The Income Taxation of Native Title Agreements

Publication Date01 September 2011
AuthorMiranda Stewart
DOI10.22145/flr.39.3.2
Date01 September 2011
SubjectArticle
THE INCOME TAXATION OF NATIVE TITLE
AGREEMENTS
Miranda Stewart*
I INTRODUCTION
In this paper is the agreement between Argyle, Traditional Owners for the mine area and
the Kimberley Land Council. This paper carries all the rules to make sure that we treat
each other properly. It has taken many years and a lot of hard work to ma ke this
agreement. We are very proud to sign it. With this agreement as a start, we can make the
future better for Traditional Owners and Argyle.
1
This article examines the tax issues that arise in respect of native title agreements and
recent proposals for tax reform by the Australian Government. N ative title agreements
sit at the i ntersection of indigenous economies, the market economy and the state.
They contribute to sharing the benefits of resource development with traditional
owners and compensate for the replacement value of non-renewable resources to the
future generations.
The recognition of native title in Mabo v Queen sland (No 2)
2
and in the Native Title
Act 1993 (Cth) ('NTA') has led to si gnificant changes in the status of indigenous
peoples in negotiating with governments and private stakeholders . Although the legal
content of native title has disappointed many and there have been only a small number
of successful compensation claims, native title agreement-making has b ecome
increasingly wide spread across Australia and payments and benefits provided under
native title agreements have become increasingly valuable in some regions. It is not
surprising, then, that t he tax treatment of payments provided under native title
agreements has become a matter of concern to traditional owners and other
____________________________________________________________________________________
* Associate Professor, Melbourne Law School; Chief Investigator on the Australian Research
Council Linkage Project 'Poverty in the Midst of Plenty' (LP 0990125). The author
acknowledges the support provided by the Australian Research Council, the Australian
Institute for Aboriginal and Torres Strait Islander Studies and the project linkage partners:
Department of Families, Community Services and Indigenous Affairs; Marnda Mia Ltd;
Rio Tinto Services Ltd; Santos Ltd; and Woodside Energy Ltd. The views expressed in this
work are solely the views of the author . My thanks go to my colleagues on this project for
their patience as I began to find my way around the Native Title Act and to an anonymous
reviewer for their insightful and provocative comments. All errors are, of course, my own.
1
Argyle Diamond Mine Participation Agreement Indig enous Land Use Agreement (8 April
2005), 'Plain English' text preamble, ATNS Project Database,
('Argyle Diamond
Agreement').
2
(1992) 175 CLR 1 ('Mabo').
362 Federal Law Review Volume 39
____________________________________________________________________________________
stakeholders (in particular the re sources industry) in recent years. A number of studies
of tax issues have been carried out,
3
and several workshops held that have brought
together indigenous peoples and their representatives, resource companies,
governments and other stakeholders, leading to the current consideration by the
Australian Treasury of tax reform for native title agreements. In May 2010, the
Treasury released its Consultation Pa per on Native Title, Indigenous Econom ic
Development and Tax (the 'Treasury Paper').
4
As at the date of writing, no final reform
proposal or draft legislati on has been released by the govern ment. The Treasury Paper
presents three main options for reform:
(1) A legislated inc ome tax exemption for native title payments;
(2) A tax -exempt Indigenous Community Fund;
(3) Native title w ithholding tax.
Most attention to date has focused o n the question of how to interpret native tit le
payments in the existing tax law framework, and the uncertainty generated in this
interpretive process. Current tax treatment is co mplicated because it involves the
intersection of two highly complex and technical legal regimes: na tive title law and tax
law. There is a risk, in the words of Attorney-General Robert McClelland, that exper ts
in native title and tax law will become 'intoxicated by their expertise' in this analysis.
5
The complexity of these two legal regimes also o bscures the more fundamental
conceptual issue of how, a nd whether, one should a pply income tax at all to native
title.
Part II explains the fundamental legal concepts of native title and compensation,
which forms the context for the income tax analysis. Part III briefly examines the
income tax treatme nt of na tive title payments in current law. Part IV presents the core
____________________________________________________________________________________
3
Lisa Strelein, 'Taxation of Native Title Agreements' (2008) 1 Native Title Research Monograph;
Commonwealth of Australia, Department of Families, Housing, Community Services a nd
Indigenous Affairs, Optimising Benefits from Native Title Agreements, Discussion Paper (2008)
discussion_paper/default.htm>; ATNS Project, 'Optimising Benefits from Native Title
Agreements' (Submission to Department of Families, Housing, Community Services and
Indigenous Affairs Discussion Paper, 6 December 2008); A Levin, Improvements to the Tax
and Legal Environment for Aboriginal Community Organisations and Trusts (Discussion paper
presented at the Indigenous Community and Economic Development a nd Tax Policy
Workshop, ATNS Project, 28 August 2007); Minerals Council of Australia ('MCA') with
Jackson McDonald Lawyers and AIATSIS, 'Improving the Tax Treatment of Benefits and
Payments to Indigenous Communities fr om Resource Agreements, Introducing an
Alternative: Indigenous Community Development Corporations' (Consultative Discussion
Paper, Minerals Council of Australia, August 2009).
4
Commonwealth of Australia, Treasury, Native Title, Indigenous Economic Development and
Tax, Consultation Paper (2010),
/20101020_Native_Title_Tax _Consultation_Paper.pdf>. The consultation process was
suspended during the 2010 election but recommenced in October 2010; 32 submissions
were received by November 2010, available at
contentitem.asp?ContentID= 1916&NavID=037>.
5
Robert McLelland, ' Negotiating Native Title Forum' (Speech delivered at the Negotiating
Native Title Forum, The Novotel Brisbane, 29 February 2008) [17]
ter_29February2008-NegotiatingNativeTitleForum>.
2011 Taxation of Native Title Agreements 363
____________________________________________________________________________________
analysis as to whether native title payments should be subject to income taxa tion. It is
concluded in Part IV that there are a number of good a rguments for the position that
payments under native title agreements are not 'income' as a matter of income tax
principle, because they are compensation for a loss or damage in property or personal
rights, or for non-economic benefits or value, or alternatively because they do not
accrue as individual gain but are a social, or collective benefit. However, the matter is
not free from doubt, and may not be resolvable in traditional tax policy terms. The
analysis in Part IV reveals a clash of discourses, or conceptual frameworks that
underpin native title and income taxation and the limitations of the legal and economic
approaches to fundamental concepts such as property, compensation and income.
Further, even if the analysis is accepted for payments for native title holders, it cannot
address the issues of justice a nd development for traditional owner s, or other
indigenous people, who are unable to demonstrate native title.
In light of the conceptual analysis in Part IV, it is argued that there are good social
and economic p olicy reasons t o justify t he exemption of all native title paymen ts from
income tax. Part V consi ders the detail of Treasury's option (1) relating to t his
exemption, including an examination of the range a nd diversity of native title
agreements to be covered and the design of the legislative exclusion. In Part VI, this
article finally turns to Trea sury's option (2), which proposes the establishme nt of a tax -
exempt Indigenous Community Fund that may receive native title payments and other
forms of payment for the benefit of indigenous co mmunities. Part VI ex plains the
context of this prop osal, being the widespread and unsatisfactory use of charitable
trusts to receive payments under native title agreements, and considers the various
features of such a fund. It is concluded that there are good arguments in support of
option (2), however significant further community c onsultation will be required to
establish the best model.
This article does not address the merits of option (3) in t he Treasury Paper,
concerning a native title withholding tax. A native title withholding tax was proposed
by the Howard government in 1998 but was not enacted at that time.
6
The proposal
was modeled on the existing Mining Withholding Tax ( 'MWT') which is levie d at 4
percent on 'mining payments' made to Aboriginal people or a distributing body in
respect of Aboriginal land.
7
It is the view of this author, consistent with the majority of
submissions to the Treasury consultation, as well as the weight of academic opinion,
that the option of a native title withholding tax should not be pursued.
8
Further, it may
be appropriate to repeal the existing MWT. In short, the MWT is inequitable, creates a
two tier tax sy stem, applies tax where recipients of payments would be under the
____________________________________________________________________________________
6
Commonwealth of Australia, Treasury, above n 6, 14.
7
Income Tax Assessment Act 1936 (Cth) Div 11A, applying among other things to mining
payments under the Aboriginal Land Rights Act 1976 (NT).
8
See especially Strelein, above n 3; Jon Altman, Submission to the Treasury (Cth),
Consultation Paper: 'Native Title, Indigenous Economic Development and Tax' 25 November
2010 ; Jon Altman,
'Native Title a nd Taxation' (CAEPR Topical Issue 4/2010, Centre for Aboriginal Economic
Policy Research, the Australian National University, September 2010)
ve%20Title%20and%20tax.pdf>; Fiona Martin, 'Native Title Payments and their Tax
Consequences: Is the Federal Government's Recommendation of a Withholding Tax the
Best Approach?' (2010) 33 University of New South Wales Law Journal 685.
364 Federal Law Review Volume 39
____________________________________________________________________________________
normal income tax threshold in any event, and would be difficult to apply to the
diversity of payments a nd agreements in the native title context (these are discussed
further below). More fundamentally, the with holding tax model is based o n the
premise that income tax should be levied on the payment. In contrast, it is argued as a
matter of principle and policy, that payments related to native title should be exempt
from income tax.
The Treasury Paper also raises other tax issues, including the tax deductibility of
native title payments for the payer, and the possibility of deductible gift recipient
status for indigenous organisations. Further issues include the treatment of native title
in the Goods and Services Tax ('GST'), the proposed Minerals Resource Rent Tax, and
various State taxes. There ha ve also been a number of other proposals for tax reform to
enhance indigenous economic development.
9
All of these warrant further
consideration, but there is no scope to do that here.
II NATIVE TITLE AND THE RIGHT TO COMPENSATION
Here, it says that Traditional Owners can't claim any compensation money from Argyle
for things that happened in the pa st. Everyone agrees that the money and other benefits
in this agreement are enough compensation for things that happened before. Tra ditional
Owners can't claim any more.
10
Prior to the recognition of na tive title, claims by Australian indigenous peoples to
recognition of lega l rights and interests i n their tra ditional lands failed.
11
State and
Territory land rights schemes created various frameworks for returning la nd to
collective indigenous ownership but d id not recognise native title rights and interests
in traditional land.
12
The High Court's belated recognition of native title in Mabo
established tha t customary title to land predated and, under certain conditions,
survived British sovereignty.
13
Justice Brennan stated in the majority judgment:
Native title has its origins in and is given its content by the traditional laws
acknowledged by and the traditional customs observed by the Indigenous inhabitants of
a territory. The nature and incidents of native title must be ascertained as a matter of fact
by reference to those laws and customs.
14
____________________________________________________________________________________
9
Gunya Australia, 'Indigenous Economic Development Scheme: a solution to create
employment opportunities within Indigenous communities' (Gunya Discussion Paper,
August 2007); Cape York Institute for Policy and Leadership, 'Can Cape York communities
be economically viable?' (November 2005) Viewpoint
/WEBSITE%20uploads/Economic%20Viability%20Attachments/SPEECH_Can%20CY%20
communities%20be%20economically%20viable.pdf>; Miranda Stewart, 'Tax Law and
Policy for Indigenous Economic Development', University of Melbourne Legal Studies
Research Paper No 436 (December 2 009), available at
/sol3/papers.cfm?abstract_id=1519603>.
10
Argyle Diamond Agreement, above n 1, cl 10.
11
Milirrpum v Nabalco Pty Ltd (1971) 17 FLR 141; Coe v Commonwealth (1979) 53 ALJR 403.
12
See, eg, Aboriginal Land Rights (Northern Territory) Act 1976 (Cth) and Aboriginal L and Trusts
Act 1966 (SA).
13
Marcia Langton et al, 'Introduction' in Marcia Langton et al (eds), Honour Among Nations?
Treaties and Agreements with Indigenous People (Melbourne University Press, 2004) 17.
14
Mabo (1992) 175 CLR 1, 58.
2011 Taxation of Native Title Agreements 365
____________________________________________________________________________________
The concept of native title, as explained by Justice Brennan in Mabo, was translated into
s 223 of the NTA. Section 223(1) defines 'native title' or 'native title rights and interests'
as:
the communal, group or individual rights and interests of Aboriginal peoples or Torres
Strait Islanders in relation to land or waters, where:
(a) the rights and interests are possessed under the traditional laws acknowledged,
and the traditional customs observed, by the Aboriginal peoples or Torres Strait
Islanders; and
(b) the Aboriginal peoples or Torres Strait Islanders, by those laws and customs,
have a connection with the land or waters; and
(c) the rights and interests are recognised by the common law of Australia.
Where native title is determined, it is required to be held for the community by a
Prescribed Body Corporate ('PBC'), which i s a corporate structure that may operate a s
a statutory trust or agency of the title for the native title holders.
15
Mabo established
native title as a sui generis right at law.
16
It was unclear after Mabo whether native title
was proprieta ry or pe rsonal in nature, in particular as it was found to be co mmunal
and inalienable and whether it amounted to a right to exclusive occupation of land or
whether lesser rights were created.
17
In Wik v Queensland,
18
Gummow J described the
'nature and incidents' of native title as varying from case to case:
It may comprise what are classified as per sonal or communal usufructuary rights
involving access to the area of land in question to hunt for or gather food, or to perform
traditional ceremonies. This may leave room for others to use the land either concurrently
or from time to time. At the opposite extreme, the degree of attachment to the land may
be such as to approx imate that which would flow from a legal or equitable estate
therein.
19
____________________________________________________________________________________
15
Native Title Act 1993 (Cth) Pt III, Div 6. See also Marcia Langton and Angus Frith, 'Legal
Personality and Native Title Corporations: The Problem of Perpetual Succession ' in Lisa
Strelein (ed), Dialogue About Land Justice: Papers from th e National Native Title Conferences
(Aboriginal Studies Press, 2010) 170.
16
The concept has been widely analysed. See, eg, Langton et al, above n 13; Noel Pearson,
'Land is Susceptible of Ownership' in Marcia Langton et al (eds), Honour Among Nations?
Treaties and Agreements with Indigenous People (Melbourne University Press, 2004); Katy
Barnett, 'Western Australia v Ward; One Step Forward and Two Steps Back: Native Title and
the Bundle of Righ ts Analysis' (2000) 24 Melbourne University Law Review 462; Lisa Strelein,
'Conceptualising Native Title' (2001) 23 Sydney Law Review 95, 1 14-115; Kent McNeil, 'The
Relevance of Traditional Laws and Customs to the Existence and Content of Native Title at
Common Law' in Kent McNeil (ed), Emerging Justice?: Essays on Indigenous Rights in Canada
and Australia (University of Saskatchewan, Native Law Centre, 2001) 416, 4203, 435.
17
Contrast the approach of Deane an d Gaudron JJ in Mabo (1992) 175 CLR 1, 109-110 to the
majority judgment by Brennan J at 77. The different approaches were considered in the
judgments in Western Australia v Ward (2000) 170 ALR 159, 178-179 (Beaumont and von
Doussa JJ), and are discussed in the references, above n 16.
18
19
Ibid 169.
366 Federal Law Review Volume 39
____________________________________________________________________________________
One suggested approach is that native title comprises both personal and proprietary
aspects, that is, 'Abori ginal land is an extension of the person and the grouprights in
rem and in personam are at the same level and centred within a spiritual framewor k.'
20
In Western Australia v Ward,
21
the High Court held that native title consisted of a
bundle of rights that could be extinguished one by one.
22
In Members of the YortaYorta
Aboriginal Community v Victoria,
23
the High Court also effectively applied a 'bundle of
rights' approach.
24
More controversially, the Court took the view that native title is
defined by reference to s 223 of the NTA and not by reference to the common law.
25
Following Ward and YortaYorta, an increasingly heavy burden rests with indigenous
people to identify traditional laws and customs, articulate the rights conferred by them
and to prove 'their co ntinued identity and existence as a group and their ongoing
connection to lands from which man y have been dispossessed'.
26
While the courts
acknowledge the inevitability of some change in indigenous societies,
27
they require
proof that the society and the system of law and custom remain intact.
Government actions, such as the grant of freehold or leasehold estates, which are
inconsistent with t he continued existe nce of native title rights and interests, operate to
extinguish or override common law rec ognition of native title. In 1998, substantial
amendments to the NTA extended the rules of extinguishment. Lisa Strelein has
described the 'ever-expanding doctrine of extinguishment' and comments that this
seemingly leaves an 'empty vessel' for Aboriginal rights.
28
Noel Pearson argues that
____________________________________________________________________________________
20
Diane E Smith, 'Valuing native title: Aboriginal, Statutory and policy discourses about
compensation' (Discussion Paper No 222, Centre for Aboriginal Economic Policy Research,
2001) 20, citing P Sutton 'Aboriginal common law and native title', Unpublished paper
presented to the NNTT, Perth (1998).
21
(2002) 191 ALR 1 ('Ward').
22
Ibid 356, 40 (Gleeson CJ, Gaudron, Gummow and Hayne JJ).
23
(2002) 214 CLR 422 ('YortaYorta').
24
James Cockayne, 'Members of the YortaYorta Aboriginal Community v Victoria :
Indigenous and Colonial Traditions in Native Title' (2001) 25 Melbourne University Law
Review 786, 805.
25
(2002) 214 CLR 422, 440; Lisa Strelein, 'Symbolism and Function: From Native Title to
Indigenous Self-Government' in Lisa Strelein (ed), Dialogue About Land Justice: Papers from
the National Native Title Conferences (Aboriginal Studies Press, 2010) 127, 128. Some have
expressed doubt as to whether there really is, an y more, a common law native title
claimable in Australia: Kent McNeil, 'The Relationship Between the Sources and Content of
Indigenous Land Rights in Australia and Canada: A Critical Comparison' (Paper presented
at Section 223 ATNS Workshop, Melbourne University Law School, 14 May 2007); Lisa
Strelein, 'Native Title: A captive statute' (Pap er presented at Section 223 ATNS Workshop,
Melbourne University Law School, 14 May 2007).
26
Odette Ma zel, 'Returning ParnaWiru: Restitution of the Maralinga Lands to Traditional
Owners in South Australia' in Marcia Langton et al (eds), Settling with Indigenous People:
Modern treaty and agreement-making (Federation Press, 2006) 159, 178.
27
See, eg, Mabo (1992) 175 CLR 1, 61, 70 (Brennan J), 110 (Deane and Gaudron JJ), 192
(Toohey J); Ward (1998) 159 ALR 483, 502, 541; YortaYorta (2002) 214 CLR 422, 439-440
(Gleeson CJ, Gummow and Hayne JJ).
28
Lisa Strelein, 'Symbolism and Function: From Native Title t o Aboriginal and Torres Strait
Islander Self-Government' in Marcia Langton et al (eds), Honour Among Nations? Treaties
and Agreements with Indigenous People (Melbourne University Press, 2004) 189.
2011 Taxation of Native Title Agreements 367
____________________________________________________________________________________
the concept of native title 'of the community as a whole, as against the world, is a
mundane possession'.
29
Section 51 of the NTA provides a legal right to compensation for loss or
extinguishment of native title:
on just terms to compensate the native title holders for any loss, diminution, impairment
or other effect of the act on their native title rights and interests.
The right to compensation arises as a result of the operation of the Racial Discrimi nation
Act 1975 (Cth), which ensures that any right to compensation for the loss of p roperty
under the Constit ution or a ny compulsory acquisition legislation extends to native title
holders. The NTA does n ot provide for the payme nt of compensation prior to the
operative date of the Rac ial Discrimination Act 1975 (Cth). Compensation may be
payable to registered nati ve title claimants; native title holders, and/or their PBCs;
claimants; and possibly to ot her indigenous holders of statutory rights and interests
over land which have compulsorily converted or re placed native title rights and
interests.
30
Compensation is available for the extinguishment of native title by certain
past, intermediate and future acts. Importantly, in many cases, negotiations which
generate compensation do not extinguish native title as a result of t he non -
extinguishment principle in the NTA; in some case s, a notion of 'compensable interest'
may be applied to determine compensation where native title is not extinguished.
31
Compensation for native tit le, in cash, property or other benefits (if approved), may be
paid directly by governments for extinguishment or suspension of native ti tle rights or
interests.
The right to compensation in itself has failed to generate significa nt direct benefits
for native title claimants. There is only a very small number of compensation c laims
extant; as at 3 June 2011, there were only 8 compensation claims in the National Native
Title Tribunal, compared to 471 native title claims.
32
One re ason for the small number
of compensation claims may be that the content of the right to compensation is difficult
to identify and value: the right to co mpensation, like native title itself, is sui generis.
33
Many indigenous compensation regimes, including that in the NTA, draw inspiration
from pre-existing State mining compensation laws.
34
However, there are difficulties in
interpreting 'co mpensation' in the NTA because of the unique fea tures of native title,
____________________________________________________________________________________
29
Pearson, above n 16, 95.
30
Native Title Act 1993 (Cth) ss 17, 29, 20, 22D, 22E, 24EB(7), 24GB(8), 24GHA(6), 24ID(2),
24KA(6), 24MD(4), 24NA(7), 51 all relate to compensation. See Smith, above n 20, 22; Tina
Jowett and Kevin Williams, ' Jango: Payment of Compensation for the Extinguishment of
Native Title (May 2007) Issues Paper 3(8).
31
Native Title Act 1993 (Cth) s 24AA(6) for 'future acts', and s 238(8) for past acts.
32
National Native Title Tribunal ( 'NNTT'), National Report: Native Title (August 2011) 1
>.
33
Smith, above n 20.
34
Jon Altman and David P Pollack, 'Native title compensation: historic and policy
perspectives for an effective and fair regime' (Discussion Paper No 152, Centre for
Aboriginal Economic Policy Research, 1998)
Publications/DP/1998DP152.php>. Appendi x A identifies relevant State mining statutes.
See also Altman, above n 8 and the references on native title compensation available from
Native Title Research Unit, Native Title Compensation Annotated Reference L ist (2009)
Australian Institute of Aboriginal and Torres Strait Islander Studies
.
368 Federal Law Review Volume 39
____________________________________________________________________________________
and traditional law and custom more generally. How are traditional owners 'to place a
value on loss or damage to this culture[?] What value should be placed on native title?
And when compensation is received how should it be managed and distributed so as
to ensure effective outcomes and minimize the social impact of contestation over
mining moneys?'
35
In contrast to direct compensation claims, the ever -increasing number and scale of
native title agreements re veals that the process of agreement-making has generated
benefits for native title holders from governments and private stakeholders. These
agreements, as indicated by the extract from the Argyle Diamond Agreement, above,
do operate as compensation. However, there are difficulties with fitting all payments
and benefits under native title agreements into a clearly defined legal category of
compensation for loss, damage or impairment of an asset. Agreements are increasingly
used for revenue-sharing and the broader goal of economic development for
traditional owners. Of course, the mere entering into of native title agreements by
traditional owners does not ensure positive economic or social outcomes; as Krysti
Guest explained, there is a real challenge for governments, to recognise 'the living
political economy' of native title holders and other indigenous groups.
36
There is a tension in the native title cases and in academic and policy commentary,
concerning the extent to which exploitation and uses of rights under the NTA, such as
the right to negotiate native title agreements, can be considered as generating
commercial reward or economic developme nt as well as compensation. In 2008,
Indigenous Affairs Minister Jenny Macklin announced that nativ e title would be
recognised as 'critical to economic devel opment'
37
and the Attorney-General stated
that native title should be fully used as 'an effective mechanism for providing
economic development opportunities for Indigenous people '.
38
Active support of
____________________________________________________________________________________
35
Altman and Pollack, above n 34, 12.
36
Krysti Guest, 'The Promise of Comprehensive Native Title Settlements: The Burrup, MG-
Ord and Wimmera Agreements' (Research Discussion Paper No 27, Australian Institute of
Aboriginal and Torres Strait Islander Studies, 2009)
gov.au/research/docs/dp/DP27.pdf> 8. See also Ciaran O’Faircheallaigh, 'Resource
Development and Inequality in Indigenous Societies' (1998) 26 World Development 381394;
Ciaran O'Faircheallaigh, 'Evaluating Agreements between Indigenous Peoples and
Resource Developers' in Marcia Langton et al (eds), Honour Among Nations? Treaties and
Agreements with Indigenous People (Melbourne University Press, 2004) 303; Deirdre Howard-
Wagner, 'Scrutinising ILUAs in the Context of Agreement Making as a Panacea for Poverty
and Welfare Dependency in Indigenous Communities' (2010) 1 4(2) Australian Indigenous
Law Review 100; Deirdre Howard-Wagner and Amy Maguire, '"The Holy Grail" or "The
good, the bad and the Ugly"?: A Qualitative Exploration of the ILUAs Agreement-making
Process and the Relationship between ILUAs and Native Title' (2010) 14(1) Australian
Indigenous Law Review 71; Sarah Burnside, '"We're from the mining industry and we're here
to help": The impact of the rhetoric of crisis on future act negotiations' (2008) 12(2)
Australian Indigenous Law Review 54; Lee Godden et al, 'Accommodating Interests in
Resource Extraction: Indigenous Peoples, Local Communities and the Role of Law in
Economic and Social Sustainability' (2008) 26 Journal of Energy and Natural Resources Law 1,
4.
37
Jenny Macklin, 'Beyond Mabo: Native title and closing the gap' (Speech delivered at James
Cook University, Townsville, 21 May 2008)
circulars/macklin.pdf>.
38
McClelland, above n 5, [26].
2011 Taxation of Native Title Agreements 369
____________________________________________________________________________________
native title agreement-making has been identified as an important element of the
Commonwealth Government's Indigenous Economic Development Strategy, with the
goal of generating sustainable intergenerational benefits.
39
The Strategy states that
'Indigenous-held land provides real economic opportunity' and aims to ensure that
agreement-making supports economic participation.
40
Many indigenous communities have similar aspirations.
41
The taxation issues
considered in the Treasury Paper must be addressed in this broader policy context.
42
One approach to the issue is to accept that even where not called 'compensation' or
legally qualifying as such, all payments and benefits under native title agreements are
de facto compensation. Smith suggests that all types of pa yments and benefits available
under the NTA can be regarded broadly 'as different aspects of t he legislation's overall
compensation regime, ranging across a practical continuum related to mitigation,
restoration, reparation, recompense, agreement and benefit.'
43
Marcia Langton argues
that native title payments a re 'private transactions' that operate 'as substitution for
crown compensation' and hence should not be taxable.
44
To date, the issue of taxation of native title payments has been largely avoided by
corporate and indigenous parties to agreements, by ensuring that the recipient entity
for payments is tax-exempt, for example, a charitable trust. As explained further in
Part VI, this has its own limitations in respect of the use and management of funds by
the traditional owners and there has been increasing dissatisfaction with this model a s
a solution. In some cases, the alternative route has been taken of claiming that the
native title payme nts are capital compensation that is exempt from tax. This article
now turns to the question of income taxation of native title.
III NATIVE TITLE AND CURRENT INCOME TAX LAW
The Treasury Paper suggests that '[a]pplying the current rules of the income tax
system, payments provided under a native title agreement may or may not be
assessable income' for a claimant group.
45
The current tax law treatment of native title
payments depends not on the purpose of the agreement or the compensation
framework of the NTA, but on the legal form, mode of payment and character of the
____________________________________________________________________________________
39
Commonwealth of Australia, Department of Families, Housing, Community Services and
Indigenous Affairs, Indigenous Economic Development Strategy 2011-2018, (2011) 17,
>.
40
Ibid.
41
See, eg, Cape York Institute for Policy and Leadership, Economic Viability
.
42
Other relevant government papers include Commonwealth of Australia, Department of
Families, Housing, Community Services and Indigenous Affairs and Attorney-General's
Department, Leading Practice Agreements: Maximising Outcomes from Native Title Benefits,
Discussion Paper (July 2010) ; Commonwealth of Australia,
Department of Families, Housing, Community Services an d Indigenous Affairs, Indigenous
Home Ownership, Issues Paper (May 2010)
pubs/housing/indig_home_ownership/Documents/Indigenous_Home_Ownership_Issue
s_Paper.pdf>.
43
Smith, above n 20, 29.
44
Marcia Langton, 'The Mabo Lecture: Native Title, Poverty and Economic Development'
(Speech delivered at the Native Title Conference, 3 June 2010) 17.
45
Commonwealth of Australia, Treasury, above n 3, 4.
370 Federal Law Review Volume 39
____________________________________________________________________________________
underlying rights. Others have made a detailed examinati on of the current tax law
treatment of native t itle payments, essentially revealing the complexity and
uncertainty in applyi ng current tax law.
46
This analysis is not repeated here, however,
a brief discussion is useful to show how the Commissio ner of Taxation (and the
Treasury) apply a 'compensation' analysis in current tax law.
A native title payment may be taxable as ordin ary income or be specifically
included by a statutory provision, including a net capital gain under the capital gains
tax ('CGT') regime, under the Income Tax Assessment Act 1997 ( Cth) ('ITAA 1997') or the
Income Tax Assessment Act 1936 (Cth) ('ITAA 1936'). There are no court decisions on the
income tax treatment of nat ive title in Australia, nor has the Commissi oner of Taxation
issued any public binding guidance as to the income taxation of native title
payments.
47
However, the Commissioner has applied a 'compensation' analysis to find
that native title payments will not be taxable, in a handful of private binding rulings
('PBRs') provided to native title claim groups.
48
In these private ruli ngs, the view is
expressed that the native title payments under consideration have a 'capital' character
and not the character of ordinary services, business or property income. Traditionally
in income tax law, a payment that compensates for the loss, da mage or extinguishment
of a capital asset, diminution of value of an asset, or loss or impa irment of earning
capacity, would be capital in nature. To determine whether co mpensation is capital in
____________________________________________________________________________________
46
See references at above n 3; Martin, above n 8; Julie Cassidy, 'Black Fella Land White
Fella Tax: changing the CGT implications of aboriginal/native title' (2010) 25 Australian Tax
Forum 397; Julie Cassidy, 'Black Fella Land: White Fella Tax: Changing the CGT
Implications of Aboriginal/Native Title' in Georg Kofler et al (eds), Taxation and Human
Rights in Europe and the World (IBFD Publications, 2011) 327; Warren Black, 'Tax
Implications to Native Title Holders of Compensation Payments' (1999) 2 Journal of
Australian Taxation 344; Warren Black, 'Transferring Native Title to a Body Corporate under
the Native Title Act 1993 (Cth) Can CGT Arise?' (2000) 3 Journal of Australian Taxation
155.
47
Goods and Services Tax Ruling 2006/9 accepts that in the case of a 'government authority
compulsorily acquiring land and interests relating to that land, including the native title
rights under a particular statute where the effect of compulsory acquisition is that every
registered and unregistered interest in the la nd is extinguished, and each person who
formerly held such an interest has that holding converted into a claim for compensation',
then 'the compensation relates to the loss suffered by the claimants on the extinguishment
of their interest in the land' and so is not subject to GST: [89]. However, this GST ruling
does not address payments by private parties, or payments where there is no
extinguishment of native title, or the income tax treatment of such payments.
48
Australian Taxation Office, Private Binding Ruling 53360, 2003 -2007; Australian Taxation
Office, Private Bindin g Ruling 77829, 2008-2011; Australian Taxa tion Office, Private
Binding Ruling 83511, 2005-2011; Australian Taxation Office, Private Binding Ruling
1011313296606, available from the ATO Register of Private Binding Rulings
. Private Binding Ruling 77829 is an extension of Private
Binding Ruling 53360 in respect of the same facts. The Register contains anonymised texts
of private rulings provided to specific entities or individuals who requested the rulin g.
Private rulings are binding on the ATO only in respect of the particular applican t, years
and arrangement ruled upon, and strictly speaking have no precedential value; however,
in the absence of other issued guidance, the rulings in the database provide an indication of
how the ATO may approach similar fact situations.
2011 Taxation of Native Title Agreements 371
____________________________________________________________________________________
nature, it is necessary to ex amine 'the nature of the claim or cause of action in respect
of which the payment was made'.
49
Private ruling 53360 considered a native title agreement in a c ontext in which native
title had not actually been determined. T he agreement provided, amongst other things,
for 'the payment of compensation to the X foundation, for and on behalf of the
beneficiaries in connection with the effect [of the activities] on Native Title rights and
interests of the Claim Group.' The X foundation was a discretionary trust for the
benefit of the native title claimant group. The ruling states:
It has been suggested that the payments made under the agreement are compensation
payments made for the effect that the project has and will have on the 'claimed' Native
Title rights and interests of the Claim Group. We note that Native Title has not yet been
granted, however, it is apparent that the payments are being made on the assumption
that there is a genuin e Native Title right to the area involved and thus an 'asset' has been
established.
50
As noted above, the NTA compensation regime has some similarities to older State
mining compensation regimes. These m ining compensation regimes also provide some
legal precedents for the tax treatment of native title payments under current income
tax law. The Commissioner in PBR 53360 relies on cases concerning compensation
payments for landowners in respect of mining operations: Barrett v The Commissioner of
Taxation of the Commonwealth of Australia
51
and Nullaga Pastoral Company Pty Ltd v
Federal Commissioner of Taxation.
52
In Barrett, payments to the owner of a farming
property from a mining company who mined soapstone on the property were held to
be capital in nature. The mining was conducted under a licence granted by a State
corporation, which owned the minerals. The mining company paid the farmer in each
year in instalments, an a mount of 5s for every ton of soapstone re moved from the land
during the year. Owen J accepted that the payments were 'to make good the estimated
diminution in the value of the land and the amount of damage to it which it was
anticipated might result from the carrying on of mining operations'.
53
In Nullaga, the
Supreme Court of Western Austra lia held that two annual payments of $ 10 000
received by a pastoral company in exchange for granting a right to explore for and
mine bauxite for 5 years on its farmlands, were capital (and hence not taxable).
Wickham J held that the payments, agreed under the Mining Act 1978 (WA), were
made as 'compensation to the taxpayer for interference with and damage to the land
and diminution in its value resulting from operations carried on or proposed to be
carried on'.
54
He explained that the agreement:
____________________________________________________________________________________
49
Commissioner of Taxation v Sydney Refractive Surgery Centre Pty Ltd [2008] FCAFC 190, [10];
The Commissioner of Taxation of the Commonwealth of Australia v Smith (1981) 147 CLR 578,
586 (Gibbs CJ, Stephen, Mason and Wilson JJ); The Commissioner of Taxes (Victoria) v Phillips
(1936) 55 CLR 144, 153 (Starke J), 156-157 (Dixon and Evatt JJ); The Glenboig Union Fireclay
Co Ltd v Inland Revenue Commissioners [UK] (1922) 12 TC 427, 463-464 (Lord Buckmaster).
50
Australian Taxation Office, Private Binding Ruling 53360, above n 48.
51
(1968) 118 CLR 666 ('Barrett').
52
(1978) 78 ATC 4329 ('Nullaga').
53
Barrett v The Commissioner of Taxation of the Commonwealth of Australia (1968) 118 CLR 666,
672 (Owen J).
54
(1978) 78 ATC 4329, 4331.
372 Federal Law Review Volume 39
____________________________________________________________________________________
embraces a kind of license, but this does not make the consideration for the total
agreement, income. the money in my opinion was paid and received as consideration
for the deprivation of part of a capital asset and in order to replace that capital.
55
Barrett was applied in another pastoral case, Case B79
56
in which a farmer who
grazed sheep on Queensland Crown leasehold land received payments of $200
annually, for wells drilled for petroleum on the land, by agreeme nt with an oil
company which held an authority to prospect issued under the Petroleum Acts 1923-
1967 (Qld). The payments were held to be 'convenient instalments of a total sum of
compensation which may not yet be known with certainty.'
57
The analogy between native title payments and mining compensation is appealing
in a number of respects. It will be obvious in many cases that mining or other activity
will cause damage or impairment to native title land, its access or use by traditional
owners, similar to that compensated, under the mining laws. As in the mining cases,
native title compensation may be paid by a private party in advance of the anticipated
damage to the land, or periodically during the course of the exploration or mining,
under a legislative regime that provides for registration of agreeme nts and provides a
right to sue for compensation if agreement cannot be reached. Extinguishment of title
is not need ed to establish an agreement for compensation under the Mining Acts; this
also applies in the native title context. More generally, the mining cases indicate that
compensation is provided in relation to 'a kind of licence' to access and mine on land,
in the words of Wickham J in Nullaga, but which is not a licence in strict legal terms.
This is comparable to the notion of a social licence to operate, or a 'local social mandate'
that resources companies may seek, in their negotiations with native title claimants.
58
Yet it is, today, irrelevant whether a payment is compensation that is capital in
nature under the tax law. This is because CGT would no w apply to any net capital gain
generated by capital compensation payments, including those received in Barrett and
Nullaga. The Commissioner of Taxation avoids the application of CGT i n t he private
rulings summarised above, only by virtue of an assumption that native title is a 'pre-
CGT' asset (ie, it was acquired prior to 20 September 1985) . The Commissioner
explains:
As regards a 'pre CGT asset', it is stated in TR 95/35 at paragraph 5: 'It follows that if the
underlying asset disposed of was acquired by the taxpayer before 20 September 1985, the
receipt of compensation has no CGT consequences for the taxpayer .' Native Title is a
traditional entitlement said to have been held since time immemorial. The capital receipt
would not be subject to capital gains tax as the Native Title Rights and interests have
been owned by the X people since prior to the introduction of capital gains tax and the
Native Title rights and interests would therefore be pre CGT assets.
59
This analysis is based on the approach of the Commissioner to settleme nt agreements
in Tax Ruling TR 95 /35, para [70], which states that one must 'look through' a
compensation agreement to identify the relevant underlying asset, which in this case is
____________________________________________________________________________________
55
Ibid.
56
(1970) 70 ATC 366.
57
Ibid 367.
58
Peter Crooke, Bruce Harvey a nd Marcia Langton, ' Implementing a nd Monitoring
Indigenous Land Use Agreements in the Minerals Industry: The Western Cape
Communities Co-Existence Agreement' in Marcia Langton et al (eds), Settling with
Indigenous People: Modern treaty and agreement-making (Federation Press, 2006) 95, 95.
59
Australian Taxation Office, Private Binding Ruling 53360, above n 48.
2011 Taxation of Native Title Agreements 373
____________________________________________________________________________________
presumably the native title itself. This analysis by the Commissioner has provided a
solution for some native title claimants. However, such a pragmatic approach is of
little use to participants in native title negotiations if it is not stated clearly in a public,
binding ruling applicable to all such negotiations. The Commissioner has so far failed
to do this, leaving native title claimants and private stakeholders engaged in
negotiation uncertain about the ATO approach to native title payments in other ca ses.
More fundamentally, there are a number of lega l weaknesses in the Commissioner's
analysis. While there are similarities, the situation of native title claimants is not fully
analogous wit h that of landowners dea ling under th e mining compe nsation regimes.
The mining compensation cases are concerned only with physical damage and loss of
economic earn ing capacity of land . The priva te rulings cite the minin g cases w ithout
commenting on the difference between physical damage and other kinds of impacts on
'looking after country', the inability to exercise traditional legal rights of governance in
respect of the land, or spiritual welfare. The private rulings also sidestep the issue of
what the tax outcome should be if native tit le is not ultimately established, or if the
native title claim is not pursued following the agreement, but rather is given up or
withdrawn. Is it enough t hat the parties proceed, perhaps only for the purpo se of
coming to an agree ment, 'as if' native title exists? It is doubtful if the approach in these
private rulings cannot be relied on to assist parties in the majority of agreements in
respect of which native title, as defined in s 223 of the NTA, is not ultimately
determined.
Third, native title agreements are increasingly being negotiated on commercial
terms. The exploitation of native title in a business-like way, with a profit-making
intention, would lead to the characterisisation of receipts as income under current tax
law.
60
If 'compensation' is n ot made out, then it seems inevitable that the current law
will tax native title payments as income and the analysis in these private rulings
cannot apply.
Fourth, the treatment of native title as an ex empt pre-CGT asset is not well
supported by the terms of the income tax law. Uncert ainties in the CGT analysis have
been exhaustively explored by others.
61
Issues include whether native title, or
associated rights, are an 'asset' as defined in the CGT rules; the time of the acquisition
of this asset (that is, whether it is really a pre- 1985 asset as defined in the law); who is
the taxpayer affected; wh at is the particular CGT 'event' or statutory provision
applicable on entering i nto a native title agreement or on receipt of payments; the time
of that CGT event; and how to ascertain the cost bas e of the relevant asset. The law
does not, in sum, comfortably support the assumption in the Treasury Paper that
'[c]ompensation payments for the extinguishment or voluntary surrender of native title
rights would generally be regarded as compensation for the loss of a pre-CGT capital
asset and therefore any capital gains or losses would be disregarded '.
62
____________________________________________________________________________________
60
The Commissioner of Taxation of the Commonwealth of Australia v The Myer Emporium Limited
(1987) 163 CLR 199, 209-210 (Ma son ACJ, Wilson, Brennan, Deane and Dawson JJ); The
Commissioner of Taxation of the Commonwealth of Australia v Whitfords Beach Proprietary
Limited (1982) 150 CLR 355, 360-361 (Gibbs CJ); Commissioner of Taxation of the
Commonwealth of Australia v Montgomery (1999) 198 CLR 639, 656-657 (Gaudron, Gummow,
Kirby and Hayne JJ).
61
Cassidy, above n 46. See also Martin, above n 8; Black, above n 46.
62
Commonwealth of Australia, Treasury, above n 3, 4.
374 Federal Law Review Volume 39
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Ultimately, the Commissioner's pragmatic approach fails to justify the exemption of
native title compensation on any coherent tax policy basis. Rather, it grounds the
exemption on the ba sis of an indefensible transition rule embedded in our tax law as a
result of the 1985 political compromise required for introduction of CGT. The recent
Henry Tax Review observed that the pre- and post-C GT distinction in our income tax
law causes significant complexity and that consideration s hould be given to its
repeal.
63
A more secure basis is needed for the exemption of native title payments from
income tax.
IV SHOULD NATIVE TITLE PAYMENTS BE SUBJECT TO TAX?
'The essential connotation of income … is gain gain to someone during a specified
period and measured according to objective market standards'.
64
I now turn to examine the question as to whether native title payments are 'income'
that sh ould be subject to income tax as a matter of principle, applying the concept of
'income' established i n the tax policy literature , sometimes known as the 'economic' or
'Schanz-Haig-Simons' concept of income.
65
The concept was described in classic terms
by US economist Henry Simons as in t he above quote, and as follows: '[p]ersonal
income connotes, broadly, the exercise of control over the use of society 's scarce
resources'.
66
This concept is c ommonly referred to today as the 'comprehens ive' notion
of income.
67
The 'comprehensive' notio n of income is very broad, and it includes all types of
payments (monetary and non-monetary) that provide a gain, or what is considered to
be a net increase or accretion to economic power of the individual taxpayer. Australian
income tax law does not measure up to this notion of compr ehensive i ncome. As
explained by the Asprey Committee in a review of the tax system in 1975:
the economists' definition would in general in clude … a great many gains that … have
not been brought in, or have been brought in only to a very limited extent, by judicial and
legislative extensions and refinements of that usage.
68
____________________________________________________________________________________
63
Commonwealth of Australia, Attorney-Gener al's Department, Australia's Future Tax
System, Final Report (December 2009), Overview (Part 1), Recommendation 17
.
64
Henry Simons, Personal Income Taxation: the definition of income as a problem of fiscal policy
(University of Chicago Press, 1938) 51.
65
Named after US economists Henry Simons and Robert Haig, and German economist Georg
Schanz; Simons essentially synthesised the work of Haig and Schanz and developed the
now-classic definition.
66
Simons, above n 64, 49.
67
In Australia, various scholars and tax reform bodies have adopted this 'comprehensive'
notion of income, including: Commonwealth Taxation Review Committee, Full Report 1975
(Australian Govern ment Publishing Service, 1975) ('Asprey Committee'); Commonwealth
of Australia, Treasury, Reform of the Australian tax system: draft white paper (Australian
Government Publishing Service, 1985); Review of Business Taxation, A Tax System
Redesigned: more certain, equitable and durable: report (1999, Commonwealth of Australia). The
Review of Australia's Future Tax System moves away from 'comprehensive' income
towards a 'consumption' tax base for some purposes, however this is not relevant to the
discussion here: Commonwealth of Australia, Attorney-General's Department, above n 63.
68
Asprey Committee, above n 67, [7.5].
2011 Taxation of Native Title Agreements 375
____________________________________________________________________________________
Nonetheless, 'comprehensive income' has operated as a benchmark for assessing the
income tax base as defined in law and has been a significant driver of tax re form as the
policy basis for the introduction of CGT in 1985 and various other measures to remove
exemptions and thereby expand the tax base.
Comprehensive income is not an accounting concept, nor does it refer to a flow or
receipt of cash or other benefits. Rather, it ai ms to tax the net economic gain for an
individual. In applying the concept, one must first identify who is the relevant
individual ta xpayer and second, ascertain whether the relevant payments or benefits
generate a net gain to this taxpayer in a particular period (usually a year). The concept
aims to identify the relative capacity to pay tax of one individual taxpayer a s compared
to another, measured by the index or proxy of their 'income'. As explained ab ove, a
PBC that holds native tit le does so either as trustee or agent for the native title holders,
not as a separate entity in its own rig ht, so it is appropriate to consider as a matter of
policy and law the application of income tax to the underlying native title holders.
I discuss here two main a rguments that may establish that native title payments a re
not 'income' as a matter of principle. First, it may be argued that these payme nts are
compensation for the loss of property or personal rights and so do not generate
economic gain. Second, it may be argued that these payments generate collective or
social economic gain, instead of individual or personal gain that is, they are in some
sense public or community gains, rather than private gains that should be taxable.
The question of how to treat compen sation payments is not directly addressed by
Simons in his classic text, and there is surprisingly little analysis of it in acad emic or
legal commentary.
69
The compensation analysis can be separated into a d iscussion of
compensation for loss of property or similar rights, and compensation for harm to the
person such as physical injury or personal wrong. It can be argued that compens ation
for lo ss, extinguishment or damage to property owned by a taxpayer is not 'income'
because there is no gain to the taxpayer, merely the 'making good', replacement or
recovery of the taxpayer's 'capital' or investment in the property.
This principle is straightforward, but th e problems of applying it in the native title
context soon become apparent. As native title is a proprietary right or a bundle of
rights that are 'possessed' by native title holders, it may be accepted that the
extinguishment, loss or impairment of those rights or i nterests causes a loss or
diminution in value of th e native title holders' property that may be compensated
under the NTA. For tax purposes, however, it will be necessary to ascertain who are
the individual native title holders being compensated. It is generally accepted that
even though there are 'native title holders' (past, current a nd future), native title is
communal in nature.
70
Native title claim groups are defined by identifying individuals
where possible, but this is often not possible and they are defined as a class 'by
reference to particular ancestors and the laws or customs that bind the group' (and that
would also include future generations).
71
In this context, is it possible to identif y an
____________________________________________________________________________________
69
These issues have been most debated in the US: see, eg, Victor Thuronyi, 'The Concept of
Income' (Fall 1990) 46 New York University Tax Law Review 45; Paul B Stephan III, 'Federal
Income Taxation and Human Capital' (1984) 70 Virginia Law Review 1357.
70
See Mabo an d other cases discussed in Part II; Stuart Bradfield, 'White picket fence or
Trojan horse? The debate over communal ownership of Indigenous land and individual
wealth creation' (June 2005) 3(3) Land, Rights, Laws: Issues of Native Title.
71
Strelein, above n 3, 17.
376 Federal Law Review Volume 39
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individual 'taxpayer' as this is understood by Simons? I sugges t that it is not possible to
'subdivide' native title rights into individual shares such that personal benefit can be
said to be obtained. Although a PBC or a native title representative body ( 'NTRB') in a
claim is the agent or trustee for multiple native title owners or claimants, it is difficult
to say that these entities hold native title for the individual benefit of native title h olders
rather than as a collective right.
Second, even if individual native title holders can be i dentified, is native title able to
be exploited for their personal economic gain such that the gain is 'income' of the
individuals? Legally, native title as such is inalienable even though it is described as a
'bundle of rights' which are proprietary in nature. Th is raises the question as to
whether any dealings in respect of native title and consequently, any compensation
for its loss or impairment under an agreement can be properly considered to be
economic in nature. If native title is extinguished by law, and compensation paid, but
that native title could not, in the first place, be exploited for value, has 'the value of
[any] person's store of property rights'
72
that may be exploited for economic value
been decreased by the extinguishment or impairment or ma de good by the
compensation? If not, is the compen sation fully taxable, essentially as a windfall
economic gain to the recipient native title group?
Third, native title compensation will only be taxable under a comprehensive
income tax to the extent that the compensation exceeds the cost or capital invested in
the native title rights or interests by the native title holders. Legally, native title rights
and interests are 'possessed' by native title holders under traditional law since time
immemorial. How can we ascertain any original 'cost' or investment in these rights and
interests? One possible view is that native title r ights and interests have no 'cost' at all.
The consequence of this view is that all native title payments, even if correctly
characterised as compensation for loss of property, would be taxable net gain under
the comprehensive income tax. On the other hand, the v iew could be taken that
compensation received for native title is either less than, or else exactly measures and
essentially replaces the 'cost' of acquisition of the native title. The logical consequence
of this alternative view is that none of the compensation should be taxable. This
alternative approach, however, requires a lega l fiction concerning the cost of
acquisition of native title.
It may be easier to analyse native title compensation by analogy with compensation
for harm or physical injury to a person.
73
This approach may more accurately reflect
the personal nature of native title as a right, and the personal wrong or harm that is
done through its impairment as a loss of solatium or enjoyment of life. One approach to
the personal injury analysis is by analogy to compensation for property rights. Under
this approach, the compensation for personal injury will be taxable gain, except to the
extent that it makes good a los s of the taxpayer. This analysis assumes a concept of
____________________________________________________________________________________
72
Simons, above n 64, 49.
73
There has been little written on this issue in Australia. In the US, there has been substantial
academic debate about the principled basis for the legal exemption of personal injury
damages: see, eg, Stephan, above n 69; Jennifer J S Brooks, 'Developing a Theory of Damage
Recovery Taxation' (1988) 14 William Mitchell Law Review 759; Joseph Dodge, 'Taxes and
Torts' (1992) 77 Cornell Law Review 143 ; Thomas D Griffith, 'Should "Ta x Norms" be
Abandoned? Rethinking Tax Policy Analysis and the Taxation of Personal Injury
Recoveries' (1993) Wisconsin Law Review 1115.
2011 Taxation of Native Title Agreements 377
____________________________________________________________________________________
'human capital' what economists term the individual's endowment (or capa city to
earn income) that is made good by the compensation. Applying the personal injury
analogy to native title, we again face the problem that the extent of any gain or the
underlying 'cost' of that personal rig ht cannot be ascertained except by making
arbitrary assumptions.
An alternative approach suggests that compensation for personal injury or other
wrong incorporates a psychic aspect t hat does not relate to the ability to earn income,
and that may be considered as 'non-economic', and so outside the concept of 'income'
altogether. Under this approach, the compensation 'substitutes' or makes good that
non-economic aspect of one's own person, which itself would be non-taxable, so that
the compensation should also not be taxable.
The Asprey Committee conside red that comprehensive income would include
'compensation for physical injury to a person received in a lump sum or for injury to
reputation'.
74
However, it concluded that the 'exclusion from income of compensation
for physical injury must rest primarily o n the importance of the element of non-
economic loss reflected in the compensation' and that 'whatever the theory of the
comprehensive tax base may s uggest, it w ould be a significan t departure from
accepted ideas to include in income amounts receive d which are in respect of physical
suffering and disability as distinct from being for the reduced capacity of a person to
earn which may attend that suffering and disability '.
75
Thus, the Committee decided
that as a matter of 'accep ted ideas ' (or common sense), compensation for personal
injury should be excluded from taxation. This approach drives the legal treatment of
capital personal injury compensation in Australian income tax law, which is
specifically excluded from tax under s 118-37 of ITAA 1997. For example, thi s approach
has been taken in respect of reparations paid to indigenous individuals b y the
Queensland government for discriminatory harm suffered by them as a result of the
Protection Acts under which their wages or savings were controlled by the Quee nsland
government.
76
The repa rations received were held to be capital compensation for a
personal wrong so non-taxable under s 118-37 of ITAA 1997.
The difficulty with the a nalysis of native title compensation as 'non-ec onomic' in
nature is that the NTA does gra nt an eco nomic dimension to native title rights and
interests. This economic dimension is being realised for traditional owners through
native title agreement-making, and is relied u pon by governments and communities
alike as an integral element of eco nomic development building on agreements. Native
title agreements bring traditional rights and custod ial responsibilities in respect of land
into Australia's contempora ry market economy and settler lega l system. The economic
character of the 'right to negotiate' of native title claimants under the NTA is illustrated
in the following comments by McHugh J in North Ganalanja Aboriginal Corporation and
Waanyi People v Queensland:
77
At the very least, the Waanyi People ha d a real chance of reaching an agreement with the
second respondents [a mining consortium] by exercising the negotiation and mediation
rights conferred by the Act. Parliament has laid down the law. It has attached valuable
____________________________________________________________________________________
74
Asprey Committee, above n 67.
75
Asprey Committee, above n 67, [7.37].
76
Australian Taxation Office, Class Ruling CR 2003/35 (7 May 2003)
[19].
77
(1996) 185 CLR 595, 644 (McHugh J).
378 Federal Law Review Volume 39
____________________________________________________________________________________
rights to an accepted claim, rights that are exercisable by a claimant before the validity of
the claim is judicially determined. The Act has given claims of native title an economic as well
as a spiritual and physical dimension. (emphasis added)
Native title agreements both compensate for incursions upon claimed native title
rights and c onstitute a major form of economic engagement between indigenous
peoples, governments and industry. As explained above, the government has a public
policy to use native title agreements as a vehicle for indigenous economic
development. In this context, native title payments are not personal or individual but
are, rather, collective, 'social' or community gains from economic developme nt.
In his classic text, Simons drew a distinction between 'personal income' and the
concept of 'social income' which is a measure of collective welfare in a society or
economy. He observed that 'increases in the social income suggest progress towards
"the good life", towards a world better in its economic aspect, whatever that may be'.
78
This statement by Simons fairly accurately represents the goal of economic growth that
is defined and measured by economists a s an increase in the total product of goods
and services (Gross Domestic Product) in a n economy, and is one measure of ec onomic
development.
79
Australia has established in the NTA, a regime for agreement-making
that demonstrably facilitates both the recognition of native title and some
compensation in case of extinguishment and the establishment of payments, transfer of
assets and building up of resources that aim to enable indigenous peoples to generate
social inc ome. A nother wa y to express this analysis may be to argue that native title
payments have a 'public' character rather than a character of private gain, and hence
are not susceptible of income taxation.
The analysis above reveals the lack of fit between the legal and economic concepts
of property, compensation and personal economic gain that underlie income tax
theory, and the concept of native title which is collective, inalienable, and handed
down through generations who are essentially custodians rather than 'owners'. As
Altman and Pollock, Smith and others suggest, similar problems apply in ascertaining
how native title claimants, or compensating governments and other parties, should
value, in economic terms, the loss or impairment of native title.
There is a further issue th at must be considered in analysing the tax treatment of
native title payments. How should the tax law treat indigenous people who cannot
establish native title at law? The vast majority of native title agreements are negotiated
on the basis that native title may be made out, but it is never finally determined. M ore
generally, the majority of Australian indi genous people have been entirely
dispossessed of their traditional ownership, so that native title cannot be e stablished by
them at all. If some kinds of native title payments categorised as 'compensation' or for
native title are found not to be income, but other payments may be assessable, this
could lead to the perverse result that those least able to establish native title in a
broad sense, most harmed by dispossession and with their connection to land most
completely oblitera ted would be subject to taxation on any payments they receive
under native title agreements, whereas those who could be said to be 'less' harmed
____________________________________________________________________________________
78
Simons, above n 64, 46.
79
Amartya Sen, 'Development: Which Way Now?' (1983) 93 The Economic Journal 745; on
development more broadly, see Sen, Development as Freedom (Oxford University Press,
1995); Sudhir Anand and Amartya Sen, 'The Income Component of the Human
Development Index' (2000) 1(1) Journal of Human Development 83.
2011 Taxation of Native Title Agreements 379
____________________________________________________________________________________
through a finding of native title are not. It would be unfair to those who cannot
establish native title that the lucky few who can esta blish native title and receive
compensation, are not required to pay tax on it.
In this context, it is important to understand the role of the income tax in
establishing a just distribution of economic resources in Australia. Tax lawyers rely on
the benchmark of 'c omprehensive income' to assist in determining whether a tax
system operates in a fair manner. However, the tax law is just one element of the
overall lega l system esta blished in our democratic, governmental and market
framework. The income tax, like the legal concept of property, itself constitutes the
distribution of economic re sources acro ss individuals and communities. This point is
made strongly by legal philosophers Liam Murphy and Thomas Nagel:
80
we have to think about property as what is created by the tax sy stem, rather than what is
disturbed or encroached on by the tax system. Property rights are the rights people have
in the resources that they are entitled to control after taxes, not before. (emphasis added).
Murphy and Nagel remind us that we cannot avoid addressing difficult questions
of social justice in the distribution of economic resources, property and power, by
reference to a prior natural or lawful state or distribution of 'income' or 'property'
among taxpayers or citizens that could be subject to an income tax. The income tax 'is
among the conditions that create a set of property holdings, whose legitimacy can be
assessed only by evaluating the justice of the whole system, taxes included.'
81
Consequently, resolution of the income tax treatment of native title is just one element
of the overall, legitimate settlement of land justice in Australia. To the extent that
payments under native title agreements might be classified as generating personal
economic gain that could be 'income', their exclusion from income tax would co mprise
a 'tax expenditure', being a subsidy or departure from the benchmark of the
comprehensive income tax (although it may be difficult to estimate the revenue
foregone from this tax expenditure).
82
Such a tax expenditure is supported as a matter
of social or public p olicy relating to indigenous economic development and justice in
native title agreements.
V A LEGISLATIVE EXEMPTION FOR NATIVE TITLE PAYMENTS
Based on the analysis in Part IV above, there are good arguments to support the
exclusion of native title payments from income tax on the basis that they are not
'income' as a conceptual matter, in particular where they can be analysed as
compensation. However, the analysis is concep tually difficult and does not solve t he
issue of social and economic justice for traditiona l owners who cannot establish native
title. A legislative exclusion from tax is needed to eliminate uncertainty and inequitable
differences in treatment in respect of different native title agree ments and would
obviate the need for strained attempts to fit payment s into the category of 'pre-CGT
compensation'. There is therefore a strong argument in support of option (1) in the
____________________________________________________________________________________
80
Liam Murphy and Thomas Nagel, The Myth of Ownership: Taxes and Justice (Oxford
University Press, 2nd ed, 2004) 175.
81
Ibid 37.
82
This concept is discussed and analysed in Lisa Philipps, Neil Brooks and Jinyan Li, Tax
Expenditures: State of the Art (Canadian Tax Foundation, 2011); see a lso, Commonwealth of
Australia, Treasury, Tax Expenditure Statement 2010 (28 January 2011)
>.
380 Federal Law Review Volume 39
____________________________________________________________________________________
Treasury Paper, be ing a legislated tax ex clusion for 'payments made under native title
agreements'.
83
The question then becomes, how should such an exclusion be legislated,
so as to best achieve the justice and economic development goals?
A An e xemption for native title agreements
As is suggested by the Treasury Paper, an exemption should be designed by refe rence
to native title agreements rather tha n on particular kinds of payments or be nefits (such
as compensat ion). The primary aim of legislative reform is to ensure that there is no
disincentive to agreement-making, to provide clarity, practical certainty and maximum
flexibility for the negotiation participants traditional owners, claimants, private
stakeholders, and governments at all levels.
This re quires an a nalysis of the range of different types of native title agreement.
Agreements may be narrow, focused on discharge of one-off rights, or may cover
entire projects, regions and a suite of rights.
84
Many native title resource agreements
comprise an overall, or undifferentiated package of be nefits.
85
As one mining company
has pointed out, 'although the financial benefits payable in accordance with these
kinds of agreements may include "co mpensation" for the impairment or
extinguishment of native title, the payments are made in consideration for a range of
agreements and commitments, not only in relation to native title'.
86
1 Indigenous Land Use Agreements
The main form of native title agreement envisaged in the NTA, s ince 1 998, is the
Indigenous Land Use Agreement, or ILUA, established under NTA Division 3,
Subdivisions B, C and D. As at 30 June 2011, there were 497 registered ILUAs, in all
states, but with a significant majority in Queensland.
87
ILUAs have the advantage that
they may be entered into based on a determination of title or where a claim exists; they
must be registered with the National Native Title Tribunal ('NNTT'); and a range of
steps are required by law that assist in ensuring due process in negotiation and
registration of the ILUA. The ILUA negotiating framework assists in a consideration of
the economic, social and cultural needs of the native title claimants and s o may enable
a more holistic compensation settlement to be achieved.
Many ILUAs are negotiated 'as if' there is native title, or on the assumption that
native title may be establi shed in due course. Re gistered ILUAs will stand ev en if
native title is not, ultimately, made out. When re gistered, ILUAs bind all parties,
____________________________________________________________________________________
83
Commonwealth of Australia, Treasury, above n 4, 2, 810, and Section 3.1.
84
Many examples and case studies of the benefits and payments in a range of types of
agreements are included in Strelein, above n 3; O’Faircheallaigh, above n 3 6. Summaries of
agreements, including location, date, parties and basic content, sometimes with primary
documents, are searchable at .
85
A diversity of financial models are illustrated in Ciaran O Faircheallaigh, 'Financial Models
for Agreements between Indigenous Peoples and Mining Companies' (Research Paper No
12, Centre for Australian Public Sector Management, January 2003); and see MCA et al,
above n 3; Strelein, above n 3, 26.
86
BHP Billiton Ltd, Submission to Commonwealth of Australia, Treasury (Cth), Submission on
the Consultation Paper 'Native Title, Indigenous Economic Development and Tax', 30
November 201 0, 3
20.pdf>.
87
NNTT, National Native Title Report (August 2011), 4. Some registered
ILUAs have expired and been removed from the register.
2011 Taxation of Native Title Agreements 381
____________________________________________________________________________________
including later native title claimants even if they were not party to the ILUA. A
significant majority of ILUAs are so-called area agreement s, which may be made
where there are no native title PBCs in the entire area to be covered (otherwise, a body
corporate agreement is made). This indicates that the majority of ILUAs are reached
with native title claimants who have yet to achieve a determination of native title.
88
Two example s of large r ILUAs, the Wester n Ca pe Communities Co-existence
Agreement ('WCCCA') and the Argyle Diamond Agreement, illustrate the kinds of
benefits and payments that may be provided and the legal structures that may be
adopted. Both of these ILUAs were a greed with companies in the Rio Tinto
conglomerate, and are evidence of a 'paradigm shift' in Rio Tinto towards recognition
of indigenous peoples and support for negotiation to crea te a more durable and
productive long term relationship with them.
89
The WCCCA between Comalco, Indigenous entities of the Cape York Peninsula
and the Queensland Government, was registered with the NNTT in 2001. The intent of
the agreement is that the indigenous pa rties support Comalco 's future m ining
operations in return for financial support, e mployment, business development and
educational opportunities as well as full recognition of status as traditional owners of
the land, and ongoing mutual reco gnition and partnership. Without any legal
imperative to do so,
90
the WCCCA was signed by el even traditional owner groups
(Alngith, Anathangayth, Ankamuthi, Peppan, Taepadhighi, Thanikwithi, Tjungundji,
Warranggu, Wathayn, Wikand Wik-Way a nd Yupungathi) and four A boriginal
community councils (New Mappoon, Mapoon, Napranum and Aurukun).
91
The
WCCCA provides for the following:
$2.5 million annual co ntribution by Comalco, indexed to mine revenue and
the Consumer Price Index ('CPI');
$1.5 million annual Queensland go vernment contribution indexed to mine
revenue and the CPI;
$500 000 Employment and Training Budget for employment, training and
youth ed ucation pr ograms managed by Comalco. If the trajectory of local
Aboriginal employment fails to remain on track for a target of 35 percent by
2010, Comalco is obliged to increase the leve l of pre-employment spending
on education and training. However if the level of Indigenous year 10
graduation in the region drops below the stated trajectory, the company
does not have to fulfill this obligation;
$150 000 Cultural Awareness Fund, cultural heritage survey, site protection
plans and ranger programs and a Cultural Awareness Course run by the
traditional owners which all Comalco staff must complete;
____________________________________________________________________________________
88
Strelein, above n 3, 12.
89
Bruce Harvey, 'Rio Tinto's Agreement Making in Australia in a context of Globalisation' in
Langton, Tehan, Palmer and Shain (eds), above n 13, 239.
90
Early in the negotiations, the High Court found in Wik Peoples v Queensland (1996) 187 CLR
1 that the Comalco mining lease was valid and had extinguished native title. Th e 1998
amendments to the NTA further reduced any legal imperative to negotiate for Comalco.
91
Harvey, above n 89, 241.
382 Federal Law Review Volume 39
____________________________________________________________________________________
Progressive relinquishment of parts of the Comalco mining lease, no longer
needed for mining, to the State Government f or return to Aboriginal
ownership; and
Support for community development and Aboriginal business enterprises.
The Argyle Diamond Agreement was negotiated between the traditional owners
and the Ashton Joint Vent ure in 2001. The agreement was registered as an ILUA in
2005. Under the agreement, the traditional owners agree to support Argyle's current
and future mining opera tions in return for financial assistance, benefits directed
toward the economic development of communities and the recognition of indigenous
interests and status as traditional owners. Annual payments are provided t o traditional
owner groups, and both a discretionary trust and a charitable trust are utilised to
receive payments. This meant that there were li ve tax issues in relati on to this
agreement. The annual payments from the miner to each traditional owner gro up are
set out separately (all amounts indexed for the CPI from January 2004):
92
$ 309 300 to Mandangala Community;
$ 116 610 to Woolah Community;
$ 288 578 to Warmun Community;
$ 45 000 to Juwulinypany Community; and
$ 25 000 to Crocodile Hole communities.
The payments to traditional owner family groups (based on senior named traditional
owners) in the Argyle ILUA, are made into a discretionary trust, the Kilkayi Trust.
93
The majority of payments under the agreement go into the Gelganyem Tr ust, a
charitable trust which funds current community development projects and a
significant proportion of monies is allocated to a Sustainability Fund for investment to
benefit future generations of Murriuwung and Gidja people in the East Kimberly
Region. The Sustainability Fund cannot be used (except for a dministration costs) until
Argyle ceases operation, providing an endowment for long term community
development.
94
The Argyle ILUA also provides for the surrender by Argyle to
traditional owners of a grazing lease, to be transferred to freehold title at the end of
mining operations.
At the other end of the scale, there are many smaller ILUAs. For example, the
Mackay Surf Lifesaving Club ILUA provides for the BirriGurra, Yuibera and
Wiri/Yuwiburra peoples to agree to a 75 year lease of land f or the Club and the
construction of a new club house.
95
The Owen Springs Transmission Line ILUA
provides for consent from the Central Land Council to installatio n of power lines in the
____________________________________________________________________________________
92
Argyle Diamond Agreement, above n 1, cl 5.2-5.3.
93
Ibid cl 6.8.
94
Rio Tinto, Sustainable development report, Argyle Diamonds 2007 - Innovation brings rewards
(2007) 20.
95
NNTT File No: QIA1999/00; see also NNTT, Registered ILUA summary - Mackay Harbour
Beach Park
Registered-ILUAs/Pages/Mackay_Harbour_Beach_Park_QIA1999001.aspx>; ATNS
Database, Mackay Harbour Beach Park Indigenous Land Use Ag reement (15 February 2005)
.
2011 Taxation of Native Title Agreements 383
____________________________________________________________________________________
Alice Springs Municipality in the Northern Territory.
96
The benefits receive d by
traditional owners under these ILUAs are not publicly known.
2 'Future Act' agreements negotiated under ss 29 and 31 of the NTA
A 'future act' under the NTA is a ny proposed act that may affect native title. A 'future
act' agreement (that is not an ILUA) deals with any act that affects or impairs native
title i n the fut ure. A future act negotiation, like an ILUA, may apply to lands where
title is determined, or may be negotiated 'as if' there is native title, applying the 'right
to negotiate'. Where property interest s are at stake (such as the issue of a licence by the
State), the future act provisions are triggered by the State government notifying all
relevant native title holders or potential holders in the relevant region. Pay ments
under f uture act agreements, like those under ILUAs, may be in a range of different
forms.
There are thousands of future act applications made each year, but only a small
number of agreements are fully mediated by the NNTT (and hence recorded by it).
Between 2008 and 2010 there were more than 9000 future act applications, many in
Western A ustralia and Queensland.
97
M ost a pplications are withdrawn, the majority
because they are resolved by private agreement, although it is difficult to track these
outcomes. The NNTT administers the 'future act' processes where there is a right to
negotiate in the claimant group, that is, basically in relation to mining. O nly a small
proportion of future act agreements are actually mediated by the NNTT and hence
recorded.
98
3 State settlements and compensation frameworks
There are a range of State settlement frameworks, some of which are directly linked to
native title and explicitly recognised in the NTA (eg, under ss 22L and 87), while others
have a separate basis in State settlement and land rights legislation. These agreement
frameworks are not referred to in the Treasury Paper but are becoming increasingly
important in establishing certain, fair and general compensation settlements for
traditional owners and other indigenous peoples within each State and Territory. It is
important from a perspective of fairness and national coverage that they are included
in any provision to exempt income under native title agreements. ILUAs and future act
agreements are geographically concentrated in Western Australia and Queensland.
State settlement and compensation frameworks are of great importance in other states,
where traditional owners have been dispossessed of their land more completely than
in more remote regions.
Existing State and Territory la nd rights regimes provide f or a ra nge of
compensation payme nts, shares of mining royalties, land transfers and other benefits
in relation to A boriginal land. A right to compensati on arising from NSW government
extinguishment is specifically provided for in s 22L of the NTA. State governments
have also made specific agreements to settle traditional owner claims, outside a native
____________________________________________________________________________________
96
NNTT, Registered ILUA summary-Owen Springs Transmission Line ILUA
ILUAs/Pages/NT-Registered_ILUA_Owen_Springs_Transmission_Line_ILUA-
DI2008_001.aspx>.
97
NNTT, above n 32, 13.
98
The NNTT records 72 future act agreements concluded in 20092010, above n 32, 43.
384 Federal Law Review Volume 39
____________________________________________________________________________________
title framework.
99
More recently, settlement frameworks have be en developed by the
States of South Australia and Victoria. Although sometimes referred to as 'non-native
title' agreemen ts, the agreements made in these processes aim to pr ovide
compensation for loss of n ative title and the establishment of a comprehensive land
management process across the state in future. In Western Australia, the State has
begun work to establish a state-wide post-determination land manage ment
framework.
100
The South Australian Settlement process focuses on two alternative paths to
litigation under the NTA use of the ILUA process or through c onsent
determinations.
101
A continued right to practise traditional laws and customs on the
land is recognised and there is a continuing right to compensation from the Crown
against acquisition of land or water rights. A South Australian Native Title Resolution
process operates in parallel to the ILUA process, bringing together the Congress of
Native Title Management Committees, the South Australian Nat ive Title Services, the
SA Farmers Federation, the SA Chambers of Mines and Energy, Wildcatch Fisheries
SA, the L ocal Government Association and the South Australian Governmen t. That
process can result in a court determination, a consent determination, or an agreement
not to pursue. Consent determinations, following negotiations and compulsory
mediation, take legal effect whe n confirmed by the Federal Court. Claimants must
provide evidence as to a continued co nnection to the land under the requirements of
the NTA for consent determinations, but this is significantly cheaper and simpler than
preparation for a full trial. Compensation is determined either under a consen t
determination or an ILUA. The Resolution process does not specify particular heads of
compensation.
Under the new Victorian Gover nment Settlement Framework in the Traditional
Owner Settlement Act 2010 (Vic), the Victorian Native T itle Unit is supposed to conduct
agreement-making and respond to relevant applications for determinations of native
title in the court system.
102
Both of these pathways are open to applicants, and failure
in one avenue does not necessitate failure in the other (for example, the YortaYorta
people came to an agreement under the Settlement Framework with t he Victoria
Government, despite fa iling to establish native title in their appeal to the High Court).
The Settlement Framework seeks to pre-empt court decisions b y conducting direct
negotiations with traditional owner groups. Agreements under the Victorian
Framework generally include a declaration that the group will cease native title
applications in relation to the agreed land and promises not to commence any such
action in the future. The Land Use Activity Regime accounts for future acts such as
____________________________________________________________________________________
99
An example is the Maralinga Tjarutja Land Rights Act 1984 (SA) under which the South
Australian government transferred inalienable freehold title of lands to the Maralinga
Tjarutja peoples: Strelein, above n 28.
100
NNTT, above n 32, 5.
101
Government of South Australia, South Australian Native Title Resolution (20 July 2009)
; AIATSIS, South Australian Settlement Framework
http://www.aiatsis.gov.au/ntru/docs/researchthemes/agreement/broadsettlements/
SouthAustralianSettlementFramework.pdf>.
102
Department of Justice (Vic), Native Title (24 December 2010)
Rights/Indigenous+Victorians/Native+Title/>.
2011 Taxation of Native Title Agreements 385
____________________________________________________________________________________
mining and large-impact land-use, providing for community benefits targeted to assist
economic, social and cultural development goals.
4 'Ancillary' and 'other' agreements
In many situations, an ILUA or future act agreement, or an agreement under a State
settlement regime, may be signed together with one or more so-called 'ancillary'
agreements such as a long term management agreeme nt (as is the case for the Argyle
Diamond ILUA) . These 'ancillary' agreements were particularly common prior to the
establishment of the ILUA process.
103
It is frequently the 'ancillary' agreement that
contains the real economic deal and that may generate payments and other benefits
that are significant to the economic development of traditional owners. These
'ancillary' agreements remain common in relation to future act agreements, and in
some states, in particular Western Australia, and they will generally need to be
recognised as part of the native title agreement process in the income tax law.
104
Both
the WCCCA and the Argyle Diamond Agreement replace the 'future act' negotiating
rules with a privately agreed process of consultation and negotiation in relation to
future mining or other a ctivity by the relevant parties on the subject land. These future
agreements by existing ILUA participants are not publicly registered or disclosed. The
Traditional Owner Settlement Act 2010 (Vic) allows for a range of supplementary
agreements. Another, massive agreement has just been announced by the Kimberley
Land Council, Woodside and the Western Australian State government regarding the
Browse basin Liquified Natural Gas precinct.
105
This agreement has not been done as
an ILUA, and will be implemented by a State Act.
B Design of a legislative tax exemption
The best approach in legislating the exemption is likel y to be to categorise all payments
or benefits under eligible native title agreements using the concept of 'non-assessable,
non-exempt income' that exists in the income tax statute.
106
Essentially, amounts
treated as non-assessable non-exempt income sit entirely outside the income tax law.
A useful precedent for design of a legislative exemption from CGT is the exemption
rule for compensation payments in s 118-37 of the ITAA 1997, which disregards any
capital gain relating directly to compensation or damages for any wrong, injury or
illness suffered in an occupa tion or personally (s 118- 37(1)(a) and (b)). A range of other
payments under various statutory schemes, have also been legislated as exempt under
this provision, including industry exit grants in relation to sugar and tobacco
industries and, formerly, re-establishment grants under a farm household support
scheme (ss 11837(1)(d), (f) and (g)). Anything of economic value provided by a S tate
or Territory government d epartment or public agency in relation to the National
Rental Affordability Scheme is exempt under s 11837(1)(j). The exemption would
need to be drafted so as to ensure that payments under eligible agreements would not
be taxed as ordinary income, for example from a business, as re nts or royalties, or as
____________________________________________________________________________________
103
Smith, above n 20, 25.
104
The NNTT recognises these 'ancillary' agreements in relation to future acts: NNTT, ILUA or
the right to negotiate process? A comparison for mineral tenement applications, (December 2008)
.
105
See Government of Western Australia, Browse LNG Precinct: Native Title Agreements (10
August 2011) .
106
ITAA 1997 s 623.
386 Federal Law Review Volume 39
____________________________________________________________________________________
profits from a profit-making venture. Analogies are found in the existing law, where
certain gains on venture ca pital investment are exempt both fro m CGT under Subdiv
118F of the ITAA 1997 and from taxation as ordinary profit under Div 51 of ITAA
1997. Another potential model is the exemption for personal injury structured
settlement annuities in Div 54 of the ITAA 1997.
As already explained, it is crucial that the legislative tax exemption support the
native title agreement-making process. It is not recommended that a legislative rule
simply pr ovide for the exemption of native title 'c ompensation' or types of payment.
This would generate lega l and compliance co mplexity as advisers and the ATO
attempt to characterise the bundle of payments under an agreement. The exem ption
should apply to payments arising under all types of agreements that are a result of a
negotiating process under the NTA or under t he other specified settlement
frameworks or laws that are set out above. The Treasury Paper suggestion that an
exemption could be tied to 'any agreement recognised or authorised under the NTA'
107
may be wide enough to achieve this goal, h owever this may not be adequate to capture
all S tate settlement f rameworks or 'ancillary' agreements. One approach could be for
the legislation to refer to the specific types of agreements discussed above, possibly by
reference to the relevant provision or Part of the NTA under which the agreement is
negotiated, registered or otherwise authorised. Alternatively, instead of incorporating
such a list into the income tax law, the general principle of exemption for native title
agreements could be stated and reference made to regulations under which the
relevant provisions and types of negotiation or agreement could be listed. T his may
make the regime more responsive to changes in the native title environment.
A legislative exemption should apply to money, property or other benefi ts received.
For example, leasehold or freehold land may be received, as in both the WCCCA and
the Argyle Diamond ILUA. Commitments to establish jobs, education and training, as
well as for general recognition and respect of traditional owners and cultural heritage,
are unlikely to be treated as taxable, however, a genera l exemption of all benefits
would avoid any uncertainty in this regard.
The legi slative exemption should be 'up front' and clear at the commencement of
native title negotiations. The Treasury Paper sug gests that one option could be 'to
allow an independent decision maker (such as the Commissioner of Taxation or the
NNTT) to declare that an agreement is a native title agreement to which the income tax
exemption extends'.
108
A difficulty with thi s proposal is that there would not be
certainty as to the tax treatment of the native title agreement until after it was made. In
the case of ILUAs, although registration occurs only at the end once a n agreement is
finalised, all parties would know from the beginning of negotiations that if the
agreement is registered as an ILUA, payments and benefits under it will be exempt.
As discussed above, most 'future act' negotiations are finalised privately and the ir
content is not disclosed. This may make it more difficult to administer the tax
exemption; nonetheless, it is appropriate to apply the general principle of tax
exemption to benefits provided under future act agreements, as they clearly relate to
acts that will affect native title in the future and the same framework is therefore
appropriate. For co nsistency and clarity, it should be made clear from the outset to a ll
participants that a consent agreement, even completed privately, under a future act
____________________________________________________________________________________
107
Commonwealth of Australia, Treasury, above n 4, 8.
108
Ibid 9.
2011 Taxation of Native Title Agreements 387
____________________________________________________________________________________
process is tax exempt. An issue in this regard is t hat for a native title claim group to
establish that they qualify for the exemption, it may be necessary for them to di sclose
the existence and terms of the future act agreement to the Commissioner of Taxation.
Many future act agreements are small in value and scope, and the administra tive cost
of requiring supervision or registration would be high. At le ast a basic disclosure of the
existence of an eligible agreement would seem appropriate, and this could support
transparency of agreement-making more broadly. An alternative is to require that
benefits under privatel y negotiated future act agreem ents are only exempt if paid into
an entity that is tax-exempt entity. This option is discussed in Part VI below. If a native
title claim group already has a tax -exempt PBC or charitable trust which carries out the
future act negotiation and receives any payments, this may not be a problem.
However, not all traditional owners are in this position. It would be u nfair to require
additional administrative steps to be taken for small future act negotiations in this case.
The Treasury Paper considers whether there should be any restrictions on the use of
tax-exempt native title payments. I sugges t that there should be no limit on the use of a
tax-exempt native title pay ment. It is a matter for the native title claim group who is in
negotiation with the government or private party to determine the best short and long
term use of native title payments.
109
For example, it should not be expected that such
payments be utilised for infrastructure funding or services in a remote community
where such facilities and services should be provided by government. The communal
nature of the underlying asset and the requirements of the NTA in relation to
consultation on native title decisions and authorisation of ILUAs, as well as other
protections under corporations and trust la ws provide sufficient safeguards for
members and beneficiaries.
FaHCSIA and the Attorney-General's Department have concurrently with the tax
reform process, been consulting on governance reforms aimed at generating 'leading
practice' native title agreements. One proposal put forward in that reform process is
that 'any new tax treatment should be conditional on adopting the governance
measures and leading practice principles ' that the government suggests are
important.
110
Governance and transparency in native title agreement- making certainly
need to be enhanced. However, a requirement for the tax exemption to be conditional
on outcomes at the end of agreement-making is not appropriate. Such a restriction at
the end of the process would work against providing certainty and fairness upfront in
native title negotiations. It would also potentially u ndermine indigenous autonomy
and decision-making about agreements and benefits.
A payment under an exempt native title agreement or other form of compensatio n
received by an individual should not be taxable (just as, under current law, a payment
in compensation for injury to that individual is not taxable under s 11837 of ITAA
1997). Importantly, however, where the individ ual is in receipt of government benefits,
a payment received by that individual, either directly or from a trust, may affect his or
her eligibility and the amount of benefits, through the application of income or assets
tests under the Social Security Act 1991 (Cth). This issue will need to be addressed by
policy-makers.
____________________________________________________________________________________
109
Not all stakeholders who participate in native title agreements concur with this view: eg,
see BHP Billiton, above n 86.
110
Commonwealth of Australia, Department of Families, Housing, Community Services and
Indigenous Affairs, above n 42, 7.
388 Federal Law Review Volume 39
____________________________________________________________________________________
A tax-exempt payment ma y be invested or dealt with to ge nerate further income or
gains. For exa mple, the Argyle ILUA provides for some amounts to be paid into a
discretionary trust. The tru stee may invest those amounts to derive income in the trust
which also a ccrues to the beneficiaries. Land subject to freehold or leasehold title may
be received in a settlement, and this could then be sold or rented out.
111
Any income or
gains generated as a result of an investment or dealing in such payments or assets
would be taxable in the usual way to the individual or entity. The only exception
would be if the invested capital or asset is owned by a tax-exempt entity. For example,
under the WCCCA charitable trust, a Western Cape Centre Property Trust oper ates as
an investment arm and its function is to quara ntine real estate and property
investments under a discrete entity.
112
It is only if this operates to invest amounts of
the charitable trust that income and gains would be tax-exempt.
However, there may be some kinds of payments which should be specifically
carved out from the basic exemption provision. One example is the payment of s alary
or wages. The Argyle ILUA and the WCCCA both provide for employment and
business opportunities to be creat ed for traditional owners and other indigenous
people in the region. The employment opportunity itsel f should be a n exempt benefit
(and likely would not be taxable in any event under current law). However, sala ry
paid to employees is clearly separate from the native title agreement itself and s hould
be taxable in the ordinary way. Similarly, payments unde r a personal contract for
provision of goods or services supp lied by a business or services of a traditional owner
should be taxable.
113
This raises an issue about payments to individuals that may
require further analysis. If payments to individuals under native title agreements are
tax-exempt, this may provide an incentive f or parties to draft agreements that make
'compensatory' payments t o individuals instead of providing meaningful employment
or business opportunities. This could have the negative effect of exacerbating
dependence on the mining company, rather than en hancing active engagement in the
'real economy'.
VI A TAX-EXEMPT INDIGENOUS COMMUNITY FUND
This Part addresses option (2) in the Trea sury Paper, which proposes the establishment
of a tax-exempt Indigenous Community Fund that could receive native title payments
and other forms of income or gain, free of income tax, to be utilised for the be nefit of an
indigenous community.
114
The Treasury notes that this second option could be either
____________________________________________________________________________________
111
As in both the WCCCA and the Argyle Diamond Agreement. Further examples are Mt
John Valley ILUA, NNTT Number: DI2009/002, registered 6 May 2009 and Broome ILUA:
Yawuru Prescribed Body Corporate ILUA, NNTT Number: WI2020/003, registered 24 May
2010 and Yawuru Area Agreement ILUA, NNTT Number: WI2010/004, registered 6
August 2010.
112
Western Cape Communities Trust and Western Cape Communities Co-ordinating
Committee, Strategic Plan 20092012 (2009) 5 5.
113
Remuneration for services is prima facie taxable. A receipt may not be taxable where it is
derived in respect of performance of a duty as traditional owner in relation to land: for
example, an occasional cultural heritage survey may be characterised as private in nature,
part of 'looking after country'. A statement would need to be provided to the mining
company in accordance with the Pay-As-You-Go withholding rules in this situation; see
Argyle Diamond Agreement, above n 1, cl 19.
114
Commonwealth of Australia, Treasury, above n 4, 10.
2011 Taxation of Native Title Agreements 389
____________________________________________________________________________________
an alternative to the first option of an exemption for native title payments, or could be
complementary and in addition to the first option.
The proposal for a tax-exempt Indigenous Com munity Fund is both broader and
narrower than the proposal for a tax exemption for native title agreements. The
proposal is broader, as it would ensure an exemption from tax for income and gains
derived in the Fund, even if these were not connecte d to native title agreements. It is
also broader, as it may be available to indigenous people and communities who do n ot
have native title rights or interests. The proposal is narrower, as it would require the
use and a pplication of those tax-exempt funds for particular, eligible purposes and
under a specific governance and regulatory process.
Option (2) has been developed as a response to dissatisfaction with the current
practice in which, to avoid the u ncertainty rel ating to tax treatment of native title
payments, many traditional owners and private stakeholders have negotiated for
native title payments to be mad e into tax-exempt charitable trusts, or PBCs that qualify
as charitable institutions. For example, this is done in respect of both the Argyle ILUA
and the WCCCA. In the WCCCA, all financial c ontributions from Comalco and the
government are d irected to a charitable tr ust (the Western Cape Community Trust) so
that the issue of whether the payments under the WCCCA would be taxable income
did not arise. The charitable trust structure both ensures tax -exempt status and
provides strict governance rules for investment and use of funds for eligible purposes
of publ ic benefit established under the trust deed. Anecdotally , it is understood that
some large private stakeholders, including re source companies, require the use of a
charitable trust in their negotiations with traditional owners. H owever, while
charitable trusts appear to have facilitated native title agre ement-making, there has
been considerable criticis m of the various limits, complexities and governance rules
associated with charitable t rusts that may not fit well with indigenous community and
governmental economic development goals.
Option (2) is also a response to the ca ll by indigenous leaders in the last few years
for assistance from the government, as a part of economic development strategies, to
establish a fund or entity to help increase capacity of communities over the long term
as well as for the immed iate relief of poverty, with a suitable governance structure and
tax-exempt status.
The existing exemption for qualifying charities from ta xation can be seen as a
government subsidy, or a form of indirect government expenditure in respect of the
eligible charitable purpose.
115
Structurally, the tax exemption depends on the status
and eligible purpose of the entity, rather than on the source of the income or gain. The
government subsidy, delivered through the tax system, may be analysed as a 'tax
expenditure' which is a departure from the comprehensive income benchmark
____________________________________________________________________________________
115
A detailed examination of the charitable tax exemption is being conducted by the
Melbourne Law School Not for Profits research project; see
index.cfm>. There is a significant analysis in US sources about the principle and policy of
the charitable exemption, see, eg, Edward H Rabin, 'Charitable Trusts and Charitable
Deductions' (1966) 41 New York University Law Review 912; R Musgrave, 'In Defense of an
Income Concept' (1967) 81 Harvard Law Review 44; L M Stone, 'Federal Tax Support of
Charities and Other Exempt Organisations: The Need for a National Policy' (1968) 20
University of Southern California School of Law Tax Institute 27.
390 Federal Law Review Volume 39
____________________________________________________________________________________
discussed above in Part IV.
116
The regulatory and tax treatment of charita ble
organisations is in a state of flux a t present. There are government proposals to tax
unrelated business income of charities, to reform regulation and g overnance and to
tighten up the statutory definition of not for profit organisations.
117
To the extent that option (2) would create an exemptio n for an entity that would be
receiving non-taxable native tit le payments, it simply operates to implement a
particular governance structure for these exempt payments. However, to the extent
option (2) has a broader scope, potentially exempting other forms of income or gains
that are received by the Indigenous Community Fund, it may be characterised as a tax
expenditure being a form of indirect government spending through the tax system,
justified on policy grounds be cause of the social and economic public benefit achieved.
As discussed in Part IV, native title payments may be characterised as 'social income'
with a public character. Arguably, such payments should be dealt with through a
process and e ntity established for the collective benefit of native title holders, the native
title group as a whole, or, possibly, for multiple grou ps of traditional owners or
indigenous peoples, by agreement, in a region. It has been suggested by some
stakeholders, and it is implicit in some aspects of government policy in this arena, that
an exemption from income tax for benefits or payments under native title agreements
should only be provided where a particular governance structure is established, so as
to ensure that the payments are put to collective benefit.
118
The remainder of this part considers the reasons for dissatisfaction with the
charitable trust structure in achiev ing the broad goals of a proposed Indigenous
Community Fund, and a number of particular issues that would need to be considered
and subject to further consultation if this proposal were to proceed.
A Proble ms with charitable trusts
As discussed by a number of co mmentators, including the Minerals Council of
Australia and various native title representative bodies, charitable trusts are 'not a neat
fit' for all goals of traditional owners or other stakeholders in agreement-making.
119
Furthermore, the current reform processes in relation to charitable trusts is generating
some uncertainty in how the law will apply to aspects of indigenous charitable trusts.
Problems in the use of charitable trusts arise from in herent limitations in the common
law and statutory definitions of charity and the administrative approach, or perceived
approach, of the Commissioner of Taxation to endorsement of entities a s tax-exempt.
____________________________________________________________________________________
116
Australian Government Tax Expenditures Statement 2010 lists the charitable exemption but
does not estimate a revenue cost of this exemption as a result of a lack of good data about
the size of the sector; see Commonwealth of Australia, Treasury, Tax Expenditures Statement
2010, above n 82.
117
Commonwealth of Australia, Treasury, Better Targeting of Tax Concessions (Consultation
Paper), (27 May 2011),
ContentID=2056&NavID=035>; Commonwealth of Australia, Treasury, Final Report on the
Scoping Study for a National Not for Profit Regulator, (4 July 2011)
.
118
See, eg, BHP Billiton, above n 86.
119
MCA et al, above n 3; Strelein , above n 3, 25; Levin, above n 3, 6; Lisa Strelein and Tran
Tran, 'Taxation, trusts and the distribution of benefits u nder native title agreements'
(Native Title Research Report No 1/2007, 2007) 910.
2011 Taxation of Native Title Agreements 391
____________________________________________________________________________________
Eligible charitable p urposes date back to the Statute of Elizabeth of 1601 (Charitable
Uses Act), as interpreted in Commissioners for Special Purposes of Incom e Tax v Pemsel,
120
and are essentially: the relief of poverty; the advancement of education; the
advancement of religion; and other purposes beneficial to the community (which has
come to be known a s purposes of 'public benefit').
121
It is clear that PBCs that hold
native title may be eligible for charitable status, and that indigenous communities may
establish charitable trusts for the purpose of pove rty relief and other community
benefits.
122
However, there is concern that eligible charitable purposes are too narrow
and prevent traditional owners from carrying out substantial co mmunity and
economic development goals. In particular, there has been uncertainty about whether
business or commercial activity is allowed to be conducted in a charitable e ntity, where
it is not mer ely incidental to a main, charitable purpose. The re cent High Court
decision in Commissioner of Taxation v Word Investmen ts Ltd
123
indicates that a charity
may conduct a business for profit, as long as the profits are used for the eligible
charitable purposes of the entity. However, a charity could not adopt a purpose of
commercial or busines s development as one of its core purposes, even where this is to
enable the native title community to benefit from economic development so as to
become sustainable in the longer term. A government pr oposal to tax unrelated
business income of charities is currently under consultation.
124
Second, there is concern about the scope of the definition of 'public' or 'public
benefit' required t o be a charitable trust . There are two a spects to this. There ma y be a
problem with benefiting native title holders related by blood (by virtue of defining the
group by their ancestors) or small groups of native title claimants. For example, the
Argyle Diamond Agreement provides for a portion of benefits to be paid to seven
specific family groups; this is done in a discretionary trust structure, not a charitable
trust. The issue is whether a PBC, holding title for native title claimants, benefits a
sufficiently broad class to qualify as a section of the 'public'.
125
In New Zealand, an
amendment has been made to the tax exemption relating to charities, which essentially
ensure that funds for the benefit of Maori clans are not excluded from eligibility
____________________________________________________________________________________
120
121
Australian Taxation Office, Tax Ruling 2011/4 addresses these issues in light of recent case
law; see Royal National Agricultural & Industrial Association v Chester (1974) 48 ALJR 304. See
also Ann O’Connell, 'The Tax Position of Charities in Australia: Why Does It Have to Be so
Complicated?' (2008) 37 Australian Tax Review 17; Gino Dal Pont, The Law of Charities (Lexis
Asia Pacific, 2010).
122
There is no direct authority, but a positive indication is in Northern Land Council v
Commissioner of Taxes (2002 ) 12 NTLR 86; see Fiona Martin, 'Prescribed Bodies Corporate
under the Native Title Act 1993 : Can they be exempt from income tax as charitable trusts? '
(2007) 30 University of New South Wales Law Journal 713; Fiona Martin, 'The legal concept of
charity in the context of Australian taxation law: The public benefit and commercial
activity, important issues for indigenous charities' (2010) 25 Australian Tax Forum 275.
123
124
Commonwealth of Australia, Treasury, above n 117.
125
Flynn v Mamarika (1996) 130 F LR 218 held that a charitable trust for the benefit of 12
Aboriginal clans was allowed as this was a sufficient section of the public. However,
whether this would apply for smaller numbers of clans in a native title PBC, or one clan
only, is not clear.
392 Federal Law Review Volume 39
____________________________________________________________________________________
because they benefit people related by blood.
126
There is also concern about a conflict
between broader community purposes or 'public benefit' and the specific obligations of
native title holders in law and culture.
Third, there is concern about whether charitable trusts are able to accumulate funds
for the long term.
127
This concern arises because of the general law requirement that
funds of a charity must be used for its defined charitable purposes. There has been
some anxiety about the ability to accumulate funds beyond 10 years; however, there is
no such rule in the la w, and where there is a clear purpose in the fund to accumulate
for the long term sustained benefit of a community, as in the Argyle Diamond trust,
this may be acceptable.
Finally, there are concerns among indigenous c ommunities and in government
about the substa ntial governance and administration requirements for charitable
trusts. Trusts w ith significant funds, such as the WCCCA and Argyle Diamond trusts,
have less of a problem in this regard than smaller PBCs: although governance needs
are concomitantly greater , expertise can be bought i n. For example, the WCCCA Trust
has a Board of Directors that consists of 3 directors from each sub re gional trust
(elected from traditional owner groups), one director from each of the regional shire
councils, one independent director to be elected and one invitee from each of the State,
CYLC and Comalco.
128
The trustees have stipulated that 60 percent of the annual
funding for the Trust is placed in long term secure investments to provide a
sustainable economic base for all of its beneficiaries and future generations. The
balance of the funds i s for current expenditure under ca veats for specific purposes to
be distributed amongst the regional sub trusts.
129
A coordinating committee made up
of all parties meets regularly and consults with traditional owners on issues such as
land management, regeneration plans and environmental applications.
130
A review of the WCCCA published in 2006 showed that while progress had been
made in emplo yment and training, cultural heri tage protection and the initial
establishment of governance and administration systems, areas in need of
improvement included weaknesses in the ongoing governance and adminis trative
capacity of the WCCCA trusts, and indigenous participation which was not keeping
pace with economic opportunities.
131
Smaller charitable trusts struggle with
governance and investment requirements. In all contexts, there is a significant need for
capacity build ing among tra ditional owners. T he governance needs of any
organisation t hat holds, in vests and distributes funds for the benefit of a community
will be s ignificant, and governance must be robust, both in terms of traditional owner
participation, consultation and decision-making and for the usual pr udential and
ethical reasons.
____________________________________________________________________________________
126
Fiona Martin and Audr ey Sharp, 'The Family Connection when a Charity is for the
Advancement of Indigenous Peoples: Australia and New Zealand compared' (AIATSIS
Issues Paper No 4(4), November 2009) 8.
127
Strelein, above n 3, 26, suggests that native title pr escribed bodies corporate have
sometimes been wound up due to failure to 'get the money out on the ground'.
128
Crooke et al, above n 58, 100.
129
Ibid.
130
Harvey, above n 89, 243.
131
Crooke et al, above n 58, 1056.
2011 Taxation of Native Title Agreements 393
____________________________________________________________________________________
B Legislative design of a tax-exempt Fund
A reform that establishes a specific exemption for an Indigenous Community Fund
could provide clarity for the long term governance of income and assets from native
title agreement-maki ng, for benefit of the indigenous community. I argue that such a
reform should complement the basic exemption of payments made under nativ e title
agreements from tax , discussed in Part V. However, substantial community
consultation is required to achieve the most suitable outcome and the suggestions
below are necessarily preliminary i n nature. It is a matter of fundamental importa nce
that indigenous communities are able to decide on the governance and institutional
form for the investment and expenditure of the 'social income' of native title pa yments.
An Indigenous Community Fund may have key objectives of addressing economic
and social disadvantage through direct provision of communi ty services and payments
to individuals, contributing to 'closing the gap'; allowing for provision of assistance for
long term well-being of individuals, for example including tax exempt contributions
towards individual superannuation; and a ccumulation for future generations.
Accumulation limits may need to be set: these might include maximums and
minimums, and the accumulation requirement might not apply where the annual
revenue stream is below a certain amount. The MCA has suggested accumulation of 50
percent of benefits for life of mine, or else a dollar amount, such as $500 000 per
annum.
132
Finally, a Fund might be able to support ongoing administration costs for
PBCs, as these are the key corporate entities that must manage the native title rights
and system indefinitely in the future.
With these purposes, an Indigenous Community Fund can be understood to have
features similar in various respects to a number of other kinds of entity: (1) a 'future
fund' for the c ollective benefit of the particular community (like the WCCCA
Sustainability Fund); (2) a community or municipal corporation that provides services,
invests in and supports social, business and governmental activities of the local
community; and (3) a charity with the purpose of advancing poverty alleviation,
education, religion or other purposes of public benefit. However, if the Fund would
simply replicate the requirements to establish a charity, t here is little point in
establishing a new form of tax-exempt entity.
In its list of potential activities or uses of the Fund, the Treasury Paper misses the
important purp ose of ensuring economic devel opment of communities. The
development of indigenous business and entrepreneurship and the establishmen t of
financial security and independence is acknowledged as central in the government's
Indigenous Economic Development Strategy, and is of great importance to indigenous
communities.
For example, an Indigenous Community Fund should have the ability to invest
some of its capital in economically beneficial activities and businesses i ncluding
indigenous businesses and business activity in indigenous communities. For example,
the Fund could decide to invest in a separate pr oprietary limited company which
would carry on a business, or to use a portion of funds for business loans or subsidies
and for business reinvestment. The Fund could prioritise indigenous business ventures
in conjunction with other mechanism s such as Indigenous Business Australia and the
Indigenous Land Corporation. These kinds of investments may not normally be
____________________________________________________________________________________
132
MCA et al, above n 3.
394 Federal Law Review Volume 39
____________________________________________________________________________________
allowed under the rules for trustees to invest prudently in respect of a charitable trust.
The proportion of capital that may be permitted to be used in this way should be
capped because of the risk involved in commercial enterprises. T he Fund should also
be eligible to receive profits from businesses (whether held directly or by investment in
a taxable company) which would, if used for eligible purposes of the Fund, be tax-
exempt, as is the case for a ll charities since Word Investments (and will remain the case
under the government's proposed reforms in relation to business income of charit ies).
An Indigenous Community Fund should be an optional alternative to other entity
structures includi ng a charita ble trust. A place remains for charitable trusts for
particular purposes for indigenous communities and individuals, such as educational
scholarships, as f or any other Australian citizen or group. However, if a Fund were to
be established with the a bove purposes, a charitable trust would not be necessary, as it
could be empowered to invest for and provide such scholarships.
1 A new category of exempt entity
A reform to establish a tax-exempt Indigenous Community Fund could be carried out
by inserting a new, separate category of exempt entity in Division 50 of ITAA 1997.
Potential models for the exemption include the current rules under which a municipal
corporation is exempt under s 5020 of ITAA 1997, or a society or association for the
purposes of promoting th e development of agricultural or industrial resourc es in
Australia is exempt under s 5040 of ITAA 1997. Endorsement may be required by the
Commissioner of Taxa tion or registration could be carried out by another government
body. An existing model requiring separate cross-departmental registration i s that
adopted for deductible gift status for environmental organisations (s 3055 and Subdiv
30E of ITAA 1997), which must be included on a register maintained by the
Environment Secretary, under the federal E nvironment Minister. Various conditions
are set out in Subdiv 30E, including a definition of principal purpose; of a public
fund; no pa yment of profits to members; various conditions if the entity is a body
corporate or a co-operative society; and reference to additional rules made by the
Environment Minister or Treasurer.
The Treasury Paper suggests that Funds of various scales could be established,
ranging from a small local group to a regional Fund covering a number of groups (and
not limited to native title holders). A Fund established for the purposes of a limited
group of beneficiaries woul d likely delineate that group on the basis of Aboriginal law
and custom.
133
A larger scale Fund such as a reg ional or State based one mi ght be one
way of accommodating some pooling of resources to achieve economies of scale and
better returns. This would be a matter for each native title group or indigenous
community to determine in negotiation and consultation with other groups, Sta te
governments and private actors.
2 Not for profit
The Indigenous Community Fund should be 'not for profit' in the sense of being
required to use its funds for designated purposes and not for distribution, except in
____________________________________________________________________________________
133
This would be based on the information provided in evidence led to establish the native
title claim in the first place see Adnyamathanha No 1 Native Title Claim Group v The State of
South Australia (No 2) [2009] FCA 359 Determination made 30/03/2009, among others. It
should not, however, be necessary that a native title claim is established, in order to set up
an Indigenous Community Fund.
2011 Taxation of Native Title Agreements 395
____________________________________________________________________________________
specific, designated and limited circumstances. Th is would be consistent with existing
treatment of tax-exempt entities.
However, there may be a case for allowing a Fund to make limited cash payments
to individuals, for example elders in a community, without putting at risk its tax
exemption. Such payments can provide recognition of individual native title claimants'
interests and contribute to ownership of the process because they enable individuals to
benefit immediately, in a small and visible way, from the native title agreement. Up to
a designated limit, such payments could be legislated to be exempt in the recipient
hands and not income for the purposes of social security payments. Payments in excess
of that limit may be not allowed or may be taxable. A further justification for this
exemption co uld be that many recipients will be below the threshold for payment of
income tax in any event.
134
The ability to make such payments to individuals could extend to distribution of
payments where they are compensation for individu al loss of particular native title
rights. For exa mple, in the Torres Strait where individual interests in land are well
defined, compensation is often paid to the individual land owner. If this was done
directly, the legislated tax exemption for payments under native title a greements,
recommended above, sho uld apply. If such payments were made indirectly, by
distribution from a Fund, it would be consistent for the exemption to apply in that case
also. However, this may generate undue complexity for Fund managers in the regime,
potentially requiring tracing of native title c ompensation payments over time. If
distributions to individuals were to be allowed, a general rule with a cash dollar
maximum per year would be simpler to administer.
3 Legal form and governance
Governance rule s for an Indigenous Community Fund should be designed to ensure
strong prudential regulation and investment expertise combined with indige nous
community leadership and consultation. The legal and governance issues for a Fund
should be the subject of further detailed consultation in their formulation.
The Treasury Paper suggests that a particular legal form, such as incorporation as a
corporation under the Corporations (A boriginal and Torres Strait Islander) Act 2006 (Cth)
(a 'CATSI' corporation), could be required for the Fund. However, it is not necessary to
limit the entity form of a Fund in this way for t he purpose of defining the tax
exemption. Again, to give the example of environmental organi sations regulated under
Subdiv 30E of ITAA 1997, additional conditions apply to organisations t hat are a body
corporate, but there is no specific kind of organisation prescribed .
The dec ision-making processes of the Fund would need to reflect indigenous law
and custom, contributi ng to effective participation, engagement and legitimacy. Issues
about administrative and compliance burden must be balanced with the goal of good
governance, especially for smaller Funds. Key requirements could include:
At least one and no more than half of the directors be experienced in
corporate and financial management;
____________________________________________________________________________________
134
This is particularly the case if the proposed carbon tax compensation reform is carried out,
which will raise the tax-free threshold to $18 200 for an individual: Clean Energy Act 2011
(Cth).
396 Federal Law Review Volume 39
____________________________________________________________________________________
A minimum number of directors be representative of the community being
appointed or elected in some manner as agreed;
For Funds of a certain size (or regional Funds), ind ependent responsible
persons sit on the board;
No noncommercial (non-arm's length) transactions with associates or
otherwise;
Annual audits and public reporting in accordance with the relevant
regulatory regime;
Annual returns submitted to the ATO;
Preparation of annual investment and distribution plans to be included in
audit requirements;
Internal (co mmunity) transparency and accountability procedures
including regular reporti ng, meetings and adequate and legitimate
representation.
A key question is who is the regulator for the Fund? Currently, many indigenous
corporations are regulated by the Office of the Registrar of Indigenous Corporations,
which regulates CATSI corporations (not all of these corporati ons are not for profit).
135
The government has recently announced the Australian Charities and Not for Profits
Commission, to be established as an independent office under the auspices of the
ATO.
136
There are issues as to whether a new tax-exempt Fund should be subsumed
into the regulatory frame work for not for profits, or whether there are sufficient
differences that this issue should be pursued independently. As a key purpose of the
Fund is accumulation and saving for the l ong term benefit of communities, some of the
prudential regulation applicable to superannuation funds may als o be relevant.
4 Transition
Existing agreements rely on charitable trusts or PBCs that have achieved tax-exempt
status as charitable institutions. Transitional rules w ill be required to enable 'migration'
of some or all of the existing asset s in these other entities to t he Indigenous
Community Fund without attracting tax consequences.
Communities may wish to leave some funds in a charitable trust with, for example,
a purpose of educational scholarships, but to invest some a ssets into a community or
regional Fund for purposes of long term wealth creati on and economic development. It
may be desirable to merge a number of separate, small charitable trusts, possibly held
for the benefit of a single community, or for the benefit of different communities in a
region and arising out of different agreements made over time, into a single Fund for
the benefit of all of the communities in the region. This would assist in eliminating
some of the governance, fees and compliance cost issues associated with a multitude of
small funds.
Legislation will be required to enable these various transitions in a simple manner
and tax-free. A 'rollover' model as is used in a number of other parts of the income tax
law could be suitable. More consultation is needed in defining such a rollover.
____________________________________________________________________________________
135
See Office of the Registrar of Indigenous Corporations (Cth) (2011) .
136
See Youtube, ACNC Taskforce (11 October 2011)
/acnctaskforce>.
2011 Taxation of Native Title Agreements 397
____________________________________________________________________________________
VII CONCLUSION
The native title regime has reached the crossroads where the 'market' and 'non-market'
pathways of human social development intersect.
137
Native title agreement-making brings more indigenous individuals and communities
into exchange relations with the wider economy and the state. Tax law may seem
remote from native title, but taxation is integral to defining the scope of these property
rights, and of the market exchange relationships and obligations between
governments, business entities and ci tizens. This article has considered the tax
treatment of native title payments as a matter of income tax law and principle. Some
native title payments recei ved by particular groups have been f ound to be ex empt
from tax by the Commissioner of Taxation because they are 'compensatory', however
this would not apply in all cases. As explained in Part III, this interpretation is not well
supported by the terms of the tax law. A more secure basis for the tax treatment of
native title payments is needed.
Part IV examined whether as a matter of tax principle, native title payments would
be treated as 'income' u nder the classic tax policy concept of personal net economic
gain. It was concluded that there are good arguments that native title payments are not
personal income, either because they are compensation for loss or diminution in value
of property ri ghts, or for the non-economic aspects of personal rights, or because they
are better characterised as 'social income' for collective benefit rather than as personal
gain. The analysis revealed that there are conceptual difficulties in applying the tax
policy concept of 'income' to native title. Native title simultaneously comprises
property and personal rights and responsibilities of individuals and comm unity
groups. Native title payments perform both a compensatory and an economic
development role to benefit indigenous communities as a whole. Thus, there is a clash
between the individualistic, market economy c oncept of personal income or economic
gain, and the collective, ina lienable and 'non-economic' features of native title in both
traditional and settler law. The analysis also identified that, while a principled
conclusion can probably be reached that some native title payments are not 'income',
others are likely to be treated as personal economic gain, in particular where native
title is not made out, or where agreements have a significant commercial flavour. It is
therefore necessary to decide, as a matter of broad public policy, how to treat these
kinds of payments under the diverse range of native title agreements.
Native title agreement-making is a key element in the ongoing struggle for a
settlement of land, economic justice and development issues in Australia's par ticular
historical context of indigenous dispossession. This a rticle supports a legislative tax
exemption for all payments under native title agreements (not just payments that
would qualify as 'compensation'), so as to provide certainty and to supp ort traditional
owners, business and governmen tal participants in native title agreement-making.
Agreement-making has enabled traditional owners, governments and other
stakeholders to move forward under processes set out in the NTA, without having to
resolve all of the complexities of native title, or t o finally resolve compensation claims
through the courts. It is important to resolve the tax treatment of native title so as to
provide certainty to participants, through legislative reform that confirms that all such
payments sit outside the tax system. The definition or class of native title agreements to
____________________________________________________________________________________
137
Langton, above n 44, 10.
398 Federal Law Review Volume 39
____________________________________________________________________________________
be treated as non-ta xable should be broad enough to cover the diversity of agreements
and innovative approaches to agreement-making tha t have been and continue to be
developed in the States and territories.
Finally, this article considered the option of a specifically designed tax -exempt
Indigenous C ommunity Fund w hich would pr ovide for the long term governance of
native title and ot her payments for the benefit of indigenous communities. This option
is supported in addition to the exemption of native title payments from taxa tion. The
inadequacies of charitable trusts, in particular for long term economic development
goals, and the fa ct that native title is not available for all Australian indigenous pe ople
are both good arguments for the enactme nt of such a tax- exempt Fund. The
fundamental goal of such a Fund should be to enable indigenous communities to
convert a communal benefit made under a collective agreement into economic and
capabilities development and relief of economic disadvantage of indigenous
individuals and families. It should be designed by communities in consultation with
government, enabling accumulation and good management of fund s for future
generations as well as to benefit the current generation of indigenous Austra lians.

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