The executor of a deceased estate that wanted to be appointed a trustee of a self-managed superannuation fund (SMSF) under the Superannuation Industry (Supervision) Act 1993 (SIS Act) in place of the deceased trustee/member, had its appeal dismissed by the Supreme Court of Western Australia recently. The case, Ioppolo v Conti , illustrates the importance of maintaining current death benefit nominations to avoid costly disputes between trustees, dependants and beneficiaries named in a will.
Mr Augusto Conti and Mrs Francesca Conti established a SMSF in 2002. The Trust Deed required the trustees to comply with the SIS Act in order for the fund to obtain the tax concessions of a SMSF.
At the time of the creation of the SMSF, Mrs Conti signed a first binding death benefit nomination (Nomination) in favour of her husband for 100% of her death benefit. Her first Nomination lapsed after 3 years.
Mrs Conti made a will in January 2005 appointing 2 of her children from her previous marriage as her executors. She made a provision in her will that her death benefit was to be divided equally between her 4 children from her previous marriage contrary to her first Nomination (which was still in place). Mrs Conti’s first Nomination lapsed in July 2005.
However, Mrs Conti made a second Nomination in April 2006, again to her husband as to 100% of the death benefit.
The second Nomination lapsed in 2009 and Mrs Conti died a little over a year later on 5 August 2010 without a Nomination in place.
Section 17A of the SIS Act sets out the requirements for a SMSF. Where a SMSF has fewer than 5 members, if the trustees of the fund are individuals, each individual trustee of the SMSF is a member of the fund. Accordingly, Mr and Mrs Conti were trustees and members of the fund.
On Mrs Conti’s death the SMSF no longer complied with the requirements under the SIS Act as Mr Conti was the surviving sole trustee and sole member. Section 17A(4) preserves the status of a non-conforming fund as a SMSF eligible to the tax concessions of being a SMSF, for the period of 6 months after the fund would have ceased to be a SMSF.
In circumstances where a member of a fund has died and his or her legal personal representative (i.e. the executor or administrator of their deceased estate) is appointed as the trustee of the fund, or the director of the corporate trustee, the SMSF continues to be a complying fund regardless of the fact that the legal personal representative is not a member of the fund, from the date of the member’s death to the date that the member’s benefits begin to be payable (section 71A(3) of the SIS Act).
Mr Conti took legal advice as to what should be done in relation to the SMSF. In relation to section 17A(3) of the SIS Act, the advice was that that section permitted, but did not require the legal personal representative of the deceased member to be appointed as a trustee of the SMSF. Mr Conti had 6 months to make the SMSF comply with the SIS Act, which he did by creating Augusto Investments Pty Ltd as a corporate trustee and of which company Mr Conti was the sole director in compliance with section 17A(2) of the SIS Act.
While he was still the sole trustee of the SMSF, Mr Conti exercised his discretion in relation to Mrs Conti’s death benefit and determined that it should be paid to him as Mrs Conti’s dependent.
The executors of the will commenced proceedings asserting that the Trust Deed in conjunction with section 17A(3) of the SIS Act required the appointment of one of them as a legal personal representative of the deceased as trustee of the SMSF on the death of the deceased and that Mr Conti’s decision to allocate Mrs Conti’s interest in the fund to himself lacked bona fides or was done in bad faith with the knowledge of the provision in Mrs Conti’s will distributing the death benefit equally among her children.
The Court found that section 17A(3) only defined a term in the SIS Act and referred to the possibility of appointing a deceased member’s legal personal representative as ‘permissive rather than mandatory’ .
The executors’ failed to show that by paying Mrs Conti’s death benefit to himself, Mr Conti had acted in an ‘inequitable or inappropriate manner’ . Mr Conti exercised his discretion that he had as the trustee of the fund.
We must therefore conclude that had Mrs Conti wanted her death benefit to go to her estate, to be divided among her children in accordance with her will, her Nomination would need to have been current and to comply strictly with the deed establishing the fund in the form of the notice and in the description of the intended beneficiary.
If a member intends their death benefit to go to their estate on their death, the nomination will not be binding if it nominates ‘The Trustee of Deceased Estate’ or ’to my estate’ if the deed specifically provides ‘When you nominate your executor you should enter legal personal representative in the relation column’ .
Members of SMSF should be careful in making Nominations. They would be wise to get advice as to the requirements of their fund and to ensure that they comply with the deadlines for the lapse of the Nominations.