Tax with Max: Binding death benefit nominations

Why a binding death benefit nomination makes sense, and understanding the aged-care rules.

Summary: A non-lapsing binding death benefit nomination will ensure the wishes of a deceased member are fulfilled.

Key take-out: If you are positive that your SMSF will be administered so that the terms of your will are met, and under your will your superannuation benefits are to be paid into your estate, you probably will not need a non-lapsing binding death benefit nomination. However, if there is some doubt it would be prudent to have a non-lapsing binding death benefit nomination drawn up.

Key beneficiaries: SMSF trustees and superannuation accountholders. Category: Superannuation.

Why a binding death benefit nomination makes sense

Is there an advantage in having binding death benefit nominations in place for an SMSF if the distribution of funds would be the same as the will of the deceased?

Answer: The major reason for drawing up a binding death benefit nomination is when someone wants their superannuation treated differently from the rest of their estate. In other words they want their super to go to one lot of beneficiaries while the rest goes to other beneficiaries.

Another reason why a non-lapsing binding death benefit nomination should be made for a self managed super fund is to guard against the trustees of the SMSF, that take over from the deceased member, not for fulfilling the wishes of the deceased member.

There is a celebrated case of a father who made a non-binding death benefit nomination leaving his super equally to his son and daughter. The daughter became the second member and trustee of the self-managed super fund. After the father died the daughter appointed her husband to become the second trustee of the fund.

Because the father had not made a binding death benefit nomination the daughter, because she and her husband effectively controlled the superannuation fund, had all of the father’s superannuation benefits paid to her.

The brother challenged the actions of his sister through the courts and, despite the actions of the sister not being fair and equitable and against the father's wishes, the court held that the sister was legally entitled to take the action she had.

If you are positive that your SMSF will be administered so that the terms of your will are met, and under your will your superannuation benefits are to be paid into your estate, you probably will not need a non-lapsing binding death benefit nomination. However, if there is some doubt it would be prudent to have a non-lapsing binding death benefit nomination drawn up.

Understanding the aged-care rules

Much has been said about superannuation, retirement etc. However not much is said about the ongoing changes to the cost of permanent care for self-funded retirees. Can you enlighten me on this perplexing matter?

Answer: The complicated nature of the rules and regulations relating to superannuation and income tax pale into insignificance when compared with the rules and regulations relating to aged care.

The first thing to understand about aged care is that there are two types that people can go into through their life. Individuals or couples often start by entering a low-level hostel aged-care facility and then transfer into a high level nursing home aged-care facility.

Both types of aged-care facilities charge a basic daily care fee and an income tested fee. Hostels, in addition, charge an accommodation bond, while nursing homes have either an accommodation charge or an accommodation bond.

There are three rates of basic daily care fee depending on how a resident is classified. The three classifications are standard residents, protected residents, and non-standard residents. Standard residents are those residents that are not protected residents or non-standard residents.

Protected residents are people who were in an aged-care facility on September 19, 2009, have not vacated the facility for more than 28 days, and are either a non-pensioner or a part pensioner.

Non-standard residents are those that entered age care before March 20, 2008, have not vacated the facility for more than 28 days, have not had a dependent child since September 19, 2009, were either a non-pensioner, or paid an accommodation bond equivalent to more than 10 times the basic age pension when they entered, or did not disclose their income to Centrelink at the time of entering the aged-care facility.

The basic daily care fee applying to the three types of residents increases twice a year in March and September. The current daily fees are $46.50 for standard residents, $42.40 for protected, and $52.79 for non-standard residents.

In addition to the basic daily fee a resident may also have to pay an income tested fee up to a maximum of $73.86. The amount payable is based on a person or couple's total assessable income counted by Centrelink under the income test, to which is added any Centrelink pensions, allowances and income supplement payments received.

The amount of income tested fee payable is 5/12 of the total assessable income less an income free amount. For standard and non-standard residents the income free amount per fortnight is $951.20 for a single resident and $933.20 for a couple each. For protected residents the income free per fortnight amount is $806.90 for a single person and $788.90 for a couple each.

In addition to the daily fees the accommodation bond payable can effectively leave a resident with only $45,000 in cash and investments. This could mean a person needing to enter either a hostel or a nursing home with $1 million in investments and superannuation can be forced to cash everything in and be left with only $45,000.

In some cases aged-care facilities allow residents to part pay a lump sum accommodation bond and also pay periodic payments off the balance of the bond. When a bond is paid off interest is charged on the amount outstanding. There is a maximum interest rate specified that can be charged by aged-care facilities that is reviewed quarterly. The interest rate that applied at April 1, 2014 was 6.63%. The interest rate payable on the bond outstanding is fixed for the term of the contract.

Accommodation bonds paid are not counted by Centrelink under the assets test and are partially refunded when a resident leaves an aged-care facility. The amount refunded is the bond paid less a retention amount. The retention amount is calculated on a monthly basis up to a maximum of five years that a resident is in an aged-care facility. The current maximum monthly retention amounts are $176 for bonds under $21,120 and $340.50 for bonds over $40,860.

Nursing homes, instead of charging an accommodation bond, can levy an accommodation charge as a daily amount. The accommodation charge is based on a resident’s assets. Residents that have assets counted for aged-care purposes of less than $45,000 do not pay an accommodation charge, those with assets of between $45,000 but less than $116,136 pay a reduced fee, residents with assets of more than $116,136 pay a daily fee of $34.20.

The amount of income tested fee and accommodation bond or charge can be negotiated with aged-care facilities. A person or couple that have made a definite choice as to the aged-care facility they want to go into will have little bargaining power. A person or couple that are happy to shop around for what aged-care facility provides them with the best total package have the most bargaining power.

As I said at the beginning, this is one of the most complex areas of rules and regulations that most people will have to deal with in their lifetime. It is therefore vitally important to obtain advice from an aged-care specialist on the alternatives available before accommodation in an aged-care facility needs to be arranged.


Max Newnham is a partner with TaxBiz Australia, a chartered accounting firm specialising in small businesses and SMSFs. Also go to www.smsfsurvivalcentre.com.au.

Note: We make every attempt to provide answers to readers’ questions, however, answers are of a general nature only. Subscribers should seek independent professional advice for more in-depth information that is specific to their situation.

Do you have a question for Max? Send an email to askmax@eurekareport.com.au