Did you know that it is a Death Benefit Nomination lodged with your superannuation or pension fund – and not a will – that can determine who receives your superannuation balance in the event of your death? It’s true, and since not all Death Benefit Nominations are the same we thought we would outline the differences so that you can consider which nomination (if any) you currently have in place and if it needs to be revised.
There are three types of Death Benefit Nominations:
- Binding; and
- Non-lapsing binding.
Non-binding Death Benefit Nominations are exactly that: non-binding on the Trustee of your superannuation or pension fund, who ultimately has the capacity to decide who receives your unspent retirement funds.
When a person passes away, their superannuation or pension fund balance can only be paid out to people who are defined as “dependants” in Section 10 of the Superannuation Industry (Supervision) Act 1993 (Cwth), namely:
- a spouse (including a de facto or same-sex partner);
- children of any age (including those who are adopted or by virtue of the deceased’s relationship with their spouse and any other person deemed a child under the Family Law Act 1975); and
- any person the deceased was in an interdependent relationship with at the time of their death.
While Non-binding Death Benefit Nominations are the quickest and easiest to put in place as typically there is no paperwork required – you simply need to log in to your fund and update your details accordingly* – they don’t hold as much weight as other types of nominations. That means that whilst the Trustee will consider the person you have listed as a Non-binding Nominee, ultimately it is their decision (in line with the applicable fund’s trust deed) where your money ends up. The Trustee has the scope to consider your situation at the time of your death and the relationships you had in your life prior to your passing, before making any final decisions.
Binding Death Benefit Nominations, in contrast, typically require that you forward a signed form to your superannuation or pension fund provider, and provided your Nomination is deemed valid, it is binding on the Trustee. That is, they must disperse your superannuation funds according to your wishes.
In the instance that a Binding Death Benefit Nomination is deemed invalid – for example, if your form was completed incorrectly or if you nominated a person who isn’t considered a dependent according to legislation – then the Trustee may choose to override your Binding Nomination and pay your benefits out to other people and/or in a different split to what you had intended.
Binding Death Benefit Nominations typically expire** after three years, and your superannuation fund should contact you about updating or renewing them.
Non-Lapsing Binding Death Benefit Nominations, lastly, are those that are binding on the Trustee of your super fund and do not lapse or expire. Unless there is a change to your personal circumstances – for example, your preferred nominee dies or you get divorced – and you want or need to update your Death Benefit Nomination, Non-Lapsing Binding Death Benefit Nominations remain in force indefinitely.
It’s important to be aware that not all super funds will offer Non-Lapsing Binding Death Benefit Nominations and so you will need to confirm with your specific fund as to what is possible.
If your superannuation balance and any applicable insurance payout are paid to your estate instead of to a named Nominee, your money will be distributed either in accordance with your valid will (if you have one) or as per the Administration Actapplicable to the state you live in, if you die without one.
Lastly, it’s important to note that whilst those considered “dependant” under the Superannuation Industry (Supervision) Act 1993 (Cwth) may receive superannuation death benefits, they may not be entitled to receive them tax-free under the Income Tax Assessment Act 1997 (Cwth). That’s a topic for a future newsletter.
Get advice. Estate planning done incorrectly can cost you money. As always, we recommend you seek legal advice before making any decisions.
*With the exception of self-managed superannuation funds.
**Binding Death Benefit Nomination expiry doesn’t apply to Self-Managed Super Funds as regulation 6.17A of the Superannuation Industry (Supervision) Regulations 1994 doesn’t apply to SMSFs.
Employee Record Keeping Obligations
An important and yet sometimes overlooked aspect of being a responsible business owner involves knowing what your employee record keeping obligations are.
Unlike most tax records which must be kept for a period of five years (Capital Gains Tax items are a common exception to this rule), the Fair Work Act 2009 (Cwth) requires that employers make and retain for seven years the specific employee records outlined in Division 3 of Part 3-6 of the Fair Work Regulations 2009 (Cwth), including:
- basic employment details such as the name of the employer and the employee and the nature of their employment (e.g. part‑time, full‑time, permanent, temporary or casual);
- overtime hours;
- averaging arrangements;
- leave entitlements;
- superannuation contributions;
- termination of employment (where applicable); and
- individual flexibility arrangements and guarantees of annual earnings.
Importantly, if you end your business, your obligation to maintain these records remains.
For example, say you used Xero for bookkeeping and payroll purposes and on the cessation of your business activities, you accordingly ended your subscription to the service. Your requirement as an employer would be to ensure you had downloaded and either saved to file or printed hard copies of all of your employees’ relevant records. Fair Work Regulation 3.31 specifies that your records must continue to be properly maintained, legible and readily accessible in the event they need to be reviewed by a Fair Work Inspector at least until the seven-year record keeping period expires; and Regulation 3.44 requires that your records are accurate at all times.*
In the event that you sell your business, and some or all of your staff form part of the agreed purchase and transfer, it is your responsibility under Division 2 of Part 2-8 of the Act and Subdivision 1 (3.41) of the Regulations to “transfer to the new employer each employee record concerning a transferring employee that the old employer was required to keep…”
More information on employee record keeping requirements are available on the Fair Work Ombudsman website here.
*In the case of Xero, your subscription to the service can be reinstated again later in the event you need to access your data. It may be the case that not every software provider offers this functionality, however, and so it is your responsibility to ensure the maintenance of your cloud- or software-based records.
Asked & Answered
Question: My husband and I are looking to refinance a loan since the interest rate we’re paying with our current lender is getting up there and we know there are more competitive rates available in the market. The broker we’ve been working with has recently reached out to me and told me we need a letter from our accountant confirming our financial position and capacity to repay. I was going to ask if that’s something you could do for us but [my husband] said you would refuse. Is that right? And if it is, is there anything you can do to help us refinance?
Answer: The dreaded “accountant’s letter” request is a topic of many complaints within professional accounting firm circles.
Essentially, since lenders look to verify your income, expenses, assets and liabilities any time you apply for credit, you need to provide proof that your overall financial position is what you say it is, and that you aren’t likely to be a credit risk for the institution lending you money.
For employees, that’s often a relatively simple proposition since you can use payslips, bank statements and income tax returns to confirm your income. Since typically those documents aren’t generated by you, they’re generated by third parties, the risk of your lender receiving falsified records from you is relatively low.
“Business” applicants, however, are a riskier prospect since the applicants themselves often control the numbers generated by their accounting systems and so could easily manipulate figures to suit their needs. As lenders know this is a possibility, they often attempt to use reliable third parties – like accountants – as verifiers of “the truth”. That is, accountants are asked to sign a letter or a capacity-to-repay certificate confirming various facts about a business, including:
- who owns the business and how it is structured (for example, a discretionary trust with a corporate trustee, or two trading entities in partnership with one another, as two of many different possibilities);
- how long the business has been trading;
- details of the business’ previous years’ earnings and profitability, and what was documented as paid to its owners;
- if the business has incurred or encountered any one-off or unexpected expenses;
- if the business owner’s intention is to use any acquired assets strictly for business purposes, or if a degree of private usage is expected to eventuate; and (but certainly not limited to)
- whether or not a prospective borrower has the financial means to repay (or “service”) a specific loan amount.
Often, the request for an accountant’s letter comes when a borrower is seeking finance via low-doc or no-doc means, meaning they are looking to provide to a lender the bare minimum required in terms of documentation. However, sometimes the request comes in other situations too, which may well be the case for you. Without more information, it is difficult for us to say.
Accountants hate the request for an accountant’s letter because there is a huge risk involved for the accountant themself in the event something goes wrong with the loan. A careless lender may well choose to rely on an accountant’s letter as proof positive of a borrower’s capacity to repay, and therefore engage in limited other due diligence activity prior to approving the loan.
Once loan funds are released, they are difficult to claw back and so if the loan has been applied for under tenuous or even fraudulent terms, the accountant who signed off on the borrower’s capacity to pay could find themselves in serious trouble.
Keddie Waller, the Head of Public Practice and Small and Medium Enterprises at CPA Australia (our governing professional body) told Accountants Daily back in July,
“What [lenders are] looking for is recourse. So should a client default on a loan or miss a payment they then have a way of coming back and saying that there was an independent third party, being the accountant, who’s actually said they could afford this loan or understood the terms and conditions of the product, and therefore can seek redress against that accountant.”
Ms Walker further shared the story of an accountant nearing retirement who signed a capacity-to-repay certificate for a client, and then faced a claim for $400,000 plus legal fees when it turned out the client hadn’t been entirely forthcoming with their financial situation, and the lender sought recourse.
While we are more than happy to help clients who need it, when it comes to accountant’s letters we have a few rules:
- We will only ever confirm in writing the things we know are facts. For example, for clients who have been using our services for years now, we would be happy to confirm in writing the details found in income tax returns and financial statements (which include any business income, assets and liabilities).
- We will NOT comment on a client’s capacity to service a loan, or their intended use of a property or asset should we be asked those questions.
- As some lenders like to call accountants directly and ask that they verify clients’ financial details over the phone, we will also NOT speak to anyone without first receiving our clients’ express authority to do so. And again, even in those situations, we will only ever verbally confirm the information we know is true and correct.
Holiday Hours 2022/23
A reminder that our office will be open until 5pm on Friday the 23rd of December this year, and then closed for the festive season until 9am on Monday the 9th of January 2023.
If you need to contact us at all during this period, please call us on (08) 9221 4100 (and be sure to leave a message if we can’t immediately get to the phone), or email us at firstname.lastname@example.org and we’ll do our best to get back to you promptly.