Greater certainty with SMSF BDBNs

A BDBN is a direction made by a fund member to a superannuation fund trustee compelling the trustee to pay the member’s death benefits in a certain way to:

• the member’s dependant(s); and/or 
• the member’s legal personal representative (LPR). 

The LPR in this context is typically the executor/executrix of the deceased member’s will or otherwise an administrator appointed under letters of administration where a fund member has died without a will (ie, intestate). 

In Hill v Zuda, the High Court confirmed that BDBNs made in respect of self managed superannuation funds (SMSFs) can last beyond 3 years. 

What impact does superannuation legislation have on BDBNs?

The option of making an indefinite or non-lapsing BDBN is generally not available for large APRA-regulated superannuation funds. This is because BDBNs for non-SMSF funds are generally subject to the onerous restrictions in reg 6.17A of the Superannuation Industry (Supervision) Regulations 1994 (Cth) (SISR). Such BDBNs must typically be renewed every 3 years to remain valid and binding on the trustee. 

The finding in Hill v Zuda that reg 6.17A does not apply to BDBNs in an SMSF, was consistent with the Commissioner of Taxation’s view in SMSF determination SMSFD 2008/3, and a number of prior State supreme court decisions, subject to the SMSF deed not expressly or impliedly importing a lapsing provision based on the SISR rules. Thus, Hill v Zuda confirms the legal position that a BDBN by an SMSF member can last indefinitely. Moreover, this confirmation is by the High Court which applies on an Australia-wide basis meaning other lower courts, including each State Supreme Court, must follow the High Court’s decision.

This means that each BDBN made by each SMSF member should be reviewed as many SMSF deeds have been incorrectly drafted on the basis that BDBNs for SMSFs were limited to 3 years. (Note that the DBA Lawyer’s SMSF deed has provided for indefinite or non-lapsing BDBNs since mid-1999 and DBA Lawyers’ position has now been confirmed by the High Court).

Note that there is a reasonably high level of risk relating to legal disputes involving BDBNs and therefore it is worthwhile having BDBNs and related SMSF deeds checked by an experienced SMSF lawyer. 

It is strongly recommended that each ‘SMSF Will’ and similar documents such as a ‘death benefit rule’ also be reviewed in this regard by an experienced SMSF lawyer as many have significant weaknesses. While these documents may have a different name or label (compared to a BDBN), they may also be covered by reg 6.17A of SISR and be subject to a 3-year limitation period (assuming they are valid and effective). (Note there is no defined or fixed meaning of what is a BDBN and SMSF Wills and death benefit rules may be treated under the same legislation despite the different label. The High Court in CPT Custodian Pty Ltd V Commissioner of State Revenue (2005) 224 CLR 98 at [15] states that:

... "unit trust", like "discretionary trust", in the absence of an applicable statutory definition, does not have a constant, fixed normative meaning ...

Moreover, the High Court in Hill v Zuda did not entertain arguments that BDBN provisions included in the SMSF deed should be treated in a different manner to a BDBN in relation to the 3-year rule.

BDBN strategies depend on the fund’s document trail

Importantly, the decision of Hill v Zuda highlights the fact that SMSF BDBNs are, in both form and substance, a creature of the relevant SMSF deed. In particular, the option of making an effective BDBN depends on the SMSF deed including appropriate and robust BDBN provisions.

This is why obtaining a well drafted SMSF deed is so important. Furthermore, it is also important to obtain deed updates and variations from ‘quality’ and qualified suppliers. Relevantly, all deeds of variation in an SMSF’s document trail must comply with the variation power in the prior deed, with any relevant consents and notifications obtained, and any other appropriate legal formalities complied with.

If the applicable formalities are not complied with in relation to each document comprising the fund’s document trail, the fund’s latest deed may not be valid and effective. The implication of this is that BDBNs and other strategies undertaken on the basis of flawed documents may be rendered shaky and possibly invalid. 

Even a well-drafted BDBN instrument that has been diligently prepared on the basis of a fund’s latest deed may not be effective if the fund’s document trail has deficiencies that give rise to legal uncertainties, including questions regarding which deed contains the operative governing rules. 

Accordingly, SMSF trustees and members who wish to implement succession planning strategies that rely on BDBNs should ensure that any older or outdated deeds they may have in place are reviewed and updated with an appropriate deed that supports indefinite or non-lapsing BDBNs. 

Also, the fund’s full document trail should ideally also be reviewed by an experienced SMSF lawyer to ensure there are no deficiencies or problems that need to be addressed. Identifying potential issues and taking remedial steps in a timely manner is generally more cost and time effective than defending a legal challenge from an aggrieved beneficiary where the fund’s document trail gives rise to any uncertainty.

SMSF BDBNs should be regularly reviewed 

Despite the High Court confirming that a member of an SMSF can make a BDBN that can last indefinitely on an appropriately drafted SMSF deed, it is important to emphasise that BDBN strategies should not be implemented on a ‘set and forget’ basis.

DBA Lawyers recommends that SMSF members should review their BDBNs at least every 3 years or sooner if the member’s circumstances change, eg, in the event of:

• a death of the family; 
• separation or divorce; or 
• there being a new partner/spouse on the scene for the member. 

The ongoing appropriateness of a BDBN should also be considered with regard to any changes in the member’s estate and succession plans. 

In summary, expert advice should be sought to ensure that the BDBN reflects the member’s current circumstances in conjunction with the member’s estate and succession planning documents.

Conclusions

Hill v Zuda indicates that the SMSF deed — not regulation 6.17A of SISR — is the supreme governing document for SMSFs. Accordingly, this allows SMSF deeds to have BDBNs that can last indefinitely. 

Given the fact that most SMSF deeds are of questionable quality, SMSF members who wish to implement a BDBN should have their SMSF deed document trail reviewed, updated and, where relevant, rectified. As noted above, a full document trail review should be undertaken to ensure that the BDBN and the fund’s latest SMSF deed is not based on ‘shaky’ foundations.

Instead of seeking to rely on SMSF Wills or death benefit rules, we recommend that given the clarity provided by the High Court in Hill v Zuda, that BDBNs be used based on a quality deed. In particular, advisers preparing SMSF Wills or death benefit rules face significant risks following the High Court decision and are best advised to rely on an indefinite BDBN as approved by the High Court.

Finally, as noted above, we recommend that SMSF deeds and related legal services be obtained from a quality law firm that has expertise in the field of SMSFs, succession planning and tax. 

Daniel Butler, director, DBA Lawyers