The High Court has dismissed an appeal from the WA Court of Appeal and ruled that reg 6.17A of the SIS Regs does not apply to self-managed superannuation fund (SMSFs), and therefore clauses in an SMSF’s deed operated as a binding death benefit nomination (BDBN). In the process the High Court made it clear the WA Court of Appeal should have determined the issue on its merits, instead of deferring to mere ‘dicta’ of a decision in a different jurisdiction. See also this related TT article, with the High Court’s own summary.

 


 

Mr Sodhy (deceased) and his de facto partner (Ms Murray) were directors of Zuda Pty Ltd which was the trustee of an SMSF. The only members of the fund were the deceased and Ms Murray. The SMSF trust deed had been amended in 2011 to insert a BDBN clause to provide that if either member of the fund died, the trustee was required to distribute the deceased member’s balance to the surviving member. Ms Hill (the only child of Mr Sodhy) commenced proceedings arguing that the BDBN clause was of no force as it did not comply with the standards prescribed by reg 6.17A(4)(c)/(6)(b) 2 witnesses etc & r4.17A(4)(d)/(7)(a) – 3-year time limit).

The Supreme Court summarily dismissed the proceeding on the basis that reg 6.17A did not apply to the Fund as an SMSF – Hill v Zuda Pty Ltd [[2020] WASC 89 (25.3.20).

The WA Court of Appeal (in Hill v Zuda Pty Ltd [2021] WASCA 59, the WA Court of Appeal followed a decision of the Full Court of the SA Supreme Court and held that reg 6.17A does not apply to SMSFs. The Court of Appeal said a reasonable reading of reg 6.17A(4) was that it only operates where reg 6.17A(2) applies and since reg 6.17A(2) only applies for the purposes of s 59(1A) of the SIS Act, it does not apply to SMSFs.

The High Court unanimously dismissed the appeal from the WA Court of Appeal and ruled that the BDBN requirements in reg 6.17A, properly construed, do not apply to an SMSF. However, the High Court said the Court of Appeal ought to have reached that conclusion by construing the regulation for itself, rather than adopting the construction of another court.

The High Court rejected Ms Hill’s argument that reg 6.17A(1) makes the standard in reg 6.17A(4) applicable to all regulated superannuation funds. Rather, the High Court held that reg 6.17A(1) simply makes the standard in reg 6.17A(4) applicable to the operation of those regulated super funds to which reg 6.17A(4) applies. Since reg 6.17A(4) has no application to an SMSF, neither does reg 6.17A(1). The High Court said it isn’t surprising that reg 6.17A(4) does not apply to SMSFs as the members of the fund are also directors of the corporate trustee. In the context of an SMSF, the High Court said that “giving notice of the kind envisaged by reg 6.17A(4) as expounded in reg 6.17A(6) and (7) would be at best an exercise in formality and at worst redundant.”

(Hill v Zuda Pty Ltd as trustee for The Holly Superannuation Fund & Ors [2022] HCA 21, High Court, Kiefel CJ, Gageler, Keane, Gordon, Edelman, Steward and Gleeson JJ, 15 June 2022.)

[LTN 112, 16/6/22]

 


 

Did the technical law work injustice?

Often these ‘daughter v defacto’ disputes don’t end well, for the natural children, and can be a bit heart rending. But in this case, the defendant had been the defacto of deceased for 33 years (a long time) and the plaintiff’s mother proved paternity, when her daughter was 20 years old (nearly 20 years prior) – suggesting that the deceased was not involved in his daughter’s life, at least for the first 20 years. Further, the daughter was seeking further provision under the will of her deceased father, suggesting she had some prospects of getting some money (unless the Estate had little in it). The follow is an extract from the Supreme Court judgement –

  1. The third defendant, Jennifer Murray (Jennifer) was the de facto partner of the late Alec Kumar Sodhy (the deceased) for a period of approximately 33 years prior to his death on 22 November 2016. Jennifer is the executor of the estate of the deceased. Probate of the deceased’s will was granted to Jennifer on 3 February 2017. The plaintiff was born in 1983 and is the only child of the deceased. The plaintiff’s mother proved the paternity of the plaintiff in proceedings taken in 2003. Jennifer is the beneficiary of the estate of the deceased. The plaintiff commenced proceedings against Jennifer as executor of the estate for provision pursuant to theFamily Provision Act 1972 (WA) on 27 July 2017. Jennifer is the sole director of the first defendant in its capacity as trustee for the Holly Superannuation Fund. The Holly Superannuation Fund was created by Deed dated 14 June 2000. This Deed was amended by an amending Deed dated 13 December 2011. The Holly Superannuation Fund had two members from its establishment – the deceased and Jennifer. Presently Jennifer is the only member.

What were the competing substantive constructions of the SIS law?

The Plaintiff/Appellant/daughter, had at least some authority on her side (which the Court of Appeal conceded, in their Conclusion (para [50] was ‘reasonably arguable’). It was the decision of Blue J. in Retail Employees Superannuation Pty Ltd v Pain [2016] SASC 121 [495] – [511]. The Court of Appeal summarised this as follows.

    1. On the appellant’s construction, reg 6.17A(6) and (7) of the SIS Regulations do apply to a self managed superannuation fund on the following basis:

(1)   Regulations 6.17A(6) and (7) do not operate only for the purpose of s 59(1A) of the SIS Act. Rather, they add content to the standard set out in reg 6.17A(4). By reg 6.17A(1), the standard set out in reg 6.17A(4) is relevantly prescribed for the purposes of s 31(1) of the SIS Act.

(2)   The trustee of a self managed superannuation fund is prohibited by s 55A(1) of the SIS Act from permitting a fund member’s benefits to be cashed after the member’s death otherwise in accordance with standards prescribed for the purposes of s 31 of the SIS Act.

(3)   The governing rules of a fund will be invalid to the extent of any inconsistency with s 55A(1).

The High Court concludes otherwise –  that the formalities required in r6.17A(4) do NOT apply to SMSFs for the following reasons.

30 Ms Hill submits that reg 6.17A(1) makes the standard set out in reg 6.17A(4) applicable to the operation of all regulated superannuation funds. The alternative, and preferable, interpretation of reg 6.17A(1) is that it simply makes the standard set out in reg 6.17A(4) applicable to the operation of those regulated superannuation funds to which reg 6.17A(4) is in its terms applicable. The standard set out in reg 6.17A(4) in its terms applies only “if the governing rules of a fund permit a member of the fund to require the trustee to provide any benefits in accordance with [reg 6.17A(2)]”. Since reg 6.17A(2) has no application to an SMSF, neither does reg 6.17A(4). And since reg 6.17A(4) has no application to an SMSF, neither does reg 6.17A(1). This is consistent with the heading to reg 6.17A referring expressly to s 59(1A) of the Act, which does not apply to an SMSF. It is also consistent with the extrinsic materials and the purposes of reg 6.17A.

31 As explained in the Explanatory Statement for the amendment to the Regulations which introduced reg 6.17A in its original form[26], following the insertion of s 59(1A) into the Act in 1999[27], reg 6.17A(1) “prescribes the standard set out in [reg] 6.17A(4) as an operating standard for the purposes of the [Act]”. Regulation 6.17A(1) is designed to have, and has, no wider operation.

 

What does the High Court say about Courts following ‘dicta’ unless they are ‘plainly wrong’?

The WA Court of Appeal did not construe r6.17A for itself, but instead deferred to the decision of the Full Court of the SA Supreme Court (Cantor Management), despite not being bound by it – under principles of ‘comity’ (ie. because it was not ‘plainly wrong’). The reasoning is explained well enough in these portions of the judgement.

    1. In our view, the principle in Farah Constructions applies in this case. The Full Court of the Supreme Court of South Australia has expressed its (at least seriously considered) opinion as to whether reg 6.17A applies to self managed superannuation funds. If this court were to adopt a contrary position merely because it prefers one of two reasonably available constructional choices, it would result in confusion for other courts. It would also produce uncertainty for those involved in the establishment, management and operation of self managed superannuation funds and their advisers. Given the popularity of self managed superannuation funds as investment vehicles, the confusion and uncertainty would likely affect the positions adopted by a broad range of people. In our view, the decision in Cantor Management [2017] SASCFC 122 should be taken as settling the question of whether reg 6.17A of the SIS Regulations applies to self managed superannuation funds until such time as it is overruled by the High Court.

Farrah Constructions sets out the principles of ‘comity’ – which the WA Court of Appeal described this way.

    1. The significance of the decision in Cantor Management is that it is a decision of an Australian intermediate appellate court construing federal legislation. The precedential effect of such a decision was described in Farah Constructions Pty Ltd v Say-Dee Pty Ltd [[2007] HCA 22; (2007) 230 CLR 89 [135]];

Intermediate appellate courts and trial judges in Australia should not depart from decisions in intermediate appellate courts in another jurisdiction on the interpretation of Commonwealth legislation or uniform national legislation unless they are convinced that the interpretation is plainly wrong. (citation omitted)

The High Court, however, unscrambled this – saying that it was only ‘dicta’ of the High Court that ‘intermediate appellate courts’ should follow, unless ‘plainly wrong’ (they would, after all, be bound by the ‘ratio’ of the High Court). The Courts of one jurisdiction, are not bound by the ‘ratio’ of decisions in another jurisdiction (but should, out of comity, follow them unless they are plainly wrong). But for mere ‘dicta’ they have no obligation to defer to them and ought approach the issue on its merits. The High Court put it this way.

25 Farah Constructions identified two decision-making principles. The first is that an intermediate appellate court should not depart from seriously considered dicta of a majority of this Court [230 CLR 89 at 151 [134]]. The second is that neither an intermediate appellate court nor a trial judge should depart from a decision of another intermediate appellate court on the interpretation of Commonwealth legislation, uniform national legislation or the common law of Australia unless convinced that the interpretation is plainly wrong [230 CLR 89 at 151-152 [135]] or, to use a different expression, unless there is a compelling reason to do so [RJE v Secretary to the Department of Justice [2008] VSCA 265 [104]].

26 Although both principles are directed to ensuring coherence in the law, the principles are distinct. The first concerns the relationship between an intermediate appellate court and this Court. The second concerns the relationships between intermediate appellate courts and between intermediate appellate courts and trial judges. In that latter context, intermediate appellate courts and trial judges are not bound to follow obiter dicta of other intermediate appellate courts, although they would ordinarily be expected to give great weight to them.

 


 

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