Australia: Binding death benefit nominations (BDBNs) for super funds

If the trust deed for a super fund so permits, a Binding Death Benefit Nomination (BDBN) can be signed by a member to direct the trustee of their super fund to pay that member's death benefits after the death of the member. This area of superannuation can be confusing to readers as commentators sometimes loosely speak of "dependants" who are eligible to receive a member's death benefits in 2 entirely different contexts.

Under the SIS Act and its regulations a member's death benefits can only be paid to a "dependant" as defined in section 10 of the SIS Act. Under tax law, certain payments to "death benefit dependants" are free of tax. But the SIS Act and the tax law use of the word "dependant" are not the same - for example while a member's "spouse" is within both definitions, a member's "former spouse" is expressly a death benefits dependant for tax purposes but not so for SIS Act purposes although a former spouse may be within the SIS Act definition due to an "interdependency relationship". Leaving aside for the moment the tax effect of paying a member's death benefits, a SIS Act dependant is the member's spouse, children and "any person with whom the person has an interdependency relationship".

Reg 6.22(2) effectively means that a super fund member has only two categories of recipient to choose under a BDBN namely:

  1. a SIS Act "dependant" of the member being the member's spouse and/or children (including adult children) and any person with whom the member has an interdependency relationship; and
  2. the legal personal representative (usually an executor) of the member.

However, under tax law, a tax exemption is only available if the death benefits are paid to a spouse (including where a spouse receives the money as a beneficiary under a will), former spouse or a "dependent" child which generally means a child under 18 or a dependent student under 25 or a disabled child – adult children who are not otherwise a "dependant" are not entitled to any tax exemption. For this reason most married couples would sign a BDBN in favour of their spouse or direct the death benefit to their estate by nominating their legal personal representatives and leave their estate to their spouse in their will.

If a superannuation fund member does not have a spouse, de facto partner or any "dependent" children, their BDBN must direct that their super death benefits on death pass to their estate by payment to their "legal personal representative".

The trust deeds for some Industry Funds and large retail funds do not permit a BDBN to be made at all and if they do permit BDBNs, the law requires that they be renewed every three years. A fund may prompt its members to update their nominations, but members should take the initiative of providing those updates themselves.

BDBNs for SMSFs are only possible if the SMSF's trust deed allows members to make a BDBN. Most SMSF trust deeds allow BDBNs but the relevant Trust Deed must be checked as some require a BDBN to be renewed every 3 years and some do not (the law for SMSFs is different to public funds which are subject to the 3 year renewal rule). Additionally, if the Trust Deed allows, this issue can be the subject of a separate agreement with the Trustee.

A recent case Munro & Anor v Munro & Anor held that a BDBN of a SMSF is exempt from the application of Section 59 of the SIS Act and the Regulations (including Reg 6.17A) which require that BDBN be renewed every three years. Therefore it would appear that a BDBN of a SMSF can survive for more than 3 years if the Trust Deed is silent on that point. The Court however still disallowed the BDBN in the case because it did not use the words required by the Trust Deed when identifying the recipient of the benefits (ie "the legal personal representatives") and instead used the words "trustee of my estate".

By the time of death a member is often over retirement age and is receiving income from their superannuation fund in the form of a pension or has received a lump sum payout. In general any pension that a member (generally over 65) is receiving from their superannuation fund is free of income tax. If on death the spouse or children who are Tax Act defined "death benefits dependants" continue to receive that income as a pension, it remains tax free. If there is no spouse or de facto partner or SIS Act dependants, the trustee of the fund will pay a lump sum to the legal personal representative of a deceased member's estate. To the extent that the lump sum passes then to persons who are other than the spouse or Tax Act "death benefits dependants" (for example a charity or adult brothers and sisters of the deceased), in the hands of the legal personal representative, the lump sum will attract income tax on the "taxable" portion. The tax rate is presently 16.5%, but if there is a life insurance component, the rate may be different. The taxable portion of the death benefit payment varies from one fund manager to the next. Fund members who have made large non-concessional contributions would have a low taxable portion and fund members who have made large concessional contributions generally have a higher taxable portion.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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