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John Giles Superannuation Fund Case
Queensland is many things. It also seems to be the place to be for litigation involving self managed superannuation funds and binding death benefit nominations. Adding to the current Queensland SMSF cases of Donovan v Donovan, McIntosh v McIntosh and Munro v Munro is the John Giles Superannuation Fund Case (aka Re Narumon Pty Ltd  QSC 185). This case, which was handed down in August, involved a number of issues - including the validity of binding death benefit nominations - related to self managed superannuation funds.
The facts of the case
Mr John Giles died in June 2017 aged 80. He was survived by his second wife (Mrs Narumon Giles) his son with his second wife and four adult children from his first marriage. The Fund was established in 1992 and at the time of the death of Mr Giles the Fund had three members (Mr Giles, Mrs Giles and Mrs Keenan – the sister of Mr Giles) with a corporate trustee, Narumon Pty Ltd. As a result of the death of Mr Giles, the Fund had only two members and the directors of the corporate trustee were Mrs Giles and Mrs Keenan. Mrs Keenan later resigned as a director and her small member account balance was paid out, leaving Mrs Giles as the only member of the Fund and as the only director of the corporate trustee.
While Mr Giles left a comparatively small estate (about $200,000), the bulk of this wealth was contained in the Fund – an accumulation account of about $1m and a lifetime complying pension, the capital value of which was about $3m.
The case commenced as a result of the trustee seeking declaratory relief from the Court as to three legal issues which had arisen in relation to the administration of the Fund and the application of the death benefit of Mr Giles. Those issues were: first, which trust deed contains the current terms of the Fund; second, whether the complying lifetime pension was reversionary; and lastly, which of the binding death benefit nominations made by or in respect of Mr Giles applied.
First Issue: Which Deed?
This issue is important as it determines whether the Fund permitted binding death benefit nominations, and what requirements must be satisfied for the nomination to be binding, but also the default allocation rule which applies if there is no binding death benefit nomination.
It is not mandatory for superannuation funds to permit members to make binding death benefit nominations. If a superannuation fund does not permit members to make binding death benefit nominations there is no contravention of the SIS Act and the fund is not thereby non-complying. If a superannuation fund - whether SMSF or large fund - does allow members to make binding death benefit nominations – this is entirely due to the terms of the trust deed governing the fund. Further, superannuation funds may have different default allocation rules (eg benefit automatically provided to the estate or the benefit allocated at the discretion of the trustees). Again, which default allocation rule applies entirely depends on the terms of the trust deed governing the fund. Consequently, the issue of which trust deed governs a superannuation fund is a significant one.
While the Fund was established in 1992, there had been amendments in 1995, 1999, 2004, 2007 and 2014. Each of the amendments (apart from the 2014 amendment) completely replaced the previous provisions with a new set of provisions. These years (apart from the 2014 amendment) are significant years in the development of superannuation. The 1995 amendment would have been made due to the introduction of the Superannuation Industry (Supervision) Act 1993 (replacing Occupational Superannuation Standards Act 1987) and the SIS Regime from 1 July 1994. The 1999 amendment would have been made due to the “SLAB 3 and SLAB 4” amendments of 1999 – which, amongst other things, introduced the term “self managed superannuation fund”. The 2007 amendment dated 29 June 2007 would have been made due to the introduction of the Costello superannuation reforms.
But why the 2014 amendment? This amendment deed was not a replacement deed: rather it purported to “cure” the invalidity of the 2007 amendment deed. The invalidity of the 2007 amendment was due to the requirement that an amendment had to be made by deed and the 2007 amendment was not in the form of a deed. Consequently the 2007 amendment was invalid as not being an effective exercise of the amendment power set out in the 2004 deed. The 2014 amendment deed was introduced to deal with the invalidity of the 2007 deed. In the 2014 deed, the trustee sought to retrospectively ratify its execution of the 2007 amendment deed as to apply the amendments proposed to be made by the 2007 amendment deed from its date of execution, ie 29 June 2007.
The Court held that while the 2014 deed could not effect a ratification of the 2007 deed (and have the 2007 changes apply from 29 June 2007), it could apply from 22 August 2014 (being the date of execution of the 2014 amendment deed). This conclusion was reached as the 2014 amendment deed was an effective exercise of the amendment power contained in the 2004 deed. While it is not stated, presumably, the amendment power contained in the 2004 amendment deed did not permit retrospective amendments.
The Court held that while the recitals to the 2014 amendment deed expressly referred to the amendment power contained in the 2007 rules, the operative provision simply referred to the amendment power conferred on the trustee. The only relevant amendment power was that contained in the 2004 amendment deed. As the 2014 deed was made in accordance with the provisions of the amendment power contained in the 2004 amendment deed, the 2014 amendment was a valid exercise of the 2004 amendment power. Consequently, the 2014 amendment was valid and had the effect of adopting the provisions set out in the 2007 amendment deed with effect on and from 22 August 2014.
The critical issues to determine whether an amendment deed is valid are (1) whether the amendment power was actually conferred on the trustees and (2) whether the manner of exercise of the power satisfied the terms of the amendment power.
Simply misidentifying the amendment power (say, Rule 7 instead of Rule 5) does not, of itself, mean that the amendment power has not been validly exercised. Misidentifying the amendment power may be embarrassing to the person drafting the amendment deed. At worst, it could be used to argue that the trustee did not intend to exercise the amendment power – though this would be easily countered by the preparation of the amendment deed and its conscious execution by the trustee.
Again thinking you are exercising the amendment power contained in document A when the actual amendment power is contained in document B may not, of itself, support an argument that the exercise of the power is defective. However, fortunately, in the current case the operative provision of the 2014 amendment deed did not specify the amendment power or specify the document which conferred the amendment power. Possibly one drafting technique is to keep the options open including “and all other powers conferred on the trustee” when drafting amendment documents which expressly identify the relevant amendment power.
Second Issue: Was the lifetime complying pension reversionary?
This issue arose because no documentation could be located as to the issue of the complying lifetime pension. In the absence of any pension documentation – could it be said that there was even a complying pension in place let alone, whether the pension was reversionary, and, if so, reversionary to whom?
While there was no primary evidence of the issue of the pension (eg pension documents, trustee minutes) which could be located, the Court held there was compelling secondary evidence of the issue of the pension. The secondary evidence being the audited financial statements of the fund, the fund annual reports and the existence of actuarial reports in respect of the pension. Importantly these secondary evidence documents involved third parties (auditor and actuary) and were contemporary with the continuance of the pension.
As to whether the pension was reversionary and, if so, to whom, the actuarial reports provided compelling secondary evidence that the pension was reversionary as the life expectancy of Mrs Giles was used to value the pension liabilities. Clearly this meant that the pension was reversionary to Mrs Giles. Had the actuarial report only applied Mr Giles life expectancy, then the actuarial report would not be compelling evidence as to whether the pension was reversionary. Fortunately for Mrs Giles as she was both younger and a female, she had a greater life expectancy that Mr Giles.
Primary documents should be retained. Secondary evidence documents can be used – but you must first undertake reasonable searches for primary documents (eg former advisers, former accountants) and the secondary evidence documents must clearly support the alleged position and not be equivocal.
As account-based pensions (and transition to retirement pensions), unlike defined benefit pensions, do not require actuarial valuations, there will generally be no secondary evidence of whether a pension is reversionary or not.
Third Issue: Which BDBN?
Mr Giles over the course of three years made five binding death benefit nominations. Additionally, Mr Giles’ attorneys signed a document on 16 March 2016 purporting to "extend" the last death benefit nomination made by Mr Giles. Also on 16 March 2016, the attorneys signed a binding death benefit nomination which was materially identical to the last nomination made by Mr Giles.
Fortunately, the Court accepted that the last nomination made by Mr Giles on 5 June 2013 ("the 5 June 2013 Nomination"), had the effect of revoking all of his previous nominations. Consequently the relevant issues were whether the 5 June 2013 Nomination was binding, whether the “extension” was effective and whether the replacement nomination was effective. The 5 June 2013 Nomination was subject to a “3 year time limit”; hence, the need for the "extension".
The 5 June 2013 Nomination was to the effect that the death benefit be applied as to 47.5% to Mrs Giles, 47.5% to Mr Giles’ son by his second wife, and 5% to Mrs Keenan (being the sister of Mr Giles).
As the 5 June 2013 Nomination was subject to a three year time limit, the nomination would cease to apply unless Mr Giles “refreshed” the nomination or made a new nomination to the same effect.
Mrs Giles and Mrs Keenan were appointed as Enduring Attorneys for Mr Giles. The most recent power of attorney was dated 5 June 2013. Their authority with respect to financial matters was to begin when Mr Giles "was assessed by a medical professional with at least 10 years’ experience as being totally incapable of making financial, health or lifestyle decisions". This assessment was reached in November 2013.
In respect of the 5 June 2013 Nomination, the three year duration period ended on 4 June 2016. The attorneys, in anticipation of the 5 June 2013 Nomination expiring, took two preventative measures. The first was to "refresh” the 5 June 2013 Nomination by signing on 16 March 2016 a document called "extension of binding death benefit nomination" ("the Extension Document") which had the effect of extending the 5 June 2013 Nomination to 15 March 2019 (but made no other changes to the nomination). The second was to prepare a new binding death benefit nomination, also dated 16 March 2016 ("the 16 March 2016 Nomination"), which provided that the death benefit was to be allocated 50% to Mrs Giles and 50% to the son of Mr Giles. Mrs Keenan was excluded as a nominee under the 16 March 2016 Nomination as Mrs Keenan was not a dependant of Mr Giles and, therefore, could not directly receive any portion of the death benefit.
Mr Giles died 14 June 2017. On his death the trustee had to determine which nomination, if any, applied. The 5 June 2013 Nomination (as extended) or the 16 March 2016 Nomination? If neither nomination applied then the default allocation rule would apply.
Was the 5 June 2013 Nomination (as extended) applicable?
As Mr Giles died within three years of the extension being effected, the question as whether the 5 June 2013 Nomination applied depended entirely on two questions: firstly, whether the 5 June 2013 Nomination was valid; and secondly, whether the attorneys had the authority to extend the 5 June 2013 Nomination. These two questions are linked. If the 5 June 2013 Nomination is not valid then presumably the extension of that nomination would not be effective.
Was the 5 June 2013 Nomination valid?
The validity and application of a nomination are separate issues. A nomination may be valid but not applicable to a death benefit as the member may have died more than three years after the making of the nomination.
The validity of the nomination depended on whether the nomination satisfied the requirements specified in the trust deed and the requirements (if any) which a nomination must satisfy set out in the SIS legislation. The relevant requirements (which must all be satisfied) specified in trust deed were:
(a) the nomination must be in writing;
(b) the allocation of benefits must be clear;
(c) each person nominated must be either the LPR of the Member or a dependant of the Member;
(d) the nomination must be signed and dated by the Member in the presence of two witnesses over age 18 and who are not nominated under the nomination;
(e) the nomination contains a statement that the nomination was signed by the Member in the presence of the witnesses;
(f) the nomination was signed by the Member within three years of the death of the Member; and
(g) the nomination must be in the form of Schedule E to the deed or some other form which complies with Superannuation Law.
In relation to the relevant requirements, a number of issues need to be noted. While the specified requirements are very similar to the specified requirements set out in SIS Reg 6.17A(4) and (6), the specified requirements in the trust deed do not require the witnesses (as SIS Reg 6.17A(6)(c) does) to sign and date a declaration that the nomination was signed in their presence.
In relation to the second requirement (“must be clear”) this presumably means that the nomination must be unambiguous. In relation to the third requirement (nominated LRP or dependants), the Court had to address a drafting error in that the text of the relevant trust deed provision was obviously incomplete. The Court held that the provision should be read as if it the contained the following underlined text:
"each person nominated in the deceased Member’s binding death benefit nomination is either the legal personal representative or a dependant of the Member".
In relation to the final requirement (nomination in form of Schedule E or other complying form), the Court held the 5 June 2013 Nomination was not in the form of Schedule E and consequently the issue arose as to whether the nomination satisfied the requirements of Superannuation Law.
Did the nomination have to satisfy the "requirements of Superannuation Law"?
The simply expressed text "some other form that complies with the Superannuation Law" is ambiguous. Does the expression mean that the form of the nomination must comply with SIS Regs 6.17A(4) and (6) whether or not those provisions apply to self managed superannuation funds? Or does the expression mean that the form of the nomination has to satisfy SIS Regs 6.17A(4) and (6) only if those provisions apply to self managed superannuation funds?
The Court held that SIS Regs 6.17A(4) and (6) do not apply to self managed superannuation funds. This is the same conclusion reached in Munro v Munro and by the Full Court of South Australian Supreme Court in Cantor Management Services Pty Ltd v Booth.
The Court reasoned as follows. Section 59 of the SIS Act imposes a prohibition (subject to some not presently relevant exceptions) on the trust deed of a regulated superannuation fund conferring discretions being exercised by persons other than the trustee. This prohibition does not apply to self managed superannuation funds. In 1999, s59 was amended by inserting s59(1A) which provided that the member may (under certain conditions) give a notice to the trustee requiring the trustee to allocate the death benefit of the member to the legal personal representative or a dependant or dependants of the member. The conditions referred to in s59(1A) are set out in SIS Regs 6.17A(4) and (6). As s59(1) does not apply to self managed superannuation funds, there is, therefore, no scope for the operation of the proviso in s59(1A) to apply to self managed superannuation funds.
The Court also considered whether SIS Reg 6.17A(4) and (6) could indirectly apply by force of s55A or s31(1) of the SIS Act. Section 55 provides that the trust deed must not permit a member’s death benefits to be paid otherwise than in accordance with the “payments standards” of the SIS Regulations. Section 31(1) provides that regulations may prescribe standards applicable to the operation of superannuation funds.
In relation to s31(1) the regulations restricted (subject to one presently not relevant exception) the class of persons to whom death benefits can be paid. This restriction was set in SIS Reg 6.22. This restriction applies to all regulated superannuation funds. However, this restriction applies to the identity of the beneficiaries of the death benefit and not with the means by which the recipients of the death benefit are determined.
In relation to s55A, this section provides that the death benefits of a member must be paid in accordance with the standards prescribed by s31(1). Critically, s55A does not provide that death benefits must be paid in accordance with the standards prescribed for the purpose of s59(1A).
SIS Reg 6.17A(2) and (3) have been prescribed for the purposes of s59(1A). SIS Regs 6.17(1) and (4) to (7) have been prescribed for the purposes of s31 and apply to all regulated superannuation funds. However, SIS Reg 6.17A(4) by its own terms can only apply to regulated superannuation funds to which SIS Reg 6.17A(2) applies and Reg 6.17A(2) can only apply to regulated superannuation funds other than self managed superannuation funds. Consequently SIS Reg 6.17A( 4) (and, therefore, sub-regs 4A to 7) cannot apply to self managed superannuation funds.
The Court also dismissed the argument that the SIS Reg 6.17A requirements had been imported into the trust deed by means of a definition of "Superannuation Law" which was defined to be the “SIS Act, SIS Regulations and any other laws or regulations that the fund must comply with to be a regulated superannuation fund”. The Court preferred the reasoning of Munro v Munro to that of Donovan v Donovan: SIS Reg 6.17A is not a provision of the SIS Regulations with which a self managed superannuation fund must comply and, consequently, it does not fall within the definition of "Superannuation Law".
Is the 5 June 2013 Nomination invalid because it nominates a non-dependant?
The 5 June 2013 Nomination nominated Mrs Keenan to receive 5% of the death benefit. Mrs Keenan was the sister of Mr Giles and is not a dependant merely because of the sibling relationship. It was not argued that Mrs Keenan was a dependant of Mr Giles either on the basis of being financially dependant on him or being in an interdependency relationship with Mr Giles. Did the inclusion of Mrs Keenan as a nominee make the entire nomination invalid or was the nomination partially invalid to the extent of Mrs Keenan’s nominated 5%?
The Court held that the nomination was partially invalid to the extent of Mrs Keenan’s nomination. In the absence of any provision of the trust deed providing that a nomination of a non-dependant not invalidating the entire nomination, it is probably a generous reading of the trust deed. Also, while Mrs Keenan was a joint executor of the estate of Mr Giles, the nomination could not be viewed as a nomination in her capacity as legal personal representative. The relevant provision in the trust deed (Rule 12.1) provided that the notice will be binding on the trustee if "each person nominated" in the nomination is either an LPR or a dependant. Clearly each person nominated in the 5 June 2013 Nomination was not an LPR or a dependant. The Court adopted a "practical and purposive approach" to hold that the preferable construction of Rule 12 that the notice is binding on the trustee to the extent that person or persons nominated are the LPR or a dependant.
In summary the 5 June 2013 Nomination was valid but not binding on the trustee solely because the trust deed required the nomination to be made within three years of the death of the deceased member. The nomination was made four years before Mr Giles death and, therefore, was not binding.
Was the 5 June 2013 Nomination validly extended?
On 16 March 2016 (within three years of the making of the 5 June 2013 Nomination) Mrs Giles and Mrs Keenan in their capacity as attorneys for Mr Giles signed a document called "extension of binding death benefit nomination" ("the Extension Document"). This document purported to confirm the 5 June 2013 Nomination and extend its operation for a further period of three years – presumably from the date of the document.
Was this document legally effective? Could a nomination be extended under the provisions of the trust deed and, if so, did the attorneys have the power to extend the nomination and, if so, were they permitted by the Powers of Attorney Act 1998 (QLD) to extend a nomination where they directly benefited from the nomination?
While the 5 June 2013 Nomination was made in accordance with the terms of the 2004 replacement rules, the 2014 amendment contained transitional rules which had the effect of providing that binding death benefit nominations made under the 2004 replacements rules were deemed to have been made under the provisions of the 2014 replacement rules. Consequently, the relevant provisions to determine whether the 5 June 2013 nomination could be extended are the 2014 replacement rules.
The 2014 replacement rules contained a general agency provision (Rule 5.4) by which any right conferred on the member by the trust deed could be exercised by the enduring attorney of the member (whether the member is under a legal disability or not) so long as exercise of the right was consistent with the terms of the power of attorney.
The relevant provisions of the 2014 replacement rules were set out in Rules 31.2 to 31.5. There are material differences between the requirements of Rule 5 of the 2004 replacement rules and Rule 31 of the 2014 replacement rules. These material differences are summarised in the following table:
The differences between the 2004 rules and the 2014 rules probably reflect the development of industry practice in that the requirement for witnessing is not inherent in the concept of a binding death benefit nomination (it is purely a preventive device to reduce fraudulent nominations); the realisation that the Reg 6.17A requirements do not automatically apply to self managed superannuation funds and the realisation of the need for a priority rule between binding nominations and reversionary pensions.
The Court noted that neither the 2004 rules nor the 2014 rules expressly dealt with a nomination being extended before its expiry. Possibly this absence is explained as under both rules, a new nomination could be made at any time and existing nominations revoked without making a new nomination.
As neither the 2004 or the 2014 rules permit nominations to be "extended", the effect of the Extension Document made on 16 March 2016 and of the new nomination also made on 16 March 2016 depend firstly on whether the "Extension Document" and the 16 March 2016 Nomination satisfy the requirements of Rule 31 of the 2014 Rules and secondly, on the scope of the attorneys’ powers.
Does the Extension Document satisfy the requirements of Rule 31.4?
Strangely, while this issue was raised by the Court, there is no discussion of whether the Extension Document satisfied the requirements of Rule 31.4.
In the absence of an express power to extend a nomination, possibly signing of the "Extension Document" constituted the creation of a new binding death benefit nomination which incorporated the terms of the 5 June 2013 Nomination. If so, then the "Extension Document" must satisfy the requirements of Rule 31.4.
Given the 2014 rules specify only four substantive requirements it seems that the 5 June 2013 Nomination would satisfy all of those four substantive requirements. The fact that the 5 June 2013 Nomination satisfies additional requirements which are not inconsistent with the four substantive requirements of Rule 31.4 is not relevant.
Did the Attorneys have the power to make the Extension Document?
The Court concluded that there is no restriction in the SIS Regulations preventing an attorney under an enduring power of attorney from signing a binding death benefit nomination on behalf of a member.
Equally the 2014 Rules expressly provide that an attorney under an enduring attorney can exercise any right conferred on a member by the trust deed in Rule 5.4.
The only issue is whether the attorneys are precluded from exercising the member’s right to make a binding death benefit nomination by reason of the provisions of the Powers of Attorney Act. Under the Act, the enduring attorney can exercise any right conferred on the principal that can be delegated so long as the exercise of the right is either not excluded by the power of attorney or the right is a "special personal matter" such as "making or revoking a will, making or revoking a power of attorney, exercising a rights to vote in political elections, marriage, adoption, etc". In particular, making a binding death benefit nomination (or altering or revoking or extending a binding death benefit nomination) is not a special personal matter as it is not a testamentary act.
The Court held that the right to make, vary, extend or revoke a binding death benefit nomination for a member while not within the listed items of "financial" or "legal" matters, would nevertheless be within the general scope of "financial" and also "legal" matters. The Court noted that the listed items are not exhaustive and, therefore, do not limit the meaning of the provision.
The next issue is whether the actual exercise of the power of attorney is defective due to the personal interest of the two attorneys. Attorneys must avoid conflict transactions unless they are expressly authorised by the principal to undertake conflicted transactions. The authorisation could be set out in the terms of the power of attorney (eg expressly authorising the attorney to make a binding nomination under which they are a beneficiary). Unfortunately, the power of attorney granted by Mr Giles did not have a relevant express authorisation permitting the attorneys to exercise the right to make a binding death benefit nomination.
The Extension Document was, as the name indicates, an extension of the 5 June 2013 nomination (with no material modification) which, it was argued, is nothing more than an extension of the deceased’s own nomination. The Court accepted the argument that the making of the Extension Document was to ensure continuity of Mr Giles’ estate planning arrangements which he had created and it was those estate planning arrangements which are the source of the benefits of the two attorneys. In short, the interest of Mr Giles (as principal) and the interest of the two attorneys coincided. Consequently the exercise of the power of attorney to effect the extension of the 5 June 2013 Nomination was the implementation of a conflict transaction which the principal had authored and therefore authorised. The Court noted that while the individuals who would benefit if the Extension Document were advised of and could have participated in the proceedings, they chose not to participate.
While the 16 March 2016 Nomination was materially the same as the Extension Document (other than the 5% gift to Mrs Keenan – so the gifts were as 50% to Mrs Giles and 50% to her son), the Court held that, in the absence of the express authorisation of within the power of attorney, the 2016 Nomination could not be accepted as a valid exercise of the power of attorney.
The Extension Document was held to constitute a valid binding death benefit nomination. However, the 5% gift to Mrs Keenan was ineffective because she was not a dependant of Mr Giles. This 5% gift would fall to be allocated by the default rules applying to death benefits which are typically, a discretion to be exercised by the trustee.
The applicant’s legal costs were ordered to be borne by the Superannuation Fund on an indemnity basis rather than party-party basis.