29/06/2015

Binding Death Benefit Nominations (or BDBNs for short) are a hot topic at the moment and here's the top 5 things you should know about them.

1.    It is part of your estate planning

A lot of people think that completing and signing a BDBN form is a mere formality as part of establishing an SMSF.  Nothing could be further from the truth as a BDBN should always be considered with reference to a member’s Will and how both documents will interact with each other.  

For the best outcome, a BDBN should be prepared as part of a member’s estate planning strategy. If a BDBN is drafted in isolation, a beneficiary could potentially lose a portion of their entitlement to the tax man.

Also, there generally isn’t much flexibility available when preparing BDBNs for public offer funds and alternative options may need to be explored to achieve a member’s intended goal.

2.  How many witnesses?

When it comes to preparing a BDBN, the legislative requirements, including the requirement to have two witnesses, are contained in reg 6.17A of the SIS Regulations.  

As reg 6.17A applies to public offer funds, a BDBN for this type of superannuation fund must meet all the criteria set out in this regulation in order to be binding on the trustee.

But what about SMSFs?

Well, while the ATO has expressed the view that section 59 of the SIS Act and regulation 6.17A of the SIS Regulations do not apply to SMSFs (SMSFD 2008/3), some commentators have rightly pointed out that this determination does not bind the Commissioner of Taxation or even the Courts.  However, comments made by the Court in the recent Munro v Munro case seem to indicate its support of the ATO’s view.  That being said, it is still possible for a fund to expressly import the requirements of reg 6.17A in its trust deed.

If the fund is governed by the SUPERCentral Governing Rules (“SCGR”), rule 22.4 of the SCGR expressly excludes reg 6.17A.  This means that reg 6.17A does not form part of the rules of the fund; instead the criteria for a binding nomination are in rule 15.18 of the SCGR.  

It should be noted that while rule 15.18 does not require the nomination to be witnessed in order to be binding, it is always good practice to have someone (who is not a beneficiary) witness the signing of the document, particularly if there is a risk of it being challenged by an aggrieved third party.

If the fund is not on the SUPERCentral system, it is best to read the trust deed to check whether reg 6.17A is incorporated and the criteria for a binding nomination, including the number of witnesses.

3. Is it lapsing?

The requirement that a nomination lapses after 3 years also comes from reg 6.17A, which means that a BDBN for a public offer fund will lapse after 3 years unless it is renewed.  

As for SMSFs, the trust deed will state whether the nomination is lapsing or not.

Any nomination made in accordance with the SCGR is non lapsing; it will last indefinitely or until revoked.

Even though a nomination is non lapsing, this does not mean it should be put aside and forgotten about until the time comes to dig it up.  BDBNs should be reviewed and, if needed updated, every few years, particularly if a member’s circumstances change to the extent that the nomination no longer reflects their wishes.

4. How to nominate the estate?

Munro v Munro highlighted the importance of using the right terminology to nominate a member’s estate in a BDBN.  It also stressed the importance of looking at the provisions of the trust deed as these will generally dictate how a member should nominate their estate as a recipient of their super benefits.  Generally the safest option is for a member to name their Legal Personal Representative as this would include not only the executor but also the administrator of their estate.

5. Can it nominate adult children?

The categories of eligible beneficiaries for death benefits are listed in reg 6.22, which applies to all superannuation funds, including SMSFs.  They are a member’s super dependants or their Legal Personal Representative.  As the definition of ‘super dependant’ includes the member’s children, regardless of their age, adult children are eligible beneficiaries but they are likely to pay tax on the taxable component of those benefits.

For further information, please contact Townsends Business & Corporate Lawyers on (02) 8296 6222.