SMSFs warned on ambiguous clauses after High Court decision

The Court determined that regulation 6.17A does not apply to SMSFs and that a binding death benefit nomination for an SMSF can therefore last indefinitely.

Speaking in a recent webinar, DBA Lawyers special counsel Bryce Figot said while this decision clarifies that regulation 6.17A does not apply to SMSFs, there may be SMSF deeds that purposefully or even accidentally opt into having this regulation apply.

“If the deed does opt you into regulation 6.17A, then the BDBN can only last three years,” warned Mr Figot.

This means that where an SMSF trust deed opts into regulation 6.17A applying to the fund or even where it is merely ambiguous on the issue, the deed will likely need an update, he explained.

Mr Figot referred to the case Donovan v Donovan [2009] QSC 26, where the deed was ambiguous in terms of whether regulation 6.17A applied to the SMSF.

In Donovan v Donovan, the deed stated that “a member may make a binding death benefit nomination in the form required to satisfy the statutory requirements”.

The deed defined statutory requirements as:

“Requirements imposed under any law or by any statutory authority which must be satisfied by a superannuation fund in order to qualify for income tax concessions provided that where the Member's Application indicates that the pension is taken out to comply with the requirements of the Social Security Act 1991 of the Veteran's Entitlements Act 1986, the term shall include those acts.“

The judge in this case concluded that the deed had purposely opted into regulation 6.17A regime, Mr Figot explained.

The judge stated that “it was quite plain that the intent of the deed [was] to require the nomination to be in the form described in regulation 6.17A”.

“I would question whether that really was quite plain when it said the member may make a binding death benefit nomination in the form required to satisfy the statutory requirements. Statutory requirements had a very vague and broad definition,” Mr Figot noted.

Mr Figot said it is important, therefore, that the SMSF deed makes it very clear that regulation 6.17A does not apply.

For example, the deed may state “for the avoidance of doubt, a BDBN is not rendered invalid to the extent that it does not satisfy any requirement expressed in section 59 of the SISA or in regulation 6.17A of the SISR”, explained Mr Figot.

It is also vital to check the BDBN, he said, in case it states that it only last for three years or is any way ambiguous.

“If there's a template that you or your clients tend to use in making BDBNs then you need to check that template,” he said.

"We now know that a BDBN can last indefinitely if properly made, but we also know that depending on the documentation you use, it might only last for three years.”