Further to our alert of 9 August 2012 legislation clarifying the way native title benefits interact with the Australian income tax system, and providing for breaks for benefits provided to Indigenous groups, has passed through Parliament and now awaits Royal Assent.
Here, partner Jonathan Fulcher, special counsel Justin Byrne and senior associate Rosalie Cattermole review review the amendments and outline the impact these changes are likely to have in practice.
- The legislation amends the Income Tax Assessment Act 1936 and the Income Tax Assessment Act 1997, and is part of a range of reform following the completion of the 2010 consultation paper Native Title, Indigenous Economic Development and Tax.
- Prior to these changes, it was unclear whether or not benefits provided under a native title agreement were assessable income. The new law clarifies this position.
- 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 (ILUA);
- 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.
It should be noted that a nominated body can be a discretionary trust but cannot be a private company unless certain other conditions apply.
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 changes provide clarity and certainty around the tax treatment of payments received under a native title agreement or under the Native Title Act 1993 (Cth).
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 reforms will also provide certainty for the payer where the whole of the payment is treated as non-assessable non-exempt income. In this case, the payer will not be required to withhold an amount from the payment where the payee fails to quote its ABN. However, where the native title benefits are provided in a lump sum payment for a range of purposes, it may be necessary to apportion the payment as between taxable purposes and (tax-free) native title benefits covered by the reforms.
Timing of reforms
The amendments are proposed to apply to native title benefits provided on or after 1 July 2008. Indigenous groups that have paid tax on native title benefits received after 1 July 2008 will have two years from now to amend their tax returns.