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Australia – Tax Reform For Native Title Benefits.

10 November, 2012

 

 

In brief
 
  • The Government has recently announced that payments made to or for the benefit of Indigenous persons under native title agreements (“NT Agreements”) or by way of compensation under the Native Title Act 1993 (Cth) will be treated as exempt from income tax (including capital gains tax).
  • The choice of tax exemption was made in preference to an Indigenous Community Fund model, which linked tax exemption to the pursuit of certain purposes within a structure meeting minimum governance standards; or a native title withholding tax, modelled on the existing mining withholding tax.
  • The proposed reform is intended to apply retrospectively to all qualifying payments from 1 July 2008, including under existing agreements with Indigenous groups.
  • The reforms appear to have beenproposed for the policy objectives of reducing uncertainty in the tax treatment of native title rights, and improving economic and social outcomes for native title groups.
 
Context for reforms
 
The reforms follow on from a series of consultations on native title, Indigenous economic development and tax and have been proposed against a backdrop of significant uncertainty over the tax treatment of native title benefits. Issues include, for example:
 
  • are NT Agreement payments capital or revenue and, even if capital to an extent, are payments taxable under the CGT regime, especially given the question about whether native title rights and interests are pre-CGT Assets?
  • are NT Agreement payments received by individuals or by a body of persons treated as a company for tax purposes?
  • can holding structures established to receive payments for the benefit of native title groups accumulate investment income for the benefit of future generations?
  • are on-payments of benefits from trusts established for the benefit of native title groups taxable in the hands of recipients?Proposed changes The tax reform will render as non-assessable non-exempt income, benefits:
  • provided to or for the benefit of Indigenous persons, or Indigenous holding entities (broadly, a range of incorporated bodies or trusts, the majority of whose members comprise, or that are for the benefit of, Indigenous persons); and
  • under NT Agreements to the extent that the benefit relates to an act affecting native title; or by way of compensation under the Native Title Act 1993 (Cth).

On-payments by Indigenous holding entities to another Indigenous holding entity or to or for the benefit of Indigenous persons, are also to be treated as non-assessable non-exempt income (unless they amount to payments for goods or services or administrative expenses).
 
Consequences
 
Significant hurdles may prevent the proposed reforms from achieving the Government’s policy objectives, whilst also causing difficulties for Indigenous groups and mining proponents.
 
Reduced certainty
 
While the reforms are drafted in simple language, they apply against a relatively complex factual backdrop of agreements. In particular, the reforms raise the following practical problems which are likely to generate uncertainty:
 
  • Apportionment: concessional tax treatment is only provided to the extent that payments are for acts affecting native title. In reality, this may be a very small proportion of many NT Agreements. However, benefits under NT Agreements are typically paid in undifferentiated sums for a range of purposes in addition to compensation for the extinguishment or temporary suspension of native title rights. Moreover, a number of agreements apply irrespective of the ultimate determination of whether native title exists.
  • Existing agreements: the proposed reforms would apply to all eligible payments from 1 July 2008, but the majority of NT Agreements for the current commodities cycle are already in place. This means that mining proponents and native title groups may be required to re-negotiate existing agreements to access the proposed treatment, since many agreements do not apportion benefits payments (as discussed above).
 
The effect of the proposed reforms on existing NT Agreements is important because in practical terms, given the extraordinary level of capital investment in new mining projects and the expansion of existing projects over the last decade, most NT Agreements required for the current cycle of projects are already in place. In Western Australia, they generate hundreds of millions of dollars to Indigenous groups every year.
 
  • Eligibility of charitable trusts: it has been common for NT Agreements to require that a significant portion of payments be made to the trustee of a charitable trust. However, it is not clear that the reform definition of an “Indigenous holding entity” would include charitable trusts, since Indigenous holding entities must (as trusts) be for the benefit of persons, not purposes. 
  • Issues not addressed: the reforms do not address existing uncertainty as to PAYG withholding and GST treatment of payments under NT Agreements.
 
Economic and social outcomes
 
The reforms fail to consider the purpose or effect of payments, or the management of benefits received by Indigenous groups. It is therefore unclear how the proposed reforms advance the Government’s objective of furthering economic and social outcomes for Indigenous people, other than the assurance of additional funds for recipients by way of a tax exemption.
 
Changes better directed at allowing the tax effective treatment of monies for community purposes or economic development purposes that benefit the community, arguably better suit the expressed objective. In this regard, an alternative such as the Government’s proposed Indigenous Community Fund would better meet the policy objectives by providing certainty of treatment for all payments to the Fund and by better facilitating outcomes through the focus on management of funds received and the purposes for which they can be used. As this model could be more easily accommodated by existing agreements, it should also increase the resources that Indigenous groups can use for achieving economic and social outcomes, rather than renegotiating agreements.
 

 

For further information, please contact:

 

Jean Bursle, Partner, Ashurst

jean.bursle@ashurst.com

 

Ian Murray, Ashurst

ian.murray@ashurst.com

 

Casey Kinchella, Ashurst

casey.kinchella@ashurst.com

 

Ashurst Tax Profile in Australia

 

Homegrown Tax Law Firms in Australia

 

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