SMSF establishment and deed update packages often come with a non-binding death benefits nomination (non-BDBN) at the back as its quick and easy to sign and doesn't come with stricter signing requirements of a BDBN, but this can often be mistaken to have the same effect as a binding death benefits nomination (BDBN).

This case is an example of the vast difference between the effect of a non-BDBN vs a BDBN.

In the decision of Tratter v Aware Super [2024] FCAFC 36 the Full Federal Court dismissed the appeal by the deceased member’s mother who challenged her deceased son's super fund trustee’s apportionment of 30% to his mother and 70% to his de facto spouse.

The deceased super fund member, the son, made a non-BDBN 100% to his mother on 12 August 2010 and he was notified that he could renew his nomination with a binding one in 2011, which he did not do.

His mother claimed that the non-BDBN still indicated her deceased son's wishes, even though it was not binding on the trustee of Aware Super.

And as a result the Court considering other factors as to the de facto spouse's relationship and financial interdependency with the son during his lifetime found no reason to overturn the apportionment percentages by Aware Super - the non-BDBN was non-binding.

This case clarifies the significant difference that can be illustrated between something that is binding on the superannuation trustee and something that is not binding (i.e. the non-BDBN could be completely disregarded which it was in this case).

If the non-BDBN was a BDBN then the mother could have obtained her son's entire superannuation interest - as long as the superannuation trust deed did not restrict BDBN beneficiaries to "dependants" (which includes the spouse and dependant children under age 18 and not the member's parents) or the legal personal representative (LPR) of the member.

However a BDBN is generally made for the benefit of a person well into the future and therefore not expected for the benefit of an elder unless made in the expectation of predeceasing.

This issue of a BDBN to a member's non-dependant is further complicated given the ATO's view that although SIS Act s 59(1A) and SIS Regs r 6.17A(2) do not restrict SMSFs that SIS Act s 55A imports operating standards including SIS Reg r 6.22(2) into the SMSF's governing rules whether or not they are inconsistent (see ATO SMSFD 2008/3) which means the SMSF trustee must first exhaust a reasonable search to locate a "dependant" or LPR of the member before only cashing death benefits to an individual. 

Therefore, although a SMSF BDBN may fall outside the restrictions of SIS Act s 59(1A) and SIS Regs r 6.17A(2), any SMSF BDBN made ouside of the "dependants" of the member (such as to their parent) will need to allow for exhaustion of the trustee's cashing of death benefits to the dependants or LPR before binding the trustee to distribute to the non-dependant parent, putting to the side that the parent becomes the LPR and could be subject to a conflict of interest with the beneficiaries of their child's estate in acting as trustee of their child's SMSF and as beneficiary of their BDBN.

Exhaustion of the trustee's search for a dependant (which includes spouse) or LPR in this case would cause the trustee to find first for the de facto (which is generally included in the definition of "spouse" in modern SMSF governing rules so as to be inclusive) and the son's interest would be exhausted to the de facto before the mother's BDBN could have any effect - making it worthless.

If you wish for your superannuation benefits to go to a particular person, or you are an expectant beneficiary, then you should consider having a BDBN made (and ensure that all signing, "dependant" beneficiary requirements and witnessing (if any) are met).

A superannuation specialist lawyer or your superannuation fund should clarify whether the death benefits nomination you sign is a binding or non-binding one - this is not always straightforward to spot when viewing the form to sign.