DEATH BENEFIT NOMINATIONS (DBN)1 AND THE ELYSIAN FIELDSExecutive Summary1. The authors of the Cooper Report (at p154) were correct in recommending a change of approach to DBNs to lessen the possibility of an inequitable outcome due to changed circumstances and for the judicial consideration of DBN’s to be guided by relevant testamentary disposition legislation and, by inference, the established common law approach to those types of matters.2. In my view, the recommendations should have gone further and should have recommended amendment to legislation in order to facilitate this approach. A genesis of this discussion3. In the Cooper Report at p.154 the author correctly reports that “… a Trustee has no discretion when the member has lodged a valid binding death nomination and must pay benefits to the nominated beneficiaries, subject to them meeting the legislated eligibility criteria.”4. The concern of the author was that the binding nature of DBN’s could work an inequity because of changed circumstances but referred to the rule requiring re-confirmation every three years designed to “… ameliorate the risk of inequitable outcomes due to a change in circumstances.”5. A further concern was that DBN’s could lead to unintended outcomes because of changed circumstances of the deceased and changed circumstances (resulting from things such as divorce). A recommendation is made that “… binding death nominations should be invalidated when there are intervening circumstances. The current system used by the1 PV Slattery QC, Barrister, Anthony Mason Chambers, Adelaide For the purposes of this paper, the singular includes the plural; masculine includes the neuter and all other genders.PVS1060
2 States and Territories could be looked to for guidance and then an appropriate amendment made to the SIS Act …”6. This discussion led to recommendation 5.14 which reads as follows: “The SIS Act should be amended so that binding death nominations would be invalidated when certain “life events” occur in respect of the members. The current systems used by States and Territories under which testamentary dispositions are invalidated could be used as guidance for creating a single national model.”7. The thesis of this paper is to: 7.1 Recommend acceptance of recommendation 5.14 of the Cooper Review, but, in circumstances where the implementation of that recommendation can only occur in the same structured environment as exist in relation to testamentary dispositions; and 7.2 Suggest that the recommendation falls short of a complete answer to the problem created by a death benefit nomination when viewed in light of practical circumstances, Trust Deed terms, and the (perhaps sometimes inevitable) falling out between family members in relation to the binding death benefit nominations which are internally no more than and must be viewed in the same context as testamentary dispositions. 7.3 A second recommendation (5.15) that binding death benefit nominations should only have to be reconfirmed every five years. In light of the discussion that preceded that recommendation, it is difficult to understand the justification for it, however, that is a matter for another day and will not be addressed in this paper.8. It is obvious that this Paper will not deal with non binding death benefit nominations and it will not deal with any other type of superannuation fund, except a self managed superfund (SMSF) (even though much of what is said here may be applicable to entitlements in other APRA regulated funds).
39. In a paper delivered to the Tasmanian division of the Tax Institute of Australia on 15 October 20102 Susan McKenzie3 (“McKenzie”) describes a number of issues about proposed death benefit distributions being questioned because of: 9.1 Questions about whether a particular document might constitute a binding death benefit nomination; 9.2 Confusion over whether a binding death benefit nomination has been invalidated; 9.3 Misunderstandings about whether a person is a dependant; 9.4 The death of a nominated dependent and the Trustee not then knowing who is eligible for the death benefit payment; 9.5 Certain eligible dependents determining to waive their interest in the distribution; 9.6 In an SMSF context, who should continue as Trustee or directors of a corporate trustee when one of the members dies?10. In my view, this is a very useful list as a starting point in giving considerations to the problems that arise in dealing with DBNs. I do not propose to deal with all of these questions and I recommend a close reading of McKenzie’s paper, which is both detailed and informative. In my opinion, for the reasons which I set out hereunder, the dominant issue in all of this is: Has the deceased properly dealt with his superannuation entitlements in a manner that fulfils the intention of the deceased (about what is probably his largest asset).11. I propose that after the death of any person, the same approach that Courts apply to testamentary instruments and their admission of testamentary instruments to Probate should be applied to death benefit nominations. This approach is the product generally of a mixture of statutory and common law developments of longstanding duration.2 “Breaking the Shackles of Tax: Dying for Super”.3 Partner, DMAW Lawyers.
412. At paragraph 1.2 of her paper, McKenzie4 suggests that: “During the recent review of the Australian Superannuation System headed by Jeremy Cooper members of the industry questioned whether it might be more appropriate for all superannuation to be paid to a deceased member’s estate to be then handled as part of the deceased estate. While Cooper was prepared to make some recommendations around death benefits5 he wasn’t prepared to go this far despite there being some merit in this approach, particularly from a Trustee’s perspective.”13. In my opinion, Cooper should have recommended a broadening of the approach to DBNs to be dealt with in a manner similar to or identical to testamentary dispositions. In my view, there is very little justification for creating a separate set of rules and structures for dealing with the assets of a deceased after that person’s death, whether they be superannuation assets or otherwise. Where the wishes of a deceased in relation to their super entitlements have been sufficiently communicated and recorded, then that record should not be any less effective but for lack of compliance with a technical requirement of a Trust Deed stipulation than, for example, a will to be divined from a statement of intention of a deceased.14. I do not recommend a wholesale departure from the technical requirements of communication to a Trustee, of writing, witnessing and execution but I do not subscribe to the view, often heard, that the concept of a binding death benefit nomination in the context of a superannuation trust of a deceased person should fail for want of form prescribed under a Trust Deed. In my view that position is deserving of little merit.The Paradigm of Death Benefits Nominations15. Sub-regulation 6.22(2) of the Superannuation Industry (Supervision) Regulations (“SIS Regulations”) provides that death benefits must be cashed in favour of the deceased member’s:4 Op cit p.2 paragraph 1.25 Recommendations 5.14 and 5.15
5 15.1 dependants;6 or 15.2 Legal personal representative.716. The role of the executor of the Will in the context of legal personal representatives is to obtain the grant of probate (the proving) of the Will and, where necessary, any other orders for the administration of the estate. Administration of an estate ordinarily applies where a person dies without a will (intestate) and it then becomes necessary for another person to apply for a Grant of Letters of Administration and to become an administrator of the deceased’s estate.17. The paradigm is in relation to the position of a dependant. The definition of dependant under the SIS Act is broader than under the Tax Act.818. S10 SIS Act defines dependant for the purposes of regulation 6.22 to include: 18.1 a spouse of the deceased;9 18.2 any child of the deceased, including an adult child;10 18.3 any person who had an interdependency relationship with the deceased immediately prior to death;1119. It is apparent that the definition of an interdependency relationship is intentionally broad, is “inclusive” because of the use of the word “include” and, it must also be noted, the definition is conjunctive. All of the attributes can be satisfied by a combination of6 The SIS legislation treatment of dependant is different from the tax legislation treatment of a dependant. ITAA 97 provides that a death benefits dependant under Section 302-195 covers a spouse, a child under 18 years, a person with whom the deceased was in an interdependency relationship immediately prior to death and any person who was financially dependent upon the deceased immediately prior to death7 S.10 SIS Act defines legal personal representative as the executor of the Will or administrator of the Estate of the deceased person.8 Op cit n9 A spouse includes a de facto spouse and since 1 July 2008 a same sex spouse.10 A child includes an adopted child, a stepchild or an ex-nuptial child; since 1 July 2008 a child of the person’s spouse; and since 1 July 2008 someone who is a child of the person within the meaning of the Family Law Act 1975. This covers children born through artificial conception and surrogacy arrangements.11 An interdependency relationship is defined as persons having a close personal relationship, living together, one or each of them provides the other with financial support and one or each of them provides the other with domestic support and personal care, there are exceptions for those persons suffering from a physical intellectual or psychiatric disability who are in an interdependency relationship.
6 circumstances. The usual legal parlance is that these are all questions of fact. It is not the purpose of this paper to discuss aspects of interdependency; it is now quite clear that a parent can be interdependent upon a child12. And this topic has been adequately dealt with elsewhere.1320. From a purely practical perspective a matter of particular interest here is whether a de facto relationship exists and the parties to that de facto relationship are spouses.14 This reflects upon the changing attitudes and standards of society as a whole. The difficulty then is how to make an assessment of those standards and legislate accordingly in a way that is fair, equitable and is necessarily certain.21. There have been a number of judicial pronouncements about what constitutes a de facto relationship. The decision which is usually quoted in this context is that of Justice Powell in Roy v Sturgen.15 This and other like decisions do not define what is or is not a de facto relationship. As is usually the case in these matters of the exercise of discretion by judicial officers, a number of features are identified as being relevant in deciding whether or not there is a de facto relationship.16 The jurisdiction of Courts in relation to these types of relationships were formerly the province of State Courts, but are now largely dealt with in the Family Court.22. One of the peculiarities of being in the position of a trustee is that the trustee may receive a claim from a person claiming to be in an interdependency relationship or as a de facto12 Regulation 1.04AAAA; SCT Determination D06-07059; Malek (ATF the Estate of Antoine Malek) v Federal Commissioner of Taxation (1999) 42 ATR 1203.13 McKenzie Op cit.14 Generally, although not always, de facto relationships exist between two persons who otherwise be married. Because someone remains a spouse until they are formally divorced from t heir spouse, it is therefore possible to have several spouses at the same time.15 (1986) 11 NSWLR 454.16 In this context, they are: The duration of the relationship; the nature and extent of the common residence; whether or not a sexual relationship existed; the degree of financial interdependence and any arrangements for support between or by the parties; the ownership, use and acquisition of property; the procreation of children; the care and support of children; the performance of household duties; the degree of mutual commitment and mutual support; reputation and public aspects of the relationship.
7 spouse. Rhetorically, what is the trustee to do because the trustee must eventually make a decision about this claim? One suggested answer that is often proffered is for the trustee to gather as much evidence as the trustee has available to make a decision. In my opinion this is fraught with difficulty because, inevitably, in human relationships, there will be a contest about the matters upon which a trustee is called upon to make a decision, such as, whether a person is or is not a de facto spouse. Again, it is not the provenance of this paper to opine or advise on those issues, but, in my opinion, a trustee is placed in an unenviable position17. That is only complicated when there are, for example, short term relationships18 and just one complication is that very young people can be in a de facto relationship.1923. At the outset of this paper, I indicated my views about the interplay between the terms of trust deeds and the governing rules, binding death benefit nominations and the SIS Act. You will all be familiar with trust deeds that adopt SIS legislation definition as a “fail safe method” but the issue is whether this is a “fail safe method” or really gives any assistance in resolving issues that appear to arise almost daily. It is appropriate that a survey be made first of the applicable legislation, the principles of Equity that are well settled and firmly established and then to look at practical examples where little assistance may be gained from any of them.The application of SIS and SISR for BDBN’s in respect of SMSF’s24. The question of whether Regulation 6.17A SISR applies to an SMSF has been sufficiently ventilated and there is little that I can add which will, in any way, elucidate the positions that have been taken.20 We are all well familiar with the content of Regulation 6.17A17 More likely that a trustee will never please everybody in the exercise of discretionary powers18 In SCT Determination D09-10042 the SCT decided that a fiancé in the peculiar factual circumstances of that case was a spouse.19 SCT Determination D06-07/139 where two people under the age of 18, the male 17 and the female 16, who had been in a relationship over an 18 month period were held to be in a de facto relationship.20 cf McKenzie at paragraph 3.1 and 3.2 and Maddocks: Binding Death Benefit Nominations – Caution Required on Non-lapsing Nominations: October 2008: published by Cleardocs.
8 SISR. I will not reiterate those requirements here. We will also be well familiar with SMSF determination SMSF D 2008/3 in which the Commissioner expressed his opinion (non-binding legally) that s.59(1A) SISA and Regulation 6.17A SISR do not apply to SMSFs. The trust deed itself may provide that the formalities of Regulation 6.17A may apply.2125. It is not the purpose of this paper to express a concluded view about the application of s.59(1) and s.59(1A) SISA and SISR 6.17A.26. It is sufficient to say that at trust law, generally, a trustee’s (unfettered) decision making discretion could not be interfered with by outside parties. This was to avoid the situation where a person (the settlor) who established the trust and appointed trustees to it, reserved the rights to direct trustees like “marionettes”. The position became and remained that, apart from any conditions imposed on the trustees in the initial trust deed, they could not be subject to outside direction in the exercise of their discretion. The trust deed was the primary source of the rules and guidelines operating upon a trustee’s behaviour, discretions and responsibilities.27. An exception to that general Rule has always been the Superannuation Trust which are now described as Self Managed Superfunds, but were formerly described as Excluded Superannuation Funds before 1999. Under these arrangements, members of the SMSF could direct where and to who their death benefits are to be distributed. The only proviso is that they are required to be paid to the legal personal representatives of the member and/or dependants pursuant to Regulation 6.22 SISR.28. S.59(1) SISA provides a general prohibition against anyone other than a trustee exercising a trustee’s discretion. The sub-section operated in respect of the governing rules of a21 See Donovan v Donovan 2009 QSC 26. See also the comments of Justice Fryberg in that decision (that do not in any way form part of his Honour’s judgment or could be relied upon or cited as authority for any particular proposition) wherein His Honour opines that above all else, Regulation 6.17A SISR applies to SMSF’s.
9 superannuation entity other than SMSF’s, to the effect that in SMSF’s, a discretion under the rules may be exercised by someone other than a trustee. A binding death nomination is a binding direction on a surviving trustee. It is not connected with the exercise of a discretion. Thus, s.59(1) historically has never applied to SMSF’s which, also historically, have recognised the ability of a member to make a binding death benefit nomination directed to a surviving trustee.29. The Superannuation Legislation Amendment Act 1998 provides an amendment to s.59 SISA by the insertion of a sub-section 59(1A) and an amendment to s.59(1) to make that sub-section subject to the following sub-section, 59(1A).30. S.59(1A) permits trustees to structure the governing rules of a superannuation entity so the trustees can accept binding death benefit nominations from members. In addition, the sub- section enables conditions in relation to the acceptance of binding death benefit nominations by trustees to be prescribed in the SIS Regulations. It does not refer to questions of the exercise of discretion of trustees.31. By its specific wording (“despite sub-section (1)”), sub-section 59(1A) is a departure from the general operation of sub-section 59(1) and also does not contain a repetition of the reference to SMSFs. Sub-section 59(1A) is of general application (insofar as it is has application) and allows members of relevant superannuation entities to establish clear directions and processes about to whom death benefits are to be paid.32. The Superannuation Legislation Amendment Bill 1998 (“the Bill”) was debated in Parliament.22 Unhappily, none of the pertinent issues were identified or discussed. There22 In the second Reading speech on 11 February 1999, Mr Joe Hockey said the bill “will improve the efficiency and effectiveness of the Superannuation Supervisory framework. It will improve the certainty and efficiency of the existing arrangements in the processing of death benefit claims by superannuation trustees. We will be watching superannuation trustees very carefully so that they can be assured –and the beneficiaries can be assured– that a predictable, efficient and flexible program is put in place that ensures that the binding nomination from a member for the payment of a death benefit is as described and promulgated rather than simply an abuse of existing arrangements.” Mr Anthony Albanese said: “The amendment will allow superannuation funds to amend their rules so as to give binding effective to the death benefit nomination provided by contributors. In other words, where a superfund chooses to change its rules, members of the fund will
10 appears to be no ventilation of these matters that are, in one, so vexing and so unnecessary as to be a waste of time and effort.33. S.59(1)(a) SISA is also an exception to the general prohibition. It provides that the governing rules may permit a discretion to be exercised by a person other than a trustee. Otherwise the usual position applies that the governing rules require the trustee’s consent to the exercise of the discretion. The governing rules must provide that the trustee consent to the death benefit nomination. To implement this, the trustee must actively consent to such nominations through a process of appropriate consideration. have the security of knowing that upon their death their contribution will go to the person or people they have nominated when certain conditions are met.…when fund members make death benefit nominations, they have no assurance that those nominations will be followed, as payment is currently at the discretion of the Trustee…This Bill allows superannuation funds trustee to accept binding death benefit nominations –subject, though, meeting certain requirements.” Mr Kelvin Thompson said: “The Bill contains other measures. The most significant of these is the one that allows trustees to accept binding death benefits nomination. Trustees’ responsibilities and duties come from trust law and the superannuation industry (supervision) Act 1993. They place a prudential and fiduciary responsibility on superannuation fund trustees to exercise care, skill and diligence in undertaking their duties on behalf of Superannuation Fund members. Trustees regard the discretionary allocation of death benefit as an important part of those prudential responsibilities – there is no question of that it ought also to be noted to that, generally, trustees are not paid to undertake their role and do not benefit financially from that discretion to allocate death benefits. In the area of the death benefits, a superannuation fund trustee may accept a nomination by a fund member to pay any death benefit to any personal entity. Under the present arrangement, the member’s nomination is not binding on the superannuation trustee. Trustees have to ensure that any payment meets the sole purpose test, which is that a superannuation fund should be maintained solely for one or more core purposes or one or more ancillary purposes relating to the provision of benefits for use on or after retirement. The sole purpose test also allows for the provision of benefits on or after a fund member‘s death if the death occurred before the member retirement and- or age 65 and the benefits are provided to the member’s legal representative, to any of all of the member’s dependents or both. You can also have a fund member’s legal representative as a representative of a deceased estate. The Government’s Bill contains technical amendments which permits superannuation fund trustees to amend the trust deed of their Fund to allow them to accept Binding Death Benefit Nominations from members. I think it is fair to say that there are a number of advantages in having trustee discretion; there are also some advantages in not having trustee discretion.…some would argue –and I have heard this argued quiet vigorously – in favor of the person who has the Superannuation Fund in their name been able to have their wishes given effect to. They take the view that their wishes ought to be paramount....Ms Annette Sampson expressed the view that it is outrageous that fund members can not treat the super and death benefit emerging from it, in the same manner as assets held outside the superannuation system. She pointed out that, while dependants can challenge a will, it has clear legal standing as a statement of your wishes and a strong case is needed to overturn it. With super all you need to do is prove dependency, which can result in unfair distributions. She welcomed the legislation as a step forward on that basis. I believe that Ms Sampson’s general assumption the people should have a say in where their superannuation contributions and benefits are distributed in the event of untimely death is fair. It does leave out the flip side about the benefits of having trustees determine where death benefits should be paid. It also, I guess, leaves up the fact that the Government provides quiet general taxation concessions to superannuation savings for the purposes of assisting individuals to build the bigger retirement income.” Ms Julie Bishop said:”The first amendment to the Superannuation Industry (Supervision) Act would permit a trustee of the fund to amend the governing rules of the fund to enable the acceptance of binding death benefit nominations from members. Payment of a death benefit is ultimately a matter of trustee discretion and, in order to expand the range of options for trustees in managing death benefit payments and, most significantly, to provide more certainty to members, the SISA would be amended to remove any impediment to funds voluntarily structuring their governing rules so that trustees can accept binding death benefit nominations. Many funds presently use beneficiary nomination forms to obtain guidance from members on how they would like the Death Benefits allocated. However, trustees are not currently bound by these forms and, in fact, under Section 59 of SISA are prevented from being bound by such nominations. So, for funds that choose to adopt the proposed approach, the trustees would automatically pay the death benefit to the person named on the beneficiary nomination form- and that is a good thing. The conditions for the acceptance of binding death benefit nominations by trustees will be prescribed in the SISR, so that there are appropriate safeguard to ensure that nominations are valid and kept up to date.”
1134. The essential difference between the two exceptions is the absence of a requirement for consent by a trustee in ss.59(1A) SISA which instead requires compliance with SISR 6.17A.35. Pursuant to SISR 6.17A principally the notice must: 35.1 be signed and dated by the member; 35.2 witnessed appropriately by two individuals not mentioned in the notice; 35.3 the nominated beneficiaries must be either dependants or the legal personal representatives of the deceased member; and 35.4 The nominated beneficiaries must also be either dependants or the legal personal representatives at the date of the member’s death.36. There are two issues that arise from these matters: SMSF’s are not expressly excluded from the operation of s.59(1A) which sets the standards for binding death benefit nominations; SMSF’s are not expressly excluded from the operation of s.59(1)(a) which sets the standards for the payment of death benefits; a priori it is arguable that both come within the scope of the section.37. S.55A SISA provides that members’ benefits should only be cashed in accordance with standards prescribed by s.31 SISA. S31 SISA provides that the regulations may prescribe applicable standards for the operation of regulated superannuation funds.38. Regulation 6.17A SISR provides that for the purposes of ss.31(1) SISA the standard set out in sub-regulation (4) is applicable to the operation of regulated superannuation funds. S55A SISA was inserted by Act number 15 of 2007, s.3 and Schedule 1, Item 361 and is applicable to the 2007/2008 income year and later years.39. Ss.59(1A) SISA was amended by Act number 53 of 2004, s.3 and Schedule 2, Item 72 by substituting “a trustee of the entity” for “the trustee” effective 1 July 2004.
1240. The explanatory memorandum to the Superannuation Safety Amendment Bill 2003 clarified the operation of SISA provisions as they applied a trustees of superannuation entities.23 In particular, the amendments recognize that notice to an individual trustee is to be regarded as notice to the group of trustees.2441. There is considerable body of opinion that these sections “s.31, s.55A, s.59(1) and s.59(1A) and Regulations (6.17) and (6.17A) are not relevant to the circumstances of an SMSF.25Ruling SMSF D2008/D142. The ruling concerns whether there is any restriction under SISA on an SMSF trust deed accepting from a member a binding nomination of the recipients of any benefits payable in the event of a member’s death. In my view, SMSF’s or their predecessors have always operated on the basis that members have made nominations to surviving trustees in the form of binding wishes or nominations giving direction to those trustees for the distribution of the benefits belonging to the members in the fund.43. The ruling states that:23 6.2 of the Explanatory Memorandum provides: “The existing SIS Act provisions impose obligations on “the trustee”; however the trustee of a regulated superannuation fund may be either a constitutional corporation or a group of individual trustees. The purpose of these amendments is to clarify the operation of the provisions of SIS Act as they apply to trustees of superannuation entities, particular for a trustee that is one of a group of individual trustees. The purpose is not to alter the definition of a trustee”.24 Paragraph 6.4A of the Explanatory Memorandum provides: “Reference to a trustee means that one or more of the individual trustees must do something, or ensure that something is done. The references to “the trustee” are used to recognise that one of a group of individual trustees is required to act. For example, where APRA seeks to give a written notice to a group of individual trustees, it is not necessary for APRA to give written notice to each individual trustee within the group … A reference to “a trustee” is also used in relation to transactions entered into by the trustee. These amendments recognise that one or more trustees may enter an agreement or arrangement on behalf of the group of individual trustees, because the group of individual trustees does not possess capacity as a separate legal entity.”25 McKenzie, at paragraph 3.2.2 says the following, having identified the proposed interpretation approach under the Acts Interpretation Act (s.15AA) Cth 1901: “In my view the purpose of s.59(1A) of the SIS Act and Regulation 6.17A of the SIS Regulations is to permit trustees of large superannuation funds to pay benefits in accordance with a binding death benefit nomination …” Having again identified that binding death benefit nominations have been available to SMSF’s and, prior to that time, excluded superannuation funds, McKenzie asked rhetorically why there were no transitional provisions to cater for binding death benefit nominations that would have in existence when the new Rules commenced SF59(1A) and Regulation 6.17A commenced operation. Of course, equally, it may be asked, rhetorically, why s.59(1) and s.59(1A) are drawn so clumsily when an ordinary level of drafting skill could have made it quite clear that the provisions were not to apply to SMSF’s and having regard to the view expressed by the Commissioner in Taxation Ruling SMSFD 2008/D1, why it is that the Federal Parliament has not seen fit to correct what seems to be an anomalous drafting method
13 43.1 there is no such restriction because s.59 of SISA and Regulation 6.17A of SISR do not apply to SMSF’s; 43.2 a nomination is not binding to the extent that it nominates someone who cannot receive the benefits in accordance with the operating standards set out in SISR (which according to Regulation 6.17A(1) of SISR are set out in Regulations 6.17A(4)).44. The ruling concerns itself with the Rules that apply to SMSF trustees with respect to SMSF members making binding nominations. However, the principal focus of the ruling is really on the issue of to whom a deceased member’s benefit may be paid – that is, the Commissioner seeks to make it clear that death benefits can only be paid to the deceased’s member’s legal personal representative or dependants. That is the effect of Regulation 6.22 and one would have thought that does not need clarification.45. The Commissioner’s view, as expressed in the ruling, is that due to the exclusion of SMSF’s under s.59(1) and because s.59(1) is now made subject to s.59(1A) and because s.59(1) (now made subject to s.59(1A)) is expressed not to cover a self managed superfund, then s.59(1A) does not, in turn, apply to SMSF’s and to that extent, SMSF’s are unregulated.46. The difficulty with that argument is obvious. The opening words of s.59(1A) is “despite ss.(1) the governing rules of a superannuation entity may, subject to a trustee (singular) of the entity complying with any conditions contained in the Regulations permit …” There is no explanation or reason given or any reasoning elucidated about why the words “other than a self managed superfund” are not contained behind the words “superannuation entity” where they first appear in s.59(1A) so as to make the two sub-sections consistent. Moreover, there is no explanation, reasons for or reasoning about the use of the expression “despite sub-section (1), …”.
1447. The use of the word “despite” as the first word of the sub-section invites a form of reasoning that a disjunctive is intended. That leads to the rhetorical question what of ss.(1) of s.59 is not to be taken into account. Moreover, when one compares the two sub- sections, it is immediately to be noted that “trustees” plural is used in s.59(1)(a) whereas trustee singular is only used in s.59(1A). There is a historical reason why this is so, but that historical reason does not explain why a proper drafting method, including an exclusion from self managed superfunds (if that was the intention) was not used in this instance.48. A second rhetorical question that arises is why, in these circumstances, is it anathema to the operation of SMSF’s in these circumstances that minimum standard as prescribed under Regulation 6.17A are not equally applicable to SMSF’s as well as other regulated superannuation funds.The Superannuation Fund Trust49. Ordinarily a trust for a superannuation fund prescribes that the trust assets are held for the benefit of qualifying members on the terms and to the extent defined by the deed.50. The deed both embodies and gives effect to a contract between the trustee and the member.2651. The trustee has the usual obligation of a trustee to adhere to the terms and conditions of the trust deed and, specifically, to all obligations imposed by that instrument.2752. Departure from the terms and conditions of an instrument of trust is a breach of trust for which the trustee is strictly liable, subject to being relieved by the Court. The trustee has an obligation to pay money only to the persons to whom it is lawfully due. It is a breach of26 McFadden v Public Trustee for Victoria  1 NSWLR 15.27 The duty to observe the terms of the trust has always been seen as paramount. Underhill and Haydon call it: “The most important of all of the rules relating to the duties of trustees”: Law Relating to Trusts and Trust Deeds (17th Edition 2008). Jacobs, Law of Trusts in Australia (6th Edition 1997) says at  that it is the trustee’s duty “to adhere rigidly to the terms of the trust”. See also WMC Gummow and Youdan (ed) Equity, Fiduciaries and Trusts (Carswell 1989, 67: Youyang Pty Ltd v Minter Ellison Morris Fletcher (2003) 212 CLR 484 at .
15 trust for a trustee to pay money other than to the beneficiary or beneficiaries entitled to receive trust assets. A beneficiary who is either unpaid or underpaid by reason of a trustee’s mistaken or unauthorised payment to a third party, or a trustees over payment of another beneficiary, may sue the trustee for the recovery of the amount of the underpayment.2853. A trustee must be certain about the beneficiary or beneficiaries to whom monies are payable. This is no less applicable under a superannuation fund as under any other trust. In the usual circumstances, upon the death of a member, a superannuation trustee will have an express obligation to distribute benefits due to the member. In that instance, it would ordinarily be a breach of trust for a trustee to defer payment without proper cause. The vital question is the actual distribution of the benefits due to the member.29A (not so) imaginary example54. These principles are not immutable or so inflexible as to be unworkable. In order to make good that assertion, consider the following scenario: 54.1 ABC fund, historically always an SMSF (or its predecessor in style) was established by trust deed in June 1978 (the original deed). 54.2 The original deed was amended in June 1990, January 1994 and October 2003.We may assume that by no later than 2003 the fund was an SMSF for all purposes. 54.3 At the point of his death, Charles was a member of the fund and a death benefit became payable from the fund upon his death under the terms of the deed. Charles was the patriarch of his family and was the principal contributor to the fund. Though it was an SMSF, Charles was the most active trustee.28 Burns v Leda Holdings Pty Ltd  1 Qd R 214 at 227-8.29 cf sub-regulation 6.17B SISR.
1654.4 Throughout the existence of this fund Charles had made memoranda of wishes about the distribution of his death benefit and these were always the same: 25% to his surviving (second) wife Isabelle and the balance to two of his children from a prior marriage of Charles. Isabelle and the two children were not close.54.5 Prior to his death, Charles, as was his want, executed a document in the presence of his solicitors and two witnesses that he called a confidential memorandum.54.6 The confidential memorandum serves a variety of purposes. It recorded the instructions for a new will for Charles, it recorded that a binding nomination was necessary and it recorded that, for present purposes, it was his binding nomination form. The percentages of the death benefit entitlement and the beneficiaries of those wishes remained the same as it had always been.54.7 By an order of the Court, the confidential memorandum was admitted to probate as representing the last will and testament of Charles. The Court did not decide what the document meant, only that it was a sufficient record of Charles’ testamentary intentions and was in sufficient form to be admitted to probate.54.8 At the time of the death of Charles, the members of the fund were Charles and his wife Isabelle. They were the trustees of the superannuation trust. After the death of Charles, Isabelle as the sole member, appointed a company DEF Pty Ltd to be the trustee (hereinafter called “the trustee”). Isabelle is the sole director and shareholder of the new trustee.54.9 Charles had been the principal contributor to and principal beneficiary of the fund up until 2004. In 2003, Charles and Isabelle were appointed the trustees of the fund. Charles was nominated as the principal of the fund.
17 54.10 During the lifetime of Charles, Isabelle did not ever see the confidential memorandum. 54.11 Throughout his life, Charles kept strict control of the finances of the family business and in particular in his relationship with Isabelle. Generally, Isabelle was informed of any financial matters on a “needs to know” basis.55. At the time that the binding nomination paragraphs were inserted into the confidential memorandum, the solicitor who prepared the documents did not have in his possession a copy of the relevant trust deed. That deed had been amended by a deed of variation in 2003. This deed of variation and all the details connected with it were organised by Charles with other solicitors.56. The deed of variation was in fact a standard self managed superfund deed of a large legal firm. It is unknown what thought was given by those solicitors to the specific matters relative to the needs of Charles.57. Isabelle and the children of Charles of the first marriage are at odds. Isabelle has announced insofar as it is in her capacity to do so through her control of the trustee she will take the whole of the benefit to herself.58. Under the definitional terms of this SMSF, a binding nomination form was defined to mean the binding nomination form referred to in clause 9.5 and in the form set out in Schedule 2, or in such other form as the trustee may accept from time to time. The other definitional provisions are unremarkable and are generally standard e.g. dependent, member, nominated dependent, relative and the like.59. Turning to the operative provisions, the relevant provisions in respect of the benefits clause reads as follows:- “Subject to the provisions of this deed, a benefit equal to the members plan credit will become payable in respect of a member if:
18 (a) (b) (c) (d) (e) The member dies.”60. Under the payment of benefits provision the following trust deed terms apply:- “Where any benefit becomes payable to or in respect of a member or former member pursuant to this deed or the member or former member is not alive when the benefit is to be paid:- (i) Where the member has completed and served upon the trustee a binding nomination form, the trustee must pay or apply the benefit to or for the benefit of the persons, and in the proportion set out in that binding nomination bind; or (ii) Where the member has not completed a binding nomination form, or has completed a binding nomination form but all or part of it is ineffective or void, the trustee must pay or apply the benefit to or for the benefit of such one or more of:- (A) The nominated dependants; (B) Any other dependants; and (C) The legal person or representatives; as determined by the trustee in his absolute discretion and in the manner and at the times by the instalments and in such proportions between them as the trustee determines in its discretion.” (My underlining)61. The trust deed also contains the following (standard) terms:- “No beneficial interest: Notwithstanding any provision of this deed, no member or any other person entitled to be paid a benefit from the fund will have or require any beneficial or other interest in a specific asset of the fund or the assets of the fund as a whole while such asset or assets remain subject to the provisions of this deed.”62. In the context of that standard deed, let us consider the difficulties that arise in relation to the (standard) problems that very often occur in families. Isabelle has no relationship with the children of Charles and she is of the view that Charles has significantly “short changed” her in relation to the distribution of his estate. Isabelle is determined to “have her day”.
1963. And when she arranges for the appointment of the corporate trustee, she also announces that it is her intention that unless she is prevented from otherwise doing so, she will determine, in her sole discretion, to pay the whole of the benefit under the superfund to herself when she is entitled at turning age 60.64. No doubt under advice, Isabelle forms the following views:- 64.1 The confidential memorandum, although it contains the wishes of Morris in relation to a binding nomination, is not a form contemplated under the terms of the trust deed. It is not a binding nomination form as prescribed in Schedule 2 of the deed. Moreover, it is not has been accepted by the trustee. 64.2 Secondly, Isabelle maintains that the nomination form has not been served upon the trustee and that being the case, the document is ineffective and void and it is entirely a matter for her how the benefit is to be applied.65. There can be no contest that the confidential memorandum is not in a form set out in Schedule 2 but Charles was in control of his own personal superannuation fund since 1978. At all times he had made nomination for the distribution of his member’s benefit upon his death since at least 1990 and certainly since 1993 and in that respect he had always ensured that his wife and two children shared in the benefit in the proportions that he decided. Notwithstanding this, (and obviously as a result of the animosity between Isabelle and Charles’ children), Isabelle has decided to give none of the benefit to the children of Charles.66. The issues give rise to interesting questions. The first is whether the expression within the deed relating to the binding nomination of “…or in such other form as the trustee may accept from time to time” means that a document will amount to a binding nomination form if it is in a form which the trustee in fact accepts when served upon it or alternatively
20 whether it really means that a document will amount to a binding nomination form only if it is in a form which the trustee has promulgated as an acceptable form from time to time.67. Isabelle contends that the latter construction must be correct because if the former construction is correct, a subsidiary question arises as to whether the enquiry is simply factual (has the trustee accepted the form?) or whether the definition clause impliedly imposes some obligation upon the trustee to give consideration to the acceptance of the form.68. The second question which Isabelle contends arises is whether the form was completed and served upon the trustee. Isabelle contends that this involves questions of objective construction of the deed and the objective characterization of the confidential memorandum.69. There are some basic and essential rules. A deed must be construed in order to ascertain the intention of the settlor. The principles applying to construction have been described as follows:- “The Court whose task it is to discover [the intention of the settlor] starts by applying the usual canons of construction; words must be given their usual meaning, the clause should be read literally and in accordance with the ordinary rules of grammar…it is then the duty of the Court by the exercise of its judicial knowledge and experience in the relevant matter, by the application of commonsense and a desire to make sense of the settlor’s and parties’ expressed intentions, however obscure and ambiguous the language that may have been used, to give a reasonable meaning to that language if it can do so without doing complete violence to it.”3070. In construing trust instruments, a Court should adopt an approach which is practical and purposive, rather than detached and literal.31 The issue is what is a practical and purposive approach which is not detached and literal? Does that approach militate in favour of an approach which recognises that in the context of superannuation, there is a premium upon30 Re Gulbenkian’s Settlement Trusts  508 at 522 applied in Mettoy Pension Trustees Ltd v Evans  2 All ER 513 at 538 cited in Jacob’s Law of Trusts in Australia (7th Edition 2006) LexisNexis Butterworths Sydney.31 Mettoy Pension Trustees Ltd (supra) cited in Jacob’s above.
21 certainty of operation? To give a practical and purposive construction to a trust instrument mean that only a certainty of operation is attainable or is there some breadth of movement?71. If it is to be said that superannuation funds need to be administered by trustees and benefits to be distributed, by hypothesis, in the absence of any contemporaneous assistance from or clarification by a relevant member, does this mean that a deed should not be likely construed in a way which contemplates that the trustee will waive or must consider waiving irregularities?72. In that context consider the question of service. At the time that the confidential memorandum was prepared, Charles saw the document, discussed it with his solicitor, signed it in front of two witnesses and took it away with him. At the time Charles was a trustee and Isabelle was the other trustee. For reasons known only to Charles, he did not discuss it with Isabelle. Even so, does that mean or can it mean that the document was not served on the trustee? What is the commonsense, practical and purposive consideration here?73. Commonsense would dictate that the document has been served upon a trustee. Whether it has been served upon both trustees may only been an issue between trustees that is the subject of a complaint of one against the other. The artificiality of that argument is obvious: to fulfill some other obligation Charles would only need to pass the document from his left hand to his right hand. It must be a consequence of requiring a member to be a trustee that the knowledge of the member is the knowledge of the trustee. It is impossible for a member/trustee to bifurcate himself or herself.74. Under the payment of benefits provision it appears that the member has completed and served upon the trustee a binding nomination form. In those circumstances the trustee must pay or apply the benefit to or for the benefit of the persons as set out in the binding
22 nomination form. Isabelle argument is diametrically opposed to this approach: there is no proper form, there is no agreement to this form, it has never been served and it binds no- one.75. However, anyone approaching the interpretation of these provisions must be extremely careful to note carefully the precise words used. In my opinion it is too simple merely to point to words and allege that they only have one meaning; the deed is in a sense a “living document”.76. In the example of the deed covering the self managed superfund of Charles and Isabelle, under the payment of benefits on death clause, the benefit is a benefit which becomes payable to or in respect of a “member or a former member”. Member is defined in the deed as follows:- “…A person who has been accepted by the trustee as a member of the fund and who has not ceased to be a member and includes a person in receipt of a pension from the fund.” – (presumably a person who is alive) One would expect and that the “person” is a member under the deed and the benefit becomes payable to the member pursuant to the deed.77. However when one looks at the terms of the payment clause the benefit must become payable to or in respect of a “member or former member pursuant to this deed and the member or former member is not alive when the benefit is to be paid”.78. In my opinion, the provision reflects the practicality of what I would call a deathbed nomination: that is it presumes a time lag between being the time of a benefit being payable and when it is to be paid. There is an intervening period and in that period, where there is a member, a benefit becomes payable to a member who is not alive. This can only be when the member has died and the right is not instantaneous because of the use of the words “when the benefit is to be paid”. It recognises a time lag between the two things so
23 that by the date when the benefit is to be paid, as long as the existing trustee has been served with a binding nomination form, then the trustee is bound to pay in accordance with the nomination form.79. As the member, Charles, the deceased, completed and signed the confidential memorandum. As a member, he made his decision, committed his wishes to writing and signed the document in accordance with Regulation 6.17, 6.17A and 6.22. At that time, as a trustee, Charles was served. It is no different from the exception under the superannuation law of declaring a trust for himself.80. Therefore, under this argument on the interpretation of this clause, when any benefit becomes payable in respect of the member and the member is not alive, then a benefit is to be paid. Therefore, (the argument follows) if the benefit did not become payable in respect of Charles until Charles’ death and notice to the trustee had been given (and Charles had notice of the trust deed prior to his death), then there had to be notice to the other trustee before it would be paid.81. All that was then required was for Isabelle as the other trustee to receive notice before it was to be paid. That is why the expression “is to be paid” is used in contradistinction to the word “payable” in the first part of the clause. It contemplates a future event and it contemplates a possible difference between being payable and being paid.82. When one looks at the clause in that light, the members’ planned fund will become payable in respect of the member if the member dies. There is no prescription that there was an immediate crystallisation of a right, that is simply that the benefit will become payable if the member dies and the sub-paragraph operates in the following terms:- “The member not being alive and the benefit still to be paid and if at that time there is service upon the trustee of the form, the trustee must pay”. [That is the practical operation of the clause].
2483. The argument follows that, recognising the difference between the terms “becomes payable” and “needs to be paid”, when a completed binding nomination form has been served, the trustee must pay upon the benefit. If there was an effective notice after death to Isabelle, then her obligation to pay followed on becoming aware of the terms of the nomination.84. This interpretation is borne out by a proper reading of sub-paragraphs (ii). In that sub- paragraph there is no mention of any question of service. Service must be inferred but the poverty of the drafting technique becomes so very obvious when one compares sub- paragraphs (i) and (ii). There is no proper interconnection between the two paragraphs having regard to the differences in meaning of a “benefit becoming payable” and when the “benefit is to be paid”.85. The summary of the position is that technical arguments have their own reward. Moreover, when one looks closely at any trust document it behoves the reader to look closely at the words of the document and not, too quickly, come to a conclusion about them.86. That in turn leads to a practical consideration of a factual circumstance which arises in Adelaide32 not less than 100 times per year (as I am told) to legal practitioners involved in wills, estates and superannuation. That practical example, to be considered in light of the arguments put by the trustee in the case of Charles and Isabelle, is one that will be very familiar to practitioners here.87. Take as an example, a call made to a legal firm to quickly attend at a hospital upon a person who is ill and who wishes to give instructions for a will. The experienced practitioner will go to the hospital armed with a number of “weapons”. The first is the knowledge that the new “client” has not previously given instructions to the firm, nothing32 And it has been suggested to me that the occurrence of these events is calculable by using as a multiple of this figure, the number of millions of the population in each place in Australia.
25 is known of the client’s background, nothing is known of the dependants, family and other circumstances of the client, nothing is known of the testamentary capacity of the client. Also, nothing is known of the following matters:- 87.1 What previous wills the client has made; 87.2 Whether the need for a new will arises out of circumstances that requires separate advice; 87.3 Whether the client has sufficient testamentary capacity to understand everything that is to be done in respect of his or her wishes; 87.4 Whether the client has a self managed superfund.88. Assume for the sake of discussion that upon arrival at the hospital, it is apparent that the client is seriously ill but of capacity. The solicitor runs through with the client the whole of the client’s wishes in relation to his will. The solicitor takes the time to take initial instructions and makes significant notes in relation to those instructions. The solicitor then takes the time to write out in detail the client’s testamentary wishes, his wishes in relation to the executor of the estate, the beneficiaries of the estate and dealing with specific testamentary wishes and the residue of his estate. The solicitor ensures that the written instructions are then signed by the testator in the presence of two independent witnesses and is dated.89. When the solicitor is about to leave the hospital room, the solicitor asks the new client whether he has a self managed superfund. His eyes widen, yes he does. The solicitor asks the client whether or not the client has considered a binding death benefit nomination for dealing with his member benefits under that self managed superfund. The client says that he has not. The client informs the solicitor that he and his wife are now significantly estranged, his wife is the co-trustee and co-member of the self managed superfund and his
26 desire is to leave his death benefit which is the substantial portion of the accrued benefit under the superannuation fund to his wife as to one-quarter and to his two children as to the other three-quarters. He certainly does not want to leave his wife completely in charge of the superfund because she is estranged from their children due to her having embraced her new religion of “profligacy”. He is satisfied that having left the whole of his estate to her (in a controlled way) that he has made sufficient provision for her in his will.90. The solicitor asks the client whether he has ever seen a binding death benefit nomination form under his trust deed. The client says that he can hardly remember ever seeing a trust deed. He knows that one was done about 10 years ago but he has always left it to an accountant or financial advisor to deal with. The solicitor cannot make contact with any advisor to ascertain the requirements of the relevant trust deed. The solicitor asks the client whether or not he would wish to make a binding nomination form. In a moment of lucid prescience the client agrees.91. The solicitor produces his firm’s standard binding nomination form. It is later ascertained that it is not in accordance with the strict requirements of the trust deed. The solicitor arranges for this binding nomination form to be completed by the client and to be executed by the client in the presence of two independent witnesses. The solicitor puts the binding nomination form into his file and carries it back to his office. As he enters the office carpark his mobile phone rings. The client has died. The essential questions arising out of this factual scenario are the following:- 91.1 What relevance is the intention of the deceased to make a binding nomination? ; 91.2 What are the terms of the trust deed and do they formulate a prescription of form that is immutable? ; 91.3 What really is the significance of service upon a co-trustee of this BDN? ;
27 91.4 What action is sufficient to constitute service? ; 91.5 Why would a Court exercising equitable jurisdiction33 interfere with the clear expressed intentions of the deceased at the behest of someone who has only their personal interests at heart? ; 91.6 Why in these circumstances is the prescription for service only to be read as service prior to death and what (using the purposive and flexible approach) is the reason for a Court of equity to deny the beneficiaries of such clearly expressed intentions because of form?92. The solution to these difficulties is not easily ascertained. Too often in my view matters are left to a decision on “questions of fact” that in turn require the expenditure of enormous expense in Court costs and the creation of tremendous heartache and friction between family members and others who are dependants.93. A solution may be to legislate for a minimum standard DBN so that if a form achieves that standard, then it will be effective for all purposes. That approach, to an extent, falls foul of the “sanctity of the trust deed provisions” theory that requires a proper adherence to trust deed provisions. This theory is grounded in principle as well as a long history of practical experience that requires form and substance provisions in a deed to be observed so that the trustee and the beneficiaries have a sufficient level of certainty in respect of the trust deed, the conduct of the trustee and for the trustee’s own security and peace of mind. It is very difficult to perceive the Commonwealth Parliament attempting to legislate in this fashion as it will not wish to legislatively redraw trust deeds.94. In my opinion one of the weaknesses of the approach of Cooper is that his focus in this area was on concepts of unfairness in changing circumstances akin to notions of inheritance33 Cf Donovan v Donovan 2009 QSC per Fryberg J.
28 provisions that are refashioned by a Court depending upon the needs and circumstances of a potential beneficiary of the deceased estate. The unfairness arises (according to the statutes) because no or no proper provision is made for [the maintenance education or benefit according to need] of that beneficiary and Parliaments in their wisdom have allowed the Courts to redraw the terms of the testamentary dispositions of the deceased under the very wide discretion given by Statute to allow a benefit to that claimant beneficiary.95. In my view Cooper’s recommendation is the second step in the process. The first step must be to ensure that the form of DBN used by a deceased is recognized as binding upon the trustee even if it does not perfectly comply with the trust deed terms.96. This approach in turn requires a wholesale change to the approach taken thus far to the drawing of trust deeds. We must keep steadily in mind that these are superannuation trusts. They are different—if only because a person is statutorily authorized to declare a trust in favour of himself. And if we really properly understand that difference we can then ask the obvious question: why are so many trust deeds drawn in such a prescriptive way that in the area of DBNs no room for movement is left in the determination about what is both sufficient and necessary? What is the underlying reason for a trustee in a closely held private trust (such as an SMSF) insisting upon a form or of knowledge about what that person does with his benefit after his death?97. I can make a binding and final will and not tell my wife or family. Why must a DBN operate any differently as if it was some form of holy writ bound up in a form of ceremonial process that provides the “passport” to enter the Elysium Fields34?34 The fields (that were a state of ideal happiness) at the end of the earth to which certain favoured heroes, exempted from death, were conveyed by the gods.
2998. If a Court is able to divine out of a series of papers and events the testamentary intention of a deceased in respect of his estate, is it so anathema to principle, the logic of the law and ordinary common sense that the form of a DBN used by a deceased that does not fully and literally comply with a promulgated or some other agreed form remains operative and effective in respect of that deceased member’s benefit? Is not the issue here the same as it is under a contention about what constitutes a will? In my opinion the answer is an emphatic yes. This is even more dramatically so when it is understood that trust deed prescriptions about the form of DBNs appear to have their genesis in the strictness and formality of the older retail and industry funds that dealt with multiples of members across a very broad range of benefits.99. In my opinion the correct approach is for two things (the first in relation to the contents of the trust deed and the second in relation to amendment of statute) to occur as follows:- 99.1 First: a completely different trust deed drafting approach be taken to DBNs that entails a minimalist requirement about what constitutes and is necessary to constitute a DBN that recognizes, for example that a DBN may be included in the terms of a will. This requires the terms of the trust to be amended to recognize that there is minimal standard to be achieved in the preparation of a DBN. A form that complies with SISR 6.17A(6) must suffice; 99.2 Whilst it is accepted that it is preferable for the other trustee/director to be given notice of the DBN and that this should be the usual approach, it not be necessary for an effective DBN that the form used be served upon a co-trustee/co-director prior to death and that it is sufficient if the notice comes to the attention of the surviving trustee before distribution of the benefit of the deceased member; and
30 99.3 Second: that all relevant statutes and regulations be amended to give the Court power to hear and determine any claim by a surviving dependant for further provision from the member’s benefit according to that dependant’s claim for maintenance education or advancement based upon need.100. It is also my opinion that unless there is a significant change of the drafting approach to SMSF trust deeds (that I think may have been dominated by slavery to precedent rather than good drafting practice), SMSFs will soon become embroiled in litigation of the type that has dominated the lives of those who practice in the area of wills and estates. That tragic result must be avoided by the application of further attention to detail, common sense and a willingness of Parliament to legislate in a complementary way. This does not ask for the Elysian fields but they may be easier to attain.