Private ruling: Native title benefits
Date of advice: 29 September 2015
Published: September 2015
Ruling period: Year ended 30 June 2015 to the end of the current arrangements
Date scheme commenced: From the date the relevant documents are executed and registered

Ruling: Q1: Are the Payments payable under the Agreement (the Payments) native title benefits under subsection 59-50(5) of the Income Tax Assessment Act 1997 ? | A1: Yes | Q2: Is the Trust an Indigenous Holding Entity as defined in subsection 59-50(6) of the ITAA 1997? | A2: Yes | Q3: Will the Payments received by the Trust form part of its net income pursuant to section 95 of the ITAA 1936? | A3: No.

Relevant facts and circumstances: The Applicant has, on their own behalf and on behalf of the People, a Native Title Claim over the relevant area registered under the Native Title Act 1993 (NTA) in Federal Court Actions. The Federal Court has not yet made a determination in relation to the Native Title Claims. Each member of the Applicant and the Native Title Claim group is an Indigenous person as defined in the ITAA 1997. An agreement (the Agreement) was entered between the Mining Venture (MV) and the People, which gives the MV the right to conduct certain activities on the land over which Native Title is claimed by the People. The Applicant, on their own behalf and on behalf of the People, has also entered and registered an initial Indigenous Land Use Agreement (ILUA) with the MV as well as an agreement under paragraph 31(1)(b) of the NTA (Section 31 Agreement). The ILUA gives the People's consent and support for MV's approved activities under the Agreement that affect native title as defined in the NTA. The Agreement, the ILUA and the Section 31 Agreement are ancillary agreements. The compensation provided under the Agreement for such use is for full and final settlement of any compensation entitlements as a result of the MVs approved activities (Compensation Entitlements). The payments provided under the Agreement (the Payments) are paid to a trust (the Trust) on behalf and at the direction of the People. All beneficiaries of the Trust are Indigenous persons or Indigenous holding entities as defined by income tax law.

Relevant legislative provisions: Income Tax Assessment Act 1936 section 95 | Income Tax Assessment Act 1997 section 6-5 | Income Tax Assessment Act 1997 section 59-50 | Native Title Act 1993 section 31 | Native Title Act 1993 section 223

Reasons for decision: Summary: Summary The Mining Benefit Payments payable under the Participation Agreement are 'native title benefits' pursuant to section 59-50(5) of the ITAA 1997. Detailed reasoning Subsection 59-50(1) of the ITAA 1997 relevantly states: To the extent that a *native title benefit would otherwise be included in your assessable income, it is not assessable income and is not *exempt income if you are an *Indigenous person or an *Indigenous holding entity. Subsection 59-50(5) of the ITAA 1997 states: A native title benefit is an amount, or *non-cash benefit, that: (a) arises under: (i) an agreement made under an Act of the Commonwealth, a State or a Territory, or under an instrument made under such an Act; or (ii) an ancillary agreement to such an agreement; to the extent that the amount or benefit relates to an act that would extinguish *native title or that would otherwise be wholly or partly inconsistent with the continued existence, enjoyment or exercise of native title; or (b) is compensation determined in accordance with Division 5 of Part 2 of the Native Title Act 1993 . | Detailed Reasoning - Note 1:: Agreements that can be covered by paragraph (a) include: (a) indigenous land use agreements (within the meaning of the Native Title Act 1993 ); and (b) an agreement of the kind mentioned in paragraph 31(1)(b) of that Act; and (c) recognition and settlement agreements (within the meaning of the Traditional Owner Settlement Act 2010 (Vic.)). | Detailed Reasoning - Note 2:: Paragraph (a) does not require a determination of native title under the Native Title Act 1993 . A native title benefit includes amounts arising under an indigenous land use agreement (ILUA) within the meaning of the Native Title Act 1993 and/or any ancillary agreements to the ILUA. The relevant benefits arise out of the Agreement, which provides that the payments made are in full and final settlement of any compensation claims that may be laid against the MV by the People. The Section 31 Agreement made pursuant to paragraph 31(1)(b) of the NTA satisfies subparagraph 59-50(5)(a)(i) of the ITAA 1997 as it is an agreement made under an Act of the Commonwealth. The ILUA has also been made under the NTA. The Agreement, being an ancillary agreement to the Section 31 Agreement and the ILUA, thus satisfies subparagraph 59-50(5)(a)(ii) of the ITAA 1997. Meaning of Native Title For the purposes of subsection 59-50(5) of the ITAA 1997 the payment must be for actions that affect native title. Section 995-1 of the ITAA 1997 states that the term "native title" has the same meaning as in the NTA. Subsection 223(1) of the NTA defines "native title or native title rights and interests" as follows: The expression native title or native title rights and interests means 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. Subsections 223(2) and 223(3) of the NTA extend the definition of native title contained in subsection 223(1) to include hunting, gathering or fishing rights and interests; and certain native title rights that are converted into, or replaced by, statutory rights and interests. The People have native title claims registered under the NTA in the Federal Court of Australia. Paragraph 59-50(5)(a) of the ITAA 1997 also requires that there is an act affecting native title that gives rise to the amounts. Section 227 of the NTA defines an 'act affecting native title' as 'an act … [that] extinguishes native title rights and interests or is otherwise wholly or partly inconsistent with their continued existence, enjoyment or exercise', which are also the words used in paragraph 59-50(5)(a) of the ITAA 1997. The agreements entered into allow non-native title claim parties to use a portion of the People's Native Title Claim for a purpose that affects the continued existence, enjoyment or exercise of native title by the People and the People's Native Title Claim. Thus it is accepted that the payments under the agreements are native title benefits in accordance with paragraph (a) of subsection 59-50(5) of the ITAA 1997. | Detailed Reasoning - Question 2: Summary As the beneficiaries of the Trust are limited to Indigenous persons or Indigenous holding entities, it is itself an Indigenous holding entity pursuant to section 59-50(6) of the ITAA 1997. Detailed reasoning Paragraph 59-50(6)(b) of the ITAA 1997 relevantly defines the term 'indigenous holding entity' as 'a trust, if the beneficiaries of the trust can only be *Indigenous persons or Indigenous holding entities…' The term 'indigenous persons' is defined in subsection 995-1(1) of the ITAA 1997 as an individual who is: a) a member of the Aboriginal race of Australia; or b) a descendant of an indigenous inhabitant of the Torres Strait Islands. Thus, the Trust satisfies the definition of an "Indigenous holding entity" as that term is defined in section 59-50(6) of the ITAA 1997. | Detailed Reasoning - Question 3: Summary The Payments are derived by the People and received by Trust on their behalf. The payments to the Trust form part of its trust estate, and thus do not form part of its net income. Detailed reasoning | Detailed Reasoning - Are the Native Title Payments made by the mining venture group to the Trust made on behalf of the People and/or at their direction?: Sections 6-5(4) and 6-10(3) explain that you will derive an amount of ordinary or statutory income 'as soon as it is applied or dealt with in any way on your behalf or as you direct.' For the People to have derived the income, it must have initially 'come home' to them under the ordinary derivation principles ( CT v Executor & Trustee Agency Co of South Australia (1938) 63 CLR 108). In this regard: • the payments are provided to the People as compensation for the permanent damage caused to the People's Native Title Rights and Interests and in full and final satisfaction of any Compensation Entitlements; • it is the People's Native Title Rights and Interests that have given rise to the Participation Agreement; • it is the People who are party to the contract and have contractually agreed to undertake the rights, obligations and actions contained in the Agreement in exchange for, amongst other things, the Payments; • the Trust only receives the payments at the direction of the People as they were nominated by the People; • the People have a contractual right to take action to recover unpaid Payments. These factors indicate that the payments are derived by the People and are made to Trust on the People's behalf or at their direction. The Payments are to be accepted by the People as full and final satisfaction of any Compensation Entitlements, which includes compensation under Native Title, of the Applicants and each member of the People. The Agreement provides that the People release the MV from, and acknowledge that the Agreement can act as an absolute bar against, all claims for Compensation Entitlements by or on behalf of the People. This is indicative that the payments are derived by the People and paid on their behalf or at their direction. Although it is the People's Native Title Rights and Interests that have given rise to the Agreement and it is the People who are a party to the contract, not the Trust, the People do not directly receive the payments but have nominated the Trust to receive them. As reflected in the wording of sections 6-5(4) and 6-10(3), a taxpayer need not have actual receipt of an amount to derive it as income for income tax law purposes. For the People to have derived the income it must have initially 'come home' to the People under ordinary derivation principles ( CT v Executor & Trustee Agency Co of South Australia (1938) 63 CLR 108). The taxpayer need not have actual receipt of the income, but they must at least have a recoverable debt ( Gasparin v. Commissioner of Taxation (1994) 50 FCR 73; 94 ATC 4280; (1994) 28 ATR 130, Farnsworth v. Federal Commissioner of Taxation (1949) 78 CLR 504; (1949) 9 ATD 33; Henderson v. Federal Commissioner of Taxation (1970) 119 CLR 612; 70 ATC 4016; (1970) 1 ATR 596; J Rowe & Son Pty Ltd v. Federal Commissioner of Taxation (1971) 124 CLR 421; 71 ATC 4157; (1971) 2 ATR 497). The Agreement gives the People, or someone on their behalf, the power to enforce payments under the Agreement. Evidently, the People have the power to enforce the Agreement, and have at least a recoverable debt and a standing to recover unpaid monies from the mining venture group. Thus, the payments have 'come home' to the People. Having regard to the terms of the Agreement, it is considered that the People derive the Payments, which are made to the Trust on behalf of and/or at the direction of the People. | Detailed Reasoning - Do the Native Title Payments received by the Trust form part of its net income?: Pursuant to section 95 of the ITAA 1936, the net income of a trust estate is the total assessable income of the trust estate calculated as if the trustee were a resident taxpayer less allowable deductions. In this regard, consideration must be had for what forms part of the 'income of a trust estate'. Draft Taxation Ruling TR 2012/D1 Income tax: meaning of 'income of the trust estate' in Division 6 of Part III of the Income Tax Assessment Act 1936 and related provisions (TR 2012/D1) provides at paragraph 71 that: For trust law purposes, income of a trust is essentially that which is a product of (that is, 'flows' from) the trust property - for example, rent from the letting of trust property or interest on loans of trust property. On that basis, it is likely to correspond in most cases with what would be ordinary income under section 6-5 of the ITAA 1997 (which may include exempt and non-assessable non-exempt amounts). Paragraph 86 of TR 2012/D1 further explains this points and states: 86. The many references in Division 6 to the 'income of the trust estate' show that the trust estate and its income are distinct concepts, the income being the product of the estate. The distinction was most recently commented upon by the Full Federal Court in Leighton v. Commissioner of Taxation . In that case, Mr Leighton was the trustee of a trust for the benefit of two companies, Salina and Kolton, and the Full Federal Court observed: The share sale proceeds deposited ... into the Westpac Bank account in Mr Leighton's name ... did not represent the income of either Salina or Kolton but rather represented the realisation of the income ... already derived by these companies. Upon being deposited, the proceeds were impressed with a trust in favour of Salina and Kolton, but they did not comprise the income of a trust estate. Rather, those deposited proceeds constituted or augmented a trust estate of which Mr Leighton was trustee. The income of that trust estate was such income, if any, as was later derived from the investment of that trust estate, e.g. any bank interest on the deposited proceeds. As discussed above, the Payments to the Trust are not a product of, and do not flow from, its trust property. The Payments made to the Trust are made on behalf of and/or at the direction of the People and thus form part of the trust estate of the Trust and not its net income. However, any monies earned on the received funds would be a product of/flow from the trust property and form part of the income of the Trust.