In a bind: SAT powerless to authorise BDBNs

A binding death benefit nomination (BDBN) nominates the person to whom you would like your superannuation fund trustee to pay the benefit upon your death. 

A superannuation trustee has no discretion to disregard a BDBN.  However, a BDBN can be challenged, and that is usually on the basis of invalidity such as a lack of legal capacity.¹ 
Can a possible challenge to the validity a BDBN based on an alleged lack of capacity be overcome by using powers under an administration order? 

The recent decision of the State Administrative Tribunal (SAT) in SM [2019] WASAT 22 clarifies the position in relation to BDBN for those subject to an administration order [click here to read the full decision]. 

The Superannuation Industry (Supervision) Regulations 1994 (Cth) (SIS Regulations) allow for five different death benefit arrangements: 

• automatic reversionary benefit (where trustee exercises no discretion);
• non-binding nomination (where there is full trustee discretion);
• binding nomination (under section 59(1A) of the Superannuation Industry (Supervision) Act 1993 (Cth) (SIS Act));
• non-lapsing nomination (under section 59(1)(a) of the SIS Act); or
• complete discretion of the trustee if none of these nominations has been made and the reversionary benefit is not applicable.² 

Under the Guardianship and Administration Act 1990 (WA) (Act), upon application for an administration order, the SAT can appoint an administrator if it is satisfied that a person is unable by reason of a mental disability, to make reasonable judgments in respect of matters relating to all or any part of their estate.³ 

In their decision, the SAT considered the following issues:

• can SAT confer on an administrator the power to make or confirm a BDBN?
• can an administrator with plenary powers make a BDBN for a represented person?
• is a BDBN a ‘testamentary disposition’ and thus a plenary administrator prohibited by s 71(2a) of the Act from making a BDBN?
•  if SAT does have the power to grant the additional function to an administrator, was it in the represented person’s best interests that the SAT grant that function to the administrator? 
• can a represented person subject to an administration order themselves make a BDBN?⁴  

Background

The represented person in these proceedings, SM, was injured in a motor vehicle accident in late 2016.  In the months following the accident, her mother was appointed as the administrator of her estate.⁵

SM was later awarded $5,745,933 in damages by the District Court of Western Australia as compensation for the injuries she had received as a result of the accident.⁶  

The District Court appointed Australian Executor Trustees Limited (AET) as the trustee of the compensation money and ordered that the money was to be held on trust for SM and invested or applied for her benefit (this was described by the court as the ‘Fund’).⁷ 

Under s 292-295 of the Income Tax Assessment Act 1997 (Cth), SM, and thus AET had 90 days from the date the Fund was received to make any contribution to superannuation.⁸  

In August 2018, after AET had received the Fund, AET filed an application with SAT seeking:

• a review of the Administration Order that had previously been granted to SM’s mother; and 
• its appointment as Administrator, so that it could deposit a portion of Fund into superannuation for SM’s benefit.⁹  

However, it was the subsequent additional function (extracted below) for which AET later applied, which was the subject of contention, and gave rise to the issues which were the subject of the decision:

‘AET as limited administrator has authority, in respect of any superannuation fund of which the represented person is a member, to make and renew any document which has the effect of directing or binding the superannuation trustee as to the payment of superannuation death benefits following the represented person's death’.¹⁰ 

SAT appointed AET as administrator of SM’s estate, with the sole function of paying a portion of the Fund into superannuation for SM’s benefit. 

However, SAT adjourned the more difficult question of the additional function, on the basis that it had potential “wide ranging implications” for administrators generally, and that, as a consequence, the Public Trustee ought to be given the opportunity to be heard.¹¹  

The Decision

In relation to the first and second issues noted at [3.1] and [3.2] above SAT found: 

• it did not have power to grant an administrator the function to make and renew any document which had the effect of directing or binding a superannuation trustee as to the payment of a superannuation death benefit following SM's death, as it would not be a function for the purpose of conserving SM's estate for her benefit;¹² 
• an administrator with plenary powers cannot make a BDBN for a represented person as it is not a function for the purpose of conserving the estate of a represented person for his or her benefit.¹³ 

In coming to these answers, the SAT reasoned that the purpose of a BDBN is solely to enable the transmission of a person’s superannuation benefit on their death,¹⁴  and although the purpose of an administration order is to conserve a person’s estate during their lifetime for their benefit and advantage, it does not go so far as to extend to the conservation of the person’s estate after death when they no longer have need.¹⁵  This is because an administrator with limited or plenary powers is only permitted to do only those things as are necessary for the performance of the functions invested in them under s 69(2) of the Act.¹⁶  Further, an administrator’s authority, along with their duties and obligations to the person under the administration order end with the persons death due to the operation of s 78(1)(b) of the Act.¹⁷  

Having responded to issues one and two in the negative, SAT did not need to consider issue three.  However, it chose to do so due to the importance of the question posed.¹⁸ 

SAT held that the making of a BDBN where the represented person has a beneficial interest in the funds the subject of the BDBN is a testamentary act or disposition.¹⁹ 
SAT relied upon the findings in other cases that:

• when determining whether a nomination in document was a testamentary act or disposition, the distinguishing factor is whether there is a legal entitlement to the object of the nomination, and whether the nomination is binding when it was made; and ²⁰
• a BDBN is a testamentary disposition where a member of a pension/superannuation fund has a present equitable entitlement to the money in the pension/superannuation fund and the BDBN was not made further to a contractual right.²¹ 

SAT referred to the case of Narumon,²² which held that two BDBN’s made by attorneys of an incapacitated person were not testamentary acts.²³ 

However, SAT noted how Bowskill J in Narumon based that view in part on McFadden, and Re Police Association,²⁴  in which Doyle CJ had adopted aspects of the approach of Holland J in McFadden.²⁵  McFadden related to the question of whether the nomination of beneficiaries under a pension scheme was a testamentary act.²⁶   SAT considered the following passage from Holland J’s judgment:

A nomination of the beneficiary to take under the trust is in the present context, in my opinion, the exercise of a contractual right not a testamentary power.  Any dispositive effect that the nomination may have derives from the contract and the exercise of contractual rights inter vivos and not from the death of the contributor.²⁷ 

However, even though Holland J rejected the submission that the nomination of beneficiaries under the pension scheme in question was a testamentary act, he distinguished it from ‘friendly society cases’.²⁸   SAT summarised the basis upon which his Honour found these ‘friendly society cases’ distinguishable at [83]:

the property in question belonged to the member up to the time of death and that the nomination was an attempt to dispose of the deceased's own property on death.  He also discussed the 'nominee insurance policy cases' where the courts found the nomination of a beneficiary to receive the policy moneys on the insured's death was a testamentary disposition.²⁹ 

Applying those principles, the proposed BDBN in question was found to be a testamentary disposition because:³⁰   
SM had a beneficial interest in the money from the Fund which was to be paid into the superannuation fund;³¹ 

• the BDBN could be changed at any time up until SM's death, subject to her capacity, and did not take effect until her death;³² 
• therefore, it followed that SM had proprietary rights and powers over the subject property during her lifetime which amounted to a beneficial interest in the property until her death;³³  and
• any BDBN she was able to make would not take effect until her death.³⁴ 

In relation to the fourth issue, SAT did not consider it would be in SM's best interest to grant the additional function to the applicant even if it had the power to do so.³⁵   This was because if SM didn’t make a BDBN before her death, any money left in the Fund would just be paid to her legal personal representative.³⁶  

On the final issue SAT held that SM as a person subject to an administration order, is not prohibited by reason of s 77(1)(a) of the Act from making or renewing any document which has the effect of directing or binding a superannuation trustee as to the payment of a superannuation death benefit following her death.³⁷ 

Lavan comment

It is vital to ensure that all documents prepared to the give effect to testamentary intentions (for examples, Wills, codicils, death benefit nominations) are valid and effective.  Any invalidity, could, and in all likelihood will, lead to the Will maker’s intentions miscarrying with possibly dire outcomes for those persons who the Will maker intended to benefit.

The reasoning of the court in drawing out the ‘distinguishing factor’ from the authorities, namely, whether there is a legal entitlement to the object of the nomination and whether the nomination is binding when it is made is telling.  It demonstrates that whether a BDBN or other nomination will be considered ‘testamentary’ is highly dependent upon the terms of the Fund itself. 

Should you require advice in relation to your own superannuation and testamentary arrangements, please do not hesitate to contact James Steedman, Lorraine Madden or Andrew Sutton.