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Are SMSF wills really ‘safer’ than BDBNs?

By Bryce Figot & Daniel Butler
11 February 2022 — 6 minute read

With the High Court to soon hand down its judgement on the appeal from Hill v Zuda Pty Ltd [2021] WASCA 59, some have suggested that SMSF wills are a way of avoiding the potential pitfalls of BDBNs. However, in many circumstances they can be more risky.

Soon the High Court will hand down a judgement being the appeal from Hill v Zuda Pty Ltd [2021] WASCA 59. This will be a critical judgement. It will definitively answer (among other things) whether an SMSF binding death benefit nomination (BDBN) can last either indefinitely or a maximum of only three years.

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. This article considers that issue: namely, is an SMSF will ‘safer’ than a BDBN? This article concludes that no, 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.

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Firstly, what exactly is an SMSF will?

The first question to ask is what exactly is an SMSF will.

Well, even really well accepted terms do not have fixed, constant, normative meanings. For example, common terms like ‘unit trust’ and ‘discretionary trust’ do not have constant, fixed normative meanings. See the High Court’s judgements in CPT Custodian Pty Ltd v Commissioner of State Revenue [2005] HCA 53 at paragraph 15 and Chief Commissioner of Stamp Duties (NSW) v Buckle [1998] HCA 4 at paragraph 8.

Accordingly, if terms like ‘unit trust’ and ‘discretionary trust’ do not have fixed, constant, normative meanings, a far more novel term such as ‘SMSF will’ does not have a fixed, constant, normative meaning.

Instead, as the High Court tells us, to obtain the meaning of a term, one must read the specific legislative regime. The SIS legislation does not use the term ‘SMSF will’, so the concept is only whatever the current governing rules of the SMSF defines the term to be.

Accordingly, different SMSF governing rules might have different definitions of ‘SMSF will’. 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.

What is the actual difference between an SMSF will and a BDBN?

Assume that an SMSF’s governing rules do define an ‘SMSF will’ and defines it as a document from an SMSF member accepted by the SMSF trustee binding the trustee as to how to pay that member’s superannuation death benefits. How does that differ from a BDBN?

The short answer is that an SMSF will might not necessarily differ at all from a BDBN. Consider the following.

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…’ (See section 59(1A).)

The Superannuation Industry (Supervision) Regulations 1994 (Cth) (SISR) are drafted in similar terms. (See regulation 6.17A.)

Accordingly, several significant risks with ‘SMSF wills’ are presenting themselves. We now focus on two of them.

SMSF will risk 1: A court might hold an SMSF will is a BDBN

If the High Court in Hill v Zuda decides that the BDBN rules in the SISA and SISR apply to SMSFs, a court might 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.

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

Accordingly, yes, an SMSF BDBN currently has uncertainty as to whether it can last three years or indefinitely. However, an ‘SMSF will’ also has this uncertainty.

SMSF will risk 2: The 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.

The case of Re Narumon Pty Ltd [2018] QSC 185 is instructive in this regard. It considers many issues. One issue was the validity of a 2007 document purporting to be a deed implementing a new set of governing rules. 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. The document therefore failed and thus the set of governing rules it was trying to implement failed.

A BDBN suffers from this weakness (ie, the validity of the governing rules under which a BDBN is made might be attacked). However, the same is true of ‘SMSF wills.’

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. As a further example, an ‘SMSF will’ might require that a trustee ‘accept’ the ‘SMSF will’ in order for it to be valid. 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. 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.

Naturally, we have been referring to BDBN cases in this article as there are not any SMSF will cases. We don’t believe that this is because BDBNs are inherently weaker than SMSF wills. Instead, we believe it is simply because:

  • an SMSF will is in substance just a type of BDBN (ie, ‘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…’); and
  • SMSF wills are novel and less frequently used than BDBNs and thus SMSF wills have had less chance to be litigated.

Practical solutions 

There are many practical solutions. One obvious solution is to take great care to ensure that all formalities etc are satisfied and the BDBN rules in the SISA, the SISR and the governing rules are all satisfied. (This of course is often easier said than done.)

There are other solutions too, which we won’t detail in this article.

However, we struggle to see an SMSF will being much of a practical solution. In fact, SMSF wills now suffer from two significant downsides that BDBNs don’t.

Firstly, there is now a growing body of jurisprudence regarding BDBNs allowing 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.)

Secondly, SMSF wills might lull people into a false sense of security. Hopefully this article proves that SMSF wills are risky and there is danger in thinking otherwise. If you are relying on an SMSF will, we strongly recommend that you have an experienced SMSF lawyer review it together with the SMSF deed document trail to ensure it is valid.

By Bryce Figot, special counsel and Daniel Butler, director, DBA Lawyers.

Are SMSF wills really ‘safer’ than BDBNs?
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