Even though the superannuation regime has been in force in Australia for some 30 years, there remain some fundamental issues which required determination and the High Court has recently passed down judgment. The question concerned the ability of a superannuation account holder to say what happens to their benefits in the event of their death. It might seem incredible that such a problem has persisted for so long, after all, this situation is extremely common and is encountered by solicitors and executors alike all around the country every day.
The issue arises because of the complex interactions between documentary requirements, and the different kinds of superannuation funds which are permitted in the regime. This particular case concerned a Self Managed Superannuation Fund (a “SMSF”). Members of a SMSF can manage their own superannuation if they meet the pre-conditions of establishment of the fund. They can then invest the funds as they choose within certain parameters and as long as the rules established in the legislation are met. Many people find using a SMSF a more practical tool for gathering together funds for retirement. Some people hate the idea. The important idea is that the legislation allows for the choice.
The disposition of the funds, accumulated by a SMSF member to fund retirement, will need to be determined if that member dies before becoming entitled to the moneys. There are rules which govern how a member might determine how their funds are to be distributed after death. Regulation 6.17A of the Superannuation Industry (Supervision) Regulations 1994 (“the Regulations”) provides some guidance: Notice must be given to the trustee, the notice must be in writing, the recipient must be the legal personal representative of the deceased, or a dependent, the benefit must be clearly allocated, and the document must be witnessed correctly. Subregulation 6.17A(7) provides that such a notice can only last for up to 3 years.
All this works well for commercial funds but applying those rules to SMSFs has proven more difficult. The 3 year requirement caused the most consternation. Because SMSFs are run by the members themselves, it often falls to the members to remember to comply with the requirements. Deadlines sometimes pass by because members fail to diarise important future dates. Old trust deeds might not comply with newer legislative requirements. Planning for the future can come to nought where death benefit nominations fail. Whether or not all these practical matters even mattered for SMSFs was uncertain.
In Hill v Zuda, the death benefit nomination was contained in the agreement itself. The entirety of the benefit transferred to the other member of the fund. The notice therefore had not been prepared or witnessed in accordance with subregulation 6.17A, and in addition, the agreement was greater than three years old when the deceased passed away. The deceased’s daughter sought the payment of the benefit to herself, and filed proceedings in the Supreme Court of Western Australia. She argued that regulation 6.17A applied to all superannuation funds in Australia, and that the nomination, as expressed as a term of the SMSF deed, was therefore invalid because of its non compliance with the regulations. Ms Hill was unsuccessful at trial, on initial appeal, and eventually in the High Court.
The High Court, in a rare 7 judge majority, held that regulation 6.17A does not apply to SMSFs. They state (at paragraph 32):
“That the requirements of reg6.17A(4) concerning the giving of notice by a member of a regulated superannuation fund to the trustee of that fund to not apply to an SMSF is not surprising given that an SMSF is, by definition, a superannuation fund in which the members of the fund are also directors of the corporate trustee of the fund. In the contest of an SMSF, giving notice of the kind envisaged by reg 6.17A(4) as expounded in reg 6.17A(6) and (7) would be at best an exercise in formality and at worst redundant. The two purposes of reg 6.17A – enabling members to compel trustees to distribute death benefits in accordance with their wishes and ensuring that members have sufficient information – are inapt to administration of an SMSF.”
What this all means is that the confusion which earlier applied has been erased. The strict requirements in the regulations have been held not to apply to SMSFs. It is hard to imagine a situation where a member of a SMSF would want a 3 year lapsing death benefit nomination in any event. The ruling means that Funds can set up their own structures for determining how to allocate death benefits. This affords funds and their members greater flexibility in future planning and provides security to their beneficiaries.