A Matter of Trust: The High Court’s Scrutiny of Self-Managed Superannuation Fund (SMSF)

The High Court’s Scrutiny of Self-Managed Superannuation Fund (SMSF) and Binding Death Benefit Nomination (BDBN)

By Grahame Young FTI, TEP, Barrister, Francis Burt Chambers

Famously, but not at all relevantly to this article, a TLA is itself a threeletter acronym.1 SMSF and BDBN are four-letter acronyms for Self Managed Superannuation Fund and Binding Death Benefit Nomination which terms have been the subject of recent scrutiny by the High Court in Hill v Zuda [2022] HCA 21. Coincidentally the names of both parties are also of four letters.

This article is in two parts: those seeking guidance as to the practical application of the decision should proceed directly to the second part and ignore the cri de coeur in the first.

The legislation

As noted by the High Court, an SMSF is by definition a superannuation fund that is managed by its members. That fact might give rise to an expectation that the legislative regime should be readily understandable and accessible by those laymen tasked with administering the fund. And this is especially so given that the value of funds held by SMSF’s in Australia approaches a trillion dollars and non-compliance can have severely adverse taxation and other consequences.

Alas, that is not so.

The decision in Hill v Zuda is that for an SMSF, a BDBN does not expire after 3 years as they do for other regulated funds.

The legislative path leading to that conclusion involves the following steps of reasoning taken under the Superannuation Industry (Supervision) Act and Regulations:

Sections 31 and 32 provide for standards to be prescribed by regulations made under section 353; Section 55A deals with cashing member benefits after death of a member;

Subsection 59(1), subject to subsection (1A), provides that the governing rules of a superannuation entity other than an SMSF must not permit a discretion to be exercised by a person other than the trustee unless certain conditions are satisfied;

Subsection 59(1A) provides that despite subsection (1) the governing rules may, subject to complying with any conditions in the regulations, permit a member to require the trustee to provide a member’s death benefits to the legal personal representative or a dependant or dependants of the member; Regulation 16.17(1) provides for the purposes of subsections 31(1) and 32(1) that the standards set out in regulation 6.17(2) are applicable to all superannuation funds;

The standard in regulation 16.17(2) (a)(i) permits benefits to be cashed in accordance with Division 6.3 of the Regulations including Regulations 6.21 and 6.22;

Subregulation 6.17A(1) provides for subsections 31(1) and 32(1) that the standard set out in subregulation (4) is applicable to the operation of all regulated superannuation funds; Subregulation 6.17A(2) provides for subsection 59(1A) that a member may require death benefits to be paid to the legal personal representative or a dependant of the member if the trustee gives the member information under subregulation (3);

Subregulation (4) sets out conditions to be satisfied in respect of a notice given under subsection (2) including witnessing requirements;

Subregulation (7) provides a notice given under subregulation (4) ceases to have effect after 3 years.

The court noted that there was no dispute that subregulation 6.17A(2) is referable solely to section 59(1A) and that neither of subregulations 6.17A(2) or (3) has application to an SMSF.

The court found that the substantive question whether subregulation 6.17A(4), including the 3-year lapsing provision, applies to an SMSF was to be answered by the preferable interpretation of subregulation 6.17A(1) being that it makes the standard set out in subregulation (4) applicable only to the funds to which that subregulation is in terms applicable, those being that the governing rules permit a member to provide benefits in accordance with subregulation 6.17A(2).

Since subregulation 6.17A(2) has no application to an SMSF, neither does subregulation (4). And since subregulation (4) has no application to an SMSF, neither does subregulation (1) (despite its apparently unqualified operation). Whilst the logic is unchallengeable, and noting the High Court’s comment that the Court of Appeal ought to have reached the conclusion itself rather than adopting the conclusion reached by another intermediate appellate court, what hope has the lay administrator in navigating through this legislative labyrinth?2

No matter how desirable it would be that the legislative regime for SMSF’s could be rescued from this morass of incomprehensibility, the writer sees little or no hope of that in his lifetime, only increasing complexity.

Practical application

A member’s superannuation benefits can be substantial compared to personally owned assets that will pass by their Will. A BDBN is not a Will, but in many respects it has the same consequence of determining entitlement to an asset after death.

And, just like a Will, challenges to the validity of a BDBN can and do happen.3

A BDBN should not be treated as a tick the box exercise or filling in a standard form. The first and most essential task is to obtain and read the governing documents. That may entail finding the original deed, any amendments and the latest rules adopted.

The documents need careful consideration to determine if BDBN’s are permitted, and, if so, what formalities are prescribed? These may require adherence to a prescribed form, witnessing requirements and service, and acknowledgement of receipt or approval by the trustee.4 Mere filing with other fund documents may be insufficient. Whether or not witnessing is required, it is suggested that it would be unwise5 not to have the nomination independently witnessed.6

Any solicitor taking instructions for a Will, enduring power of attorney or guardianship or a succession plan ought satisfy themselves whether a BDBN has been made, is valid and whether and how it may be replaced if needed.

Even if the instructions are simply to make or update a BDBN, I suggest a solicitor should follow the same procedures as for a Will, by being satisfied as to capacity,