Superannuation in Australia is governed by the Superannuation Industry (Supervision) Act 1993 (Cth) (SIS Act) and Income Tax Assessment Act 1997 (Cth) (ITA Act).
Superannuation is a tax-effective way to save for your future. The SIS Act provides for the formation of a Self-Managed Superannuation Fund (SMSF). These funds are subject to strict compliance requirements however, they also allow members flexibility and control over the choice and management of their investments.
The potential benefits of having an SMSF cannot be achieved without sound planning and administration. This includes having in place a valid Binding Death Benefit Nomination (BDBN). This is often overlooked by fund members resulting in unintended and undesired consequences after the member’s death.
What is a Binding Death Benefit Nomination?
A BDBN is a direction to the trustee of your superannuation fund to pay your death benefits to an eligible beneficiary or beneficiaries, or to your estate. Essentially, the BDBN overrides the decision of the trustee so that benefits are paid in accordance with your wishes rather than at the trustee’s discretion.
Superannuation does not automatically form part of your estate so without a BDBN, the beneficiaries would otherwise be decided by the trustee under the terms of the fund and relevant legislation.
The trust deed for a SMSF can include provisions allowing members to make BDBNs. Many trust deeds already have these provisions in place however if not, it may be possible to amend the trust deed to allow for a BDBN.
Who can I nominate?
Death benefits can only be paid to a dependant of the fund member or to the member’s legal personal representative (the executor or administrator of the estate).
A ‘dependant’ includes a spouse (including a de facto), a person with whom the fund member had an interdependency relationship, a child of any age or a person who is financially dependent on the member. A child includes a biological child, adopted child, step child and ex-nuptial child.
A ‘dependant’ under the ITA Act (unlike the SIS Act) does not include financially independent adult children. This means that although adult children can be paid from the fund, they may be taxed higher than other beneficiaries. The choice of beneficiary is therefore an important consideration when making a BDBN. The overall estate must be considered – sound financial and legal advice can make a big difference in the tax consequences to the person inheriting.
A 2005 case illustrates the consequences of leaving the distribution of your superannuation funds to your trustee’s discretion. In Katz v Grossman  NSWSC 934, the deceased’s Will provided for equal distribution of the estate to his son and daughter. Considerable assets were held in an SMSF of which the daughter was trustee.
The daughter paid the entire SMSF balance (approximately $1 million) to herself rather than dividing it with her brother. Unfair you say? Probably; however despite the provisions in the Will, the Court determined that the daughter (a trustee and dependant under the SMSF) was legally permitted to pay herself.
Unless specific directions are made through a BDBN for the payment of your death benefits, the beneficiary of your superannuation fund could be determined by a trustee and a contrary direction in your Will may not be enforced.