By Justin Byrne, Special Counsel, Hannah Byrne and Courtney Smith
The Australian Government has released exposure draft legislation that clarifies the way native title benefits interact with the Australian income tax system, and provides tax breaks for benefits provided to Indigenous groups.
Here, special counsel Justin Byrne and solicitors Courtney Smith and Hannah Byrne review the proposed tax amendments and outline the impact these changes are likely to have in practice.
Key points
- The legislation proposes amendments to the Income Tax Assessment Act 1936 and the Income Tax Assessment Act 1997, and is part of a range of intended reform following the completion of the 2010 consultation paper Native Title, Indigenous Economic Development and Tax.
- Under the current tax rules, it is unclear whether or not benefits provided under a native title agreement are assessable income. The proposed new laws clarify this position.
- Once the new laws come into effect, native title benefits provided under an agreement on or after 1 July 2008 will not be subject to income tax or capital gains tax where the benefit is for an Indigenous holding entity (the Indigenous group's nominated body receiving benefits under the agreement, referred to here as 'nominated body') or one or more Indigenous people.
Which native title benefits will the new laws apply to?
The new laws will apply to benefits (both monetary and non-monetary) provided to a nominated body or to one or more Indigenous people (or applied for their benefit) under:
- an Indigenous land use agreement;
- a right to negotiate agreement; or
- compensation paid for loss of native title due to extinguishment, where a compensation determination application has been successful in the Federal Court.
The new laws will also apply to native title benefits provided under agreements under the Traditional Owner Settlement Act 2010 (Vic) or other State legislation. The new laws will not apply to common law agreements or agreements that are otherwise outside of the framework established by the Native Title Act.
A nominated body can be a prescribed body corporate, an Aboriginal land council or an Indigenous corporation registered under the Corporations (Aboriginal and Torres Strait Islander) Act 2006. A trust with Indigenous beneficiaries will also be classed as a nominated body.
Where a nominated body provides a native title benefit to one or more Indigenous people, the native title benefit will remain as non-taxable income. This gives Indigenous groups flexibility in structuring their financial affairs, and ensures that native title benefits can be distributed to beneficiaries without tax consequences.
What will be taxable despite the new laws?
The new legislation will also not affect native title benefits where the payment is:
- not provided to an Indigenous holding entity or an Indigenous person, or applied for their benefit;
- to be used to meet administrative costs; or
- to be used for remuneration or consideration for the provision of goods and services.
In these instances, the payment may be taxed.
The nominated body or Indigenous person's subsequent use of the native title benefit may also be taxable. For example, where a nominated body invests funds received as a native title benefit, or the benefit is used to establish a profitable business, the earnings (such as interest income) or capital gains/losses will form part of the entity's taxable income. In these circumstances, using a charitable trust may continue to assist in avoiding tax liabilities.
Due to the uncertainty surrounding the tax treatment of native title benefits previously, many groups set up charitable trusts to receive and manage any native title payments for the benefit of the Indigenous group. Under the new laws, groups may no longer need to set up a charitable trust immediately to receive the native title payment, as these payments can be made to an Indigenous holding entity initially (free of tax), and then transferred to a charitable trust (if the group so desires) down the track. It's important to note, however, that any earnings on the payment derived before it is transferred to the charitable trust will remain taxable. As a result, structures involving charitable trusts set up specifically to receive native title payments may still have benefits worthy of consideration by a nominated body or Indigenous group.
Impact of the changes
For native title groups, the proposed changes provide clarity and certainty around the tax treatment of payments received under a native title agreement or under the Native Title Act 1993.
Companies paying benefits to parties under native title agreements will still be able to claim a deduction on the payments made, if they are considered to have been necessarily incurred by the business in carrying on its affairs.
The amendments are proposed to apply to native title benefits provided on or after 1 July 2008. This retrospective application will mean that native title groups that have previously treated the native title benefits received as taxable will be able to lodge amended tax returns to claim a refund on any tax paid in the previous four years.
Where to now?
The exposure draft (with accompanying explanatory material) is currently open for consultation. Consultation is due to close on 24 August 2012.
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