does a payment to a non-SIS dependant make the nomination invalid?

In this case Mr Giles made five (5) binding death benefit nominations between 2010 and 2013.  These nominations purported to deal with the accumulation balance of the fund of approximately $1 million.  What was interesting was that four (4) of the nominations, including the last one made in June 2013, left benefits to a non-superannuation dependant.  In particular, 47.5 per cent was left to Mrs Giles, 47.5 per cent to his son Nicholas and the remaining 5 per cent to his sister Mrs Keenan, who, according to the superannuation laws, did not qualify to be a SIS dependant. 

Further, the June 2013 nomination was expressed to lapse after 3 years (i.e. by 5^th of June 2016).

However, in March 2016 Mrs Giles and Mrs Keenan in their capacity as attorneys for Mr Giles signed a document purporting to renew the 2013 binding death benefit nomination for a further 3 year period. 

At the same time and with the intent to cure what was a defective nomination, they made a further fresh nomination which they signed on behalf of Mr Giles leaving 50 per cent of his accumulation balance to each of Mrs Giles and his son Nicholas.

One of the questions that came before the court was whether the June 2013 nomination was wholly invalid. It was noted that no previous case had decided this issue.  In considering this question, the court went through all the relevant provisions of the 2004 deed which specified that the binding death benefit notice must be made in the form set out in the schedule to the deed or some other form “that complies with the superannuation law”.  What the court found was that the form of the 2013 death benefit nomination did not comply with the form provided in the schedule to the deed, nor did it comply with “the superannuation law”.

That is, the deed purported to require that the death benefit nomination comply with the requirements and form of binding nomination of regulation 6.17A of the SIS Act regulations. However, the court found based on the earlier case of Munro -v- Munro that the requirements of regulation 6.17A did not apply to an SMSF and that the trust deed which contains the governing rules of an SMSF, will govern the form which a binding nomination may be made. 

What the court had to consider was whether the deed effectively imported the requirements of regulation 6.17A as far as the form of nomination and how it was to be made binding. What is significant is that the court adopted the view that reference in the deed to a nomination being made that complies with “the requirements of the superannuation law” ( or in the Munro case , reference to the “relevant requirements”)  was NOT SUFFICIENT to import the requirements and binding form of nomination specified under regulation 6.17A of the SIS Act regulations into the deed.  According to the court, reference to “requirements of the superannuation law” refers to the laws or regulations that the fund must comply with to be a regulated superannuation fund and regulation 6.17A is not such a law or regulation because that regulation is excluded by s. 59(1A) of the SIS Act from applying to SMSFs.

Despite these comments however, the court found in this case that as the deed made reference to a binding death benefit nomination that “may be in a certain form”, it did not require any strict compliance with a particular form and so the form of nomination was of itself not invalid.

In relation to the payment of a portion of the death benefit to a non-SIS dependent the court took a practical and purposive approach and did not find the whole nomination invalid. It decided that only that part of the nomination being paid to a non-SIS dependent (i.e. Mrs Keenan) was invalid (5 per cent).

Can a power of attorney make a new or extend a binding death benefit nomination?

With regard to the question of whether Mrs Giles and Mrs Keenan who held power of attorney for Mr Giles could renew Mr Giles death benefit nomination in March 2016 for a further 3 years and whether they had the power to make a fresh binding death benefit nomination, the court took a careful look at the provisions of the Powers of Attorney Act in Queensland as well as the provisions of the deed.

What the court ultimately found was that the attorneys could extend the existing death benefit nomination for a further 3 years but could not make a fresh binding nomination. The court came to these conclusions for the following reasons:

• The Powers of Attorney Act in Queensland permitted an enduring power of attorney to make a decision relating to a “financial matter” or a “legal matter”. Given the breadth of the definition which was not exhaustive, a binding death benefit nomination was a financial matter to which an enduring power of attorney could act upon;
• the making of a binding death benefit nomination was not a testamentary act which had to be performed personally, like making a will, which an attorney was restricted from making;
• the deed did not restrict but in fact expressly permitted the power of attorney to “exercise any power or right given to a member”;
• There was nothing in the SIS Act which expressly prevented the power of attorney from executing a nomination on behalf of the member;
• The Queensland Powers of Attorney Act had a number of protective features to avoid power of attorney abuse that would apply in relation to the making or extending an existing binding death benefit nomination;
• One of these protective features prevented what is referred to as a “conflict transaction”. Mr Giles power of attorney did not authorise his attorneys to enter into a conflict transaction of any kind or type.  However, it was determined that the renewal of an existing death benefit nomination was NOT a conflict transaction because it was the continuation of the initial choice of the member.  There was no conflict between the initial wishes of Mr Giles and the attorneys because all they were doing was renewing and confirming his initial wishes and there was no evidence of any change in those wishes.
• However, by contrast, the making of a fresh nomination that is different to the initial nomination is a conflict transaction that could not have been made on behalf of the interests of the principal.  Mr Giles power of attorney did not authorise a conflict transaction and therefore was outside the scope of his power of attorney.  On this basis the fresh binding death benefit nomination that divided my Giles death benefits equally between his wife and son was completely invalid. However, in any event, this purpose was achieved because the renewal of the of the earlier 2013 nomination by the attorneys was held to be valid, but excluded the 5 per cent benefit to Mr Giles sister as a non- dependant.

Practical implications to clients and advisers flowing from the NARUMON case?

For clients with SMSF balances and advisers administering SMSFs there are a number of practical implications that follow from the principles enunciated by Justice Bowskill in the Narumon case:

1. As with most cases, the outcome of a particular issue turns on the individual facts and the relevant law in the state in which the case is determined. Clients and advisers will need to carefully review the provisions of their trust deeds and the provisions of the relevant Powers of Attorney Act in the State in which the member is resident when considering whether a power of attorney can make or renew an existing death benefit nomination.
2. What the case does seem to highlight is that it is possible for a client to permit their enduring power of attorney to make or renew a death benefit nomination if it is a permitted “conflict transaction”, expressly specified in the relevant power of attorney and if the trust deed also permits the attorney to exercise such power  of the member as the trust deed did in the Narumon  This degree of flexibility may be useful with families in conflict and where a member wants to give more control to their spouse/partner or power of attorney to make or alter their death benefit nomination and make it binding during a period of incapacity where there is a change of family circumstances.
3. There are many trust deeds in Australia which are silent or unclear about the form of a binding death benefit nomination and which purport to prescribe a form of nomination to be binding that complies with the “requirements of the superannuation law”. That is they attempt to import a regulation 6.17A form of binding death benefit nomination. Based on the Narumon case these nominations would not automatically be imported into the deed. As a result many death benefit nominations that are made from a trust deed purporting to follow regulation 6.17A as a binding death benefit nomination could be invalid! They would be invalid because regulation 6.17A does not apply to an SMSF and a court following the Narumon case would limit the interpretation of “requirements of the superannuation law “to the administration requirements of the fund generally in meeting its complying status.  The form of nomination in Narumon was only held valid because the deed, by using reference to “may” meant on an objective basis that it did not require strict compliance with any particular form of nomination.
4. Pension documents which are missing could result in assets that form retirement phase income streams being dealt with as part of a death benefit nomination, potentially contrary to the wishes of client who wants to allocate their pension and accumulation balances on death to different people. This is important for clients, particularly in blended families who have beneficiaries competing for their superannuation balances. Typically, they leave their pension balances to a spouse or partner by reversion and their accumulation balances to be cashed out to non tax dependants, regulated by their death benefit nominations. Further, if there is no clear extrinsic evidence that a pension is reversionary, a beneficiary would lose the benefit of the 12 month crediting rule under the transfer balance Cap. Clients and advisers should revisit their pension documents and determine whether there is enough extrinsic evidence to support a reversionary pension.  If in doubt they should prepare deeds affirming or substituting the original pension documents or, alternatively, and subject to their trust deed(s), rolling back and commencing fresh pensions that are expressed to be reversionary.
5. Clients and advisers should review the processes that have been applied to update previous trust deeds or where there has been a previous change of trustee to ensure that the change process has been strictly performed in accordance with the terms of the trust deed. A defect in this process could make an otherwise perfectly valid and binding death benefit nomination prepared based on a current deed, being declared invalid!

Chris Hill, principal, Hill Legal Lawyers and Consultants