Superannuation

9.28       In Chapter 7, the increase in wealth held under superannuation funds is noted. This makes superannuation held by individuals a potential target for financial abuse, where a trusted person seeks to access the older person’s superannuation for their own benefit. As the Law Council of Australia observed, ‘[g]iven the value of many members’ death benefits there is an unfortunate incentive to manipulate a member’s nomination’.^[34]

9.29       Two means are considered: the exercise of influence to have the older person make, or alter, a death benefit nomination in the trusted person’s favour; and seeking to make the death benefit nomination under the supposed authority of a power of attorney.

Death benefit nominations

9.30       Superannuation funds commonly make provision for funds held by a member to be paid on the person’s death in accordance with a nomination of the member. The Superannuation Industry (Supervision) Act 1993 (Cth) (SIS Act) and Superannuation Industry (Supervision) Regulations 1994 (Cth) (SIS Regulations) provide mechanisms to allow superannuation fund rules to permit a member of the superannuation fund to complete a binding death benefit nomination of a beneficiary.^[35] Such a nomination must:

• be in writing;

• be signed and dated by the member in the presence of two witnesses, each of whom have turned 18 and neither of whom is mentioned in the nomination; and

• contain a declaration signed and dated by the witness stating that the notice was signed by the member.^[36]

9.31       A member can nominate a legal personal representative, or a dependant or dependants as their beneficiary.^[37] The potential for manipulation of the nomination in a person’s favour is therefore limited to this group. The Law Council pointed out that ‘the restriction on the persons who are eligible to receive the death benefit will somewhat limit the prospects on that abuse’.^[38]

9.32       Nominations are generally only binding for three years, but can be renewed.^[39] On or after the member’s death, the trustee of the fund must then provide the member’s benefits to the person or people mentioned in the notice.^[40] Binding death nominations are often made in the context of broader estate planning and, in particular, a desire to ensure the most tax-effective structure for succession and to limit any potential claims on the deceased’s estate.

9.33       Because of the relationship between the payment of funds and the member’s death, binding death benefit nominations are will-like in character.^[41] The Law Council of Australia commented that, given the value of many members’ death benefits ‘there is an unfortunate incentive to manipulate a member’s nomination’.^[42] Pressure to make a will may also include pressure to make a binding death benefit nomination, as evident in a case study provided to the Queensland Law Society (QLS), part of which was quoted above. Although the relevant solicitors no longer acted for ‘V’ they were aware of circumstances concerning her superannuation and pressure by her partner:

it became apparent through our discussions that V had made a binding death benefit nomination in relation to her superannuation to her ‘partner’. Her superannuation, as far as we could tell was her largest asset. V had a copy of the nomination with her (given to her by her partner to bring into our meeting). The nomination had been made within the two weeks prior to our meeting. This concerned me as although the capacity to make a binding death benefit nomination is the ability to enter into a contract, and not the same as making a will, it was doubtful that V had the capacity to understand the nature and effect of that decision. Further it was probable that she was told to sign the nomination by her partner in front of the two witnesses.^[43]

9.34       State Trustees Victoria described as ‘insidious’, ‘where a third party manipulates a person into nominating them as a binding death benefit nominee’.

It is unclear to what extent this happens but it should be considered a potential issue to be managed. Given that the binding death benefit nomination only takes effect after the death of the principal, disproving that the nomination was not valid would be very difficult.^[44] 

9.35       The Law Council of Australia observed that the validity of the nomination is an issue that regularly arises in relation to death benefit nominations.

There can be disputes around whether the nomination was validly made, whether the nomination is binding, has lapsed or has ceased to have effect for any other reason. It is rare for validity to be contested on the basis that it was involuntary, although a recent example is D15-16112 [2016] SCTA 214 [The allegation was made but not substantiated]. It is unusual for validity to be contested on the basis of lack of mental capacity, although an example is D14-15172 [2015] SCTA 31.^[45]

9.36       State Trustees Victoria suggested that this risk of misuse of binding nominations could be minimised by requiring there are witnesses ‘to verify that the person appeared to have capacity when the nomination was made’.^[46] The QLS also suggested that:

Given the ease with which binding death benefit nominations can be made and the risk to that asset, it might be worthwhile requiring that prior to any superannuation nomination being made the member obtain a certificate of independent legal advice.^[47]

9.37       Given the similarity in effect of binding death benefit nominations and wills it would seem appropriate to align the witnessing requirements with those otherwise applicable to the making of wills.^[48] The Law Council commented that while solicitors are often involved with the preparation of wills, this is much less the case in the preparation of nominations. Abuse could be reduced, the Council suggested, ‘if a solicitor is involved and the direction of the death benefit is to the estate.^[49] In such cases, the guidelines proposed in Proposal 9–1 could also include binding death benefit nominations as well as wills.

Death benefit nominations and substitute decision makers

9.38       A further matter of contention in relation to binding death benefit nominations is whether, when a member of a superannuation fund has appointed a state or territory decision maker, that decision maker may be able to nominate a beneficiary on behalf of the member.

9.39       In the 2007 report, Older People and the Law, the House of Representatives Standing Committee on Legal and Constitutional Affairs recommended that the SIS Act be amended ‘to enable a substitute decision maker to renew, or if required to do so, to make a binding death benefit nomination’,^[50] adopting a suggestion made to the Committee by Brian Herd.^[51] There were no other submissions referred to on this point.

9.40       The legal position on this issue was considered in the ALRC Report, Equality, Capacity and Disability in Commonwealth Laws,^[52] where it was pointed out that, as a matter of law, there does not appear to be any restriction in the SIS Act or SIS Regulations themselves that would prevent a person acting under a power of attorney from completing and signing a binding death benefit nomination.

9.41       In Determination D07–0830, theSuperannuation Complaints Tribunal stated that, in principle, an enduring power of attorney would permit an attorney to complete and sign a binding death nomination on behalf of the member. As the Tribunal did not decide the matter on the basis of the binding nomination, however, its comments are not of direct application. Hence, the Law Council of Australia observed that ‘[w]hether the scope of an attorney’s authority extends to making a nomination remains a matter of debate’.^[53]

9.42       In the Equality, Capacity and Disability Inquiry, the Law Council of Australia pointed to the different practices of funds:

some funds accept a nomination by a person holding an enduring power of attorney granted by the member, generally without inquiring as to the wishes of the member. Some funds do not accept a nomination by a person holding an enduring power of attorney, with the result that binding nominations cannot be made by these members.^[54]

9.43       The Law Council suggested that superannuation funds would adopt a more consistent approach if there were greater clarity in legislative provisions governing superannuation death benefits.^[55]

9.44       As explained in the Equality, Capacity and Disability Report, the policy issue is a difficult one, given the difference between a nomination, as a lifetime act, and its effect, which is will-like in nature—as it affects property after the death of the member. Given the uncertainty about whether a person holding an enduring power of attorney could exercise a death benefit nomination on behalf of the member, the ALRC asked whether such person should be restrictedfrom nominating a beneficiary on behalf of the person for whom they were acting—assuming that such action was not prevented by the power of attorney itself.^[56]

9.45       The Law Council agreed with the ALRC that the main issue concerning binding death benefit nominations is that there is currently no clear policy position on whether a nomination should be considered similar to a will or simply a lifetime instruction in relation to a person’s assets. The Council also agreed with the ALRC’s analysis that nominations are will-like in nature and they should be treated in policy terms ‘similarly to wills’.^[57]

9.46       A basic principle of wills formalities is that a person is required to have testamentary capacity when making a will. If a person was regarded as no longer having capacity, any will made by such person would be void.^[58] Now, however, under strict conditions, wills can be authorised by the court in all Australian states and territories where a person is regarded as having lost, or never having had, legal capacity.^[59] In the succession context it is a relatively new jurisdiction for the court to be able to approve these ‘statutory wills’. It is exercised cautiously, given the importance accorded to testamentary freedom as a valued property right.^[60]

9.47       Applying this approach to the question of whether a person holding an enduring power of attorney should be able to sign a binding death benefit nomination on behalf of the member, the ALRC concluded that this should not be permitted. As the role of an enduring attorney is one focused on the lifetime transactions and needs of the person, the ALRC concluded that it was not appropriate for such a person to make a binding death benefit nomination that was will-like in effect. The Law Council agreed with this approach and submitted that the SIS Act and SIS Regulations could be amended to make this clear so that a nomination ‘generally cannot be made on behalf of a member by a person exercising powers under an EPA’.^[61]

9.48       If a member dies then any superannuation balance is paid in accordance with the rules of the fund. That balance may well form part of the member’s estate in due course. A person who holds an enduring power of attorney may apply for a statutory will on behalf of the member during the member’s lifetime, but that is an entirely different matter from seeking to use the power of attorney to make the death benefit nomination on behalf of the member. The application for a statutory will would be subject to the strict scrutiny of the court.

9.49       In the Terms of Reference for this Inquiry the ALRC was directed to have regard to the recommendations in the Older People and the Law report, as well as to those in the ALRC’s more recent Equality, Capacity and Disability Report. As explained above, the ALRC’s consideration of the authority of an enduring attorney with respect to the making of a binding death benefit nomination for a member of a superannuation fund was different from that in the Older People and the Law report.

9.50       The ALRC acknowledges that the proposal to prohibit an attorney, acting under an enduring power, from making a binding death nomination does raise policy challenges in the context of the three-year limit on nominations.^[62]

9.51       For example, a member may make a binding death nomination and then subsequently lose legal capacity. If the attorney does not have the power to renew the binding death nomination when it lapses after three years, on death, the principal’s superannuation funds may be distributed:

• in a way that the member had not intended;

• in a manner less ideal for tax purposes when compared with the lapsed binding death nomination; or

• in a manner that results in the funds forming part of the estate of the member which may be subject to certain creditors’ claims.^[63]

9.52       Another challenge is that a binding death benefit nomination does not have the flexibility to take into account a change in circumstances. A member may make a binding death benefit nomination in favour of their spouse and then subsequently lose legal capacity. The marriage may thereafter break down, but the death benefit nomination will remain in place notwithstanding the change in circumstances.

9.53       The ALRC considers that the SIS Act and SIS Regulations should be amended in line with the conclusions that the ALRC reached in the Equality, Capacity and Disability Report. Nevertheless, the ALRC recognises that the implementation of this proposal requires a broader consideration of the consequences of prohibiting a person appointed under an enduring power of attorney from making a binding death benefit nomination on behalf of a member, particularly in terms of a person’s estate planning goals. The ALRC seeks input from stakeholders regarding the consequential changes to laws and legal frameworks that would be required if the proposal were implemented.