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Supreme Court decision confirms attorney’s power to make Binding Death Benefits Nomination

By Sarah Camm

In a significant decision handed down last week, the Supreme Court of Queensland has held that a Binding Death Benefits Nomination (“BDBN”) executed by an attorney was valid.

Justice Bowskill’s decision in Re Narumon [2018] QSC 185 is significant because, until now, the question of whether an attorney has (or should have) this power has been unclear, and has been the subject of some discussion in the legal community.

The reason for this uncertainty is as follows:

  • An attorney can be given power to make financial and legal decisions on behalf of a principal, however the execution of a BDBN is not included in the examples of these types of decisions in the Powers of Attorney Act 1998 (Qld);
  • An attorney cannot be given the power to make decisions about special personal matters, including making a will and appointing an attorney, in part on a policy basis, because of the potential for abuse;
  • A BDBN, which provides direction for payment of a benefit after death of the principal, could be said to be testamentary or will-like in nature; but
  • BDBNs differ from a will in that they often lapse, and must be renewed or re-made every three years, depending on the rules of the particular fund.

 

Facts in Re Naruman

In 2013 Mr Giles made a lapsing BDBN with his SMSF, nominating his wife and their son to receive 47.5% of his death benefits each, and his sister to receive 5%.

Shortly after making the 2013 BDBN, Mr Giles lost capacity. Under an existing Enduring Power of Attorney, his wife and sister were appointed his attorneys for personal and financial matters.

In 2016, before the 2013 BDBN expired, the attorneys executed an extension of the 2013 Nomination. They also executed a new BDBN, because they were concerned that the 5% distribution to Mr Giles’ sister in the 2013 BDBN, who is not a dependent as required by superannuation legislation, would invalidate the document.

The Court had to determine:

  1. Whether the 2013 BDBN was valid, despite the nomination of his sister to receive 5%
  2. Whether an attorney can execute a BDBN on behalf of the principal member
  3. Whether the extension of the 2013 BDBN or the new BDBN executed in 2016 were conflict transactions, and whether this invalidated the documents

 

The 2013 BDBN

The Court found that the 2013 BDBN was valid, but that as the member had no power to nominate his sister, and the trustee was not authorised to pay the benefit to her, the nomination of Mr Giles’ sister to receive the 5% benefit was of no effect.

 

Attorneys executing BDBNs generally.

The Court found that nothing in the Superannuation legislation appears to restrict an attorney of a member executing a nomination on behalf of that member, noting that the terms of the fund deed itself actually govern the rights of a member to make a BDBN.

The terms of Mr Giles’ fund deed did not prohibit an attorney executing a BDBN on behalf of a member and in fact expressly contemplated that they could.

The Court then considered the Powers of Attorney Act 1998 (Qld) itself and held as follows:

The effect of a BDBN, if valid, is to bind the trustee of the superannuation fun to pay benefits, following the member’s death, to the nominated persons (and, if relevant, to do so in the nominated way). That does not seem to fall within any of the examples in the definition of a financial matter, including as a legal matter relating to the principal’s financial matters. But the examples are not exhaustive and do not limit the meaning of the provision. It is difficult to see why the exercise of a member’s right under a SMSF deed, to require the trustee of the fund to pay benefits, after their death, in a particular way would not be “a matter relating to the [member’s] financial… matters”. Given the breadth of meaning of the word “financial”… such an act does fall within the meaning of this term.[1]

The Court also held that, although it deals with benefits of a member after their death, a BDBN is not a testamentary act, so it does not fall within the restricted ‘special personal matters’.

While acknowledging the possibility for abuse by allowing attorneys to make a BDBN on behalf of the principal, the Court noted that several protections against abuse exist in the making of an EPOA, as well as in the attorney’s duties to act honestly and in the principal’s interests, and to avoid a conflict of interest.

 

The 2016 Extension

The Court held that there was no conflict of interest in the execution of the extension by the attorneys. This Court accepted that the reason for executing the extension was to ensure continuity in Mr Giles’ estate planning and that his wishes continued to have effect. While the attorneys gained some benefit, this was held to be incidental to the exercise of the power, and coincided (rather than conflicted) with the interests of the principal. The 2016 extension was therefore held to be valid.

 

The new 2016 BDBN

The Court was not prepared to hold that the new BDBN made in 2016 was valid. The new BDBN removed the 5% nomination to Mr Giles’ sister, and nominated Mr Giles’ wife and son to each receive 50% of the benefit. While the change was minor, it was held that without express authority in the EPOA to enter into conflict transactions, the attorneys could not make a BDBN which changed what Mr Giles had proposed in favour of themselves.

 

Conclusion

Re Narumon does resolve some ambiguities in this important discussion. It is important to note however that the Court was considering circumstances where there was an existing BDBN to refer to. The Court did not exclusively determine whether, even if the EPOA did have a conflict clause, the execution of a BDBN either changing the member’s existing nomination or where the member had no previous nomination, would be valid.

Unfortunately, Binding Death Benefits Nominations are often overlooked in the Estate Planning process. EPOAs, too, are seen as a DIY document, simply containing a number of tick boxes for completion. Trust Deeds are often drafted by an accountant, and executed without a legal advice from your estate planning solicitor.

The decision in Re Narumon highlights the importance of having well considered advice over all aspects of your estate plan. At Just Us Lawyers we can review your existing EPOAs, BDBNs and other estate planning documents to ensure that they will do what you want them to.

We can draft appropriate conflict clauses to ensure your attorneys have the appropriate powers to act in your interests, and provide you with certainty and peace of mind that your affairs will be taken care of.

[1] Re Narumon [2018] QSC 185 at [69].


Depreciation – The property investor’s friend

By Skye Nicholson

Don’t be another property investor who forgoes thousands of dollars of unclaimed money, simply for being none the wiser! This tax time, we look into claiming depreciation deductions for your investment property.

In recent data released by SQM Research this week, it is noted that the national vacancy rate sits at 2.1%, with Brisbane specifically siting at 2.9% [1]. This reflects 9,331 rental vacancies, and, as a direct result, tenants are more inclined to request rent reductions. At a time where vacancy rates in investment properties are ever-so-prominent and asking rent is decreasing, investors should be maximising tax breaks where possible.

Every investor has an “Investment Property Strategy”, increasing the amount of return you receive on your investment property at tax time is a crucial element to be included in that strategy. While depreciation tax breaks are predominately greater on newer properties, they are applicable for all investment properties and should be incorporated into your Strategy irrespective of a property’s construction date and construction type. The process of claiming depreciation directly improves your cash flow by reducing your taxable income or assessable income, and accordingly, increases the potential to expand your portfolio further.

The table below highlights the average depreciation deduction for investors who requested schedules during the financial year 2015-2016.

AGE OF RESIDENTIAL PROPERTIES SELECTED: 2015-2016 FINANCIAL YEAR [2].

Description: Construction dates: Percentage of total:  Average first full year deduction
Old Pre 1987 22.3% $4,899
Pre 2000 1987 – 2000 16.9% $7,543
Up to 15 years old 2000 – end of 2012 26% $11,303
Fairly new 2012 – 2015 13.3% $12,316
Brand new  Built after 1/3/2015 21.5% $12,680

It is clear that, regardless of the age of the property, it is worthwhile to speak with a specialist quantity surveyor on exactly what can be claimed with respect to your investment property. As demonstrated in the above, residential properties that have been constructed prior to 1987 can receive an average depreciation deduction of $4,899.00 in the first financial year alone. This means investors in those circumstances could pocket roughly $94.00 a week! Even those who have a depreciation schedule set up may be underestimating just how much they could be claiming. We note also, these figures are merely indicative on investors who requested depreciation schedules.

Practical Aspects

Maximising property depreciation requires a thorough understanding of the legislation surrounding depreciation deductions, and how to structure your depreciation report so that deductions are utilised to their full potential. In the following paragraphs, we look into the practical aspects for you.

The Australian Taxation Office (ATO) sanctions depreciation of assets that have “a limited effective life and can reasonably be expected to decline in value over the time it is used” [3]. Further, the two main types of expenses that can be depreciated for investment properties at tax time are as follows:-

  1. Wear and Tear of Fixtures and fittings – Plant and equipment (Division 40); and
  2. Capital Works expenses – Capital Works Allowance (Division 43).

The ATO recognises that the ageing of investment properties, and items within the property that suffer wear and tear, cause a decline in overall value. In light of same, the ATO allows investors to claim this financial loss as a tax deduction each financial year against their assessable income.

Noting the above, deductions can only be claimed for the period during the financial year that the property is rented or is available for rent. This means that if you live in a property and intend to rent it out in future, investment property depreciation is not available to you until the property is used specifically for the purposes of rent generation, whereby providing an investment return/benefit to you.

1. Plant and equipment depreciating assets (Division 40).

Division 40 of the Income Tax Assessment Act 1997 (Cth) (“the Act”) provides that an amount that is equal to the decline in value of the “Depreciating asset” is claimable at tax time. As a result, lowering your assessable income, and which in turn provides you with a greater tax return.

In accordance with section 40-B of the Act, “Depreciating Assets are assets with a limited effective life that are reasonably expected to decline in value” [4]. In other words, depreciating assets are plant and equipment items within the property that have a limited “effective life” as determined by the ATO. The depreciation deduction available on that item is then calculated with respect to said effective life.

These items are removable fixtures generally described as ‘not structural’. Items for example include, carpet, blinds, kitchen appliances, light shades, security systems, elevators, air conditioners, hot water systems, etc.

The depreciation deduction available on these items is calculated with respect to the specified “effective life”.  Accordingly, this forms one significant aspect of an investor’s depreciation schedule. We refer you to section 40-30 of the Act for a more definitive list of the claimable assets.

2. Capital Works Allowance (Division 43).

Division 43 of the Act, more commonly referred to as “Capital Works Allowance” covers deductions available to investors for fixed items/assets and the structural elements of the property. Essentially, this division provides a system of deducting capital expenditure incurred by the investor in respect of the construction of a building, and other capital works, to lower assessable income, similar to the purposes of Division 40 of the Act.

The age and type of fixed assets and construction determine the allowance provided under the Capital Works Allowance division. This can be complex and we recommend you engage a Quantity Surveyor to provide advice over the allowable deductions.

At Just Us Lawyers we strive to understand your investment strategy and to help you fashion legal solutions to achieve your property goals – from discussing and advising on property holding entities, planning issues and objections, and contract design, to helping you with your conveyancing needs.

For the best Conveyancing lawyers in Brisbane call/email Just Us Lawyers or complete our enquiry form for a quote today

[1] Vacancy Rates Steady In May, Asking Rents Dip (2018) Sqmresearch.com.au

[2] Maverick, BMT Quantity Surveyors. 2017. Depreciation data highlights investment trend www.bmtqs.com.au

[3] Guide to depreciating assets 2017, Page 3, Australian Taxation Office, “a limited effective life and can reasonably be expected to decline in value over the time it is used.”

[4] Income Tax Assessment Act 1997 Federal Register of Legislation, Division 40 Capital allowances, Section 40-10, “Depreciating Assets are assets with a limited effective life that are reasonably expected to decline in value.”