Edited version of your written advice

Authorisation Number: 1012760764129

Ruling

Subject: Native title claim

Question 1

Is the lump sum amount derived by the X people (the "X People") pursuant to X Agreement (the "X Agreement") a 'native title benefit' as that term is defined in section 59-50(5) of the Income Tax Assessment Act 1997 ("ITAA 1997")?

Answer

Yes.

Question 2

Is the Lump Sum amount settled on the XY Trust (the "XY Trust") by the State (at the direction of the X People in the relevant income year) the ordinary or statutory income of the XY Trust, such that the lump sum amount is required to be included in the XY Trust's Assessable Income or net income (as that term is defined in section 95(1) of the Income Tax Assessment Act 1936 (the "ITAA 1936"), in the relevant income year?

Answer

No

Question 3

With effect from the date of execution of the Deed of Variation, does the XY Trust constitute an 'indigenous holding entity" as that term is defined in section 59-50(6) of the ITAA 1997 for the purposes of section 59-50(5) of the ITAA 1997?

Answer

Yes.

This ruling applies for the following periods:

Year ending 30 June 2014

Year ending 30 June 2015

Year ending 30 June 2016

The scheme commences on:

1 July 2013

Relevant facts and circumstances

1. In 200X, a native title claim was filed on behalf of the X People;

2. The native title claim was subsequently accepted for registration in the Federal Court of Australia;

Negotiations and entry into the X Agreement

3. The essence of clause 4.1 is that the Parties consent to the establishment of the Project, and to the doing of all things ancillary to the Project, including the grant of the lease of Crown land over the X.

4. Clause 4.1 of the X Agreement provides that:

(i) the X Claimants' consent under clause 4 includes their agreement not to object to any of the acts referred to in clause 4.1; and

(ii) the X Claimants agree to do all things, including signing any documents, necessary to give effect to their consent to the acts referred to in clause 4.

5. The monetary benefits to be provided to the X Claimants under the X Agreement are set out in clauses 10 and 12.2. Details of various non-monetary benefits to be provided to the X Claimants are also contained throughout the X Agreement.

Establishment of the entities

6. Clause 8 and 9 of the X Agreement require the establishment of an "Approved Body Corporate" and a "X Trustee Company" to represent the X People and to manage and distribute benefits provided by the X People under the X Agreement;

7. To facilitate the above objective, clause 12 of the X Agreement requires the State and the X Claimants to procure the X Trustee Company to act as the trustee of the X General Trust and the X Charitable Fund;

8. On X date, the X Claimants incorporated the XY Limited;

9. The X Trust Deed was subsequently amended by a Deed of Variation on X date;

Payment of the Lump Sum Amount

10. In accordance with clause 12.2(a) of the X Agreement, the State is required to settle the sum of $X on the X Trust and the sum of $X on the X Charitable Trust, both amounts being compensation to the X People;

Relevant legislative provisions

Section 59-50 of the Income Tax Assessment Act 1997

Section 95(1) of the Income Tax Assessment Act 1936

Section 6-5 of the Income Tax Assessment Act 1997

Reasons for decision

Question 1

Is the lump sum amount derived by the X People (the "X People") pursuant to the X Agreement a 'native title benefit' as that term is defined in subsection 59-50(5) of the Income Tax Assessment Act 1997 ("ITAA 1997")?

Summary

It is considered that the X Agreement is the type of agreement that is intended to be covered by subsection 59-50(5) of the ITAA 1997. Accordingly, it is accepted that the payments derived by the X People are paid pursuant to an agreement within the requirements of paragraph (a) of section 59-50 of the ITAA 1997, and are considered to be native title benefits.

Detailed reasoning

Meaning of native title benefit

The explanatory material to the Native Title Exposure Draft explains at [1.16] that the definition of a 'native title benefit' in subsection 59-50(5) of the Income Tax Assessment Act 1997 ("ITAA 1997") covers agreements under Australian legislation that provide payments for an action affecting native title.

An 'action affecting native title' is one that extinguishes native title rights and interests, or is otherwise wholly or partly inconsistent with their continued existence, enjoyment, or exercise.

Subsection 59-50(5) of the ITAA 1997 defines a native title benefit as follows:

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.

Note 1 to subsection 59-50(5) of the ITAA 1997 expressly refers to Indigenous Land Use Agreements ("ILUAs") as being covered by paragraph (a) of the section.

The X People have a registered Native Title Claim over some X square kilometres of land in the X region of X.

The X People entered into negotiations with X, Y and Z (collectively referred to as the "Non-Native Title Claim Parties"), resulting in the creation of the X Agreement in June 200Y. Payments are made to the X people and the X Trust pursuant to this agreement.

The Non-Native Title Parties wish to use a portion of the land (the "Land") to develop X. The X native title claim (the "X Claim") has been made over the area of land that includes the X and the land on which the X project is proposed to be developed and operated.

Under the terms of the X Agreement, the X People have agreed to allow the Non-Native Title Claim Parties to use the X Land, by supporting the granting of X, and facilitating the development of the X.

Conclusion

Because the X Agreement is an agreement that facilitates the use of a portion of the X Native Title Claim for a purpose that affects the continued existence, enjoyment or exercise of native title by the X People and the X Native Title Claim, it is accepted that payments under the X Agreement are 'native title payments' in accordance with paragraph (a) of subsection 59-50(5) of the ITAA 1997.

Question 2

Is the Lump Sum amount settled on the X Trust (the "X Trust") by the State, at the direction of the X People in the relevant income year, the ordinary or statutory income of the X Trust, such that the lump sum amount is required to be included in the X Trust's Assessable Income or net income (as that term is defined in section 95(1) of the Income Tax Assessment Act 1936 (the "ITAA 1936") in the relevant income year?

Summary

The income is derived by the X People by virtue of their rights to native title and the X Native Title Claim. As such, funds are paid to the X Trust on behalf of the X People because of their native title rights.

The X Trust has no capacity to derive income from native title rights, as the native title belongs to the X People, and not the X Trust. Therefore, the money received by the X Trust on behalf of the X People is a capital contribution to the X Trust, and as such, it is considered non Assessable income of the X Trust.

Detailed reasoning

Consideration must be had for what forms part of a trust estate's income. 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 ("TD 2012/D1") provides at paragraph 71 that:

For trust law purposes, income of a trust estate 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 the above point, stating:

86. the many references in Division 6 of the 'income of the trust estate' show that the trust estate and its income are distinctive concepts, the income being a 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 the 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.

In the current circumstances, the nature of the payment to the X Trust under the X Agreement depends on who derives the income. Put another way, the issue to be considered is whether the payment made under the X Agreement is derived by the X People by virtue of their native title claim, or whether is it derived by the X Trust as the recipient of the payment.

Sections 6-5(4) and 6-10(3) of the ITAA 1997 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 X 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).

An analysis of the circumstances surrounding the payment of the lump sum amount to the X Trust demonstrates that:

• the lump sum amount is settled on the X Trust under the terms of the X Agreement, which represents compensation entitlements for the effect that developing the X will have on the claimed native title rights and interests of the X People;

• The lump sum amount is settled on the X Trust by the State (or by the State at the direction of the X People) and the X Trust must administer those payments in accordance with the terms of the X Trust deed;

• the X Trust is merely the commercial structure designed to hold part of the compensation entitlements of the X People on the terms of the X Trust Deed;

• the X Trust has no capacity to derive any income from the native title claim- it is the X People who derive the income by virtue of their naïve title claim;

• The lump Sum amount is a one off payment- it is not a recurring receipt.

Clause 19.1 of the X Agreement provides that the X People acknowledge and agree that the lump sum amount constitutes "full and final compensation". Further, clause 19.2 acknowledges that the X People release the Non-Native Title Parties from any liability for compensation, other than compensation agreed to under the X Agreement.

In accordance with the X Agreement, the lump sum amount is paid in full and final satisfaction of all compensation entitlements of the "X Claimants" (being the X People), which adds weight to the argument that the payments are derived by the X People, and not the X Trust. Further, pursuant to clause 9.6 of the X Agreement, the X Trust is not a party to the agreement, nor does it have any right to claim 'compensation' from the State under the terms of the X Agreement, or otherwise at law.

As expressed above, it is the X People's native title rights and interests that have given rise to the X Agreement, and it is the X People who are a party to the contract, not the X Trust. Nonetheless, the X People do not directly receive the lump sum payment, but have nominated the X Trust to receive it, as required by clause 12 of the X Agreement. As reflected in the wording of subparagraphs 6-5(4) and 6-10(3) of the ITAA 1997, a taxpayer need not have actual receipt of an amount to derive it as income for income tax purposes.

The above factors indicate that the payments are derived by the X People, and are made to the X Trust on the X People's behalf, or at their direction. Therefore, the payment to X Trust is not a product of, and does not flow from, its trust property. The lump sum payment is made to the X Trust on behalf of and/or at the direction of the X People, and thus, the lump sum amount forms part of the trust estate of the X Trust, and not its net income.

It should be noted that, despite the above, any money earned on the received funds will be a product of/flow from the trust property and form part of the net income or assessable income of the X Trust.

Question 3

With effect from the date of execution of the Deed of Variation, does the X Trust constitute an 'indigenous holding entity", as that term is defined in section 59-50(6) of the ITAA 1997, for the purposes of section 59-50(5) of the ITAA 1997?

Summary

Paragraph (b) of subsection 59-50(6) of the ITAA 1997 expressly requires that, for a trust to be an indigenous holding entity, its beneficiaries can only be Indigenous persons or Indigenous holding entities.

It is accepted that, from the date of the execution of the Deed of Variation, the beneficiaries of the X Trust are now limited to either indigenous persons or indigenous Holding Entities. Accordingly, X Trust qualifies as an indigenous holding entity for the purposes of subsection 59-50(6) of the ITAA 1997.

Detailed reasoning

Definition of an indigenous holding entity

Subsection 59-50(6) of the ITAA 1997 defines the term 'indigenous holding entity' as follows:

a) a distributing body; or

b) a trust, if the beneficiaries of the trust can only be Indigenous persons or Indigenous holding entities. or

c) a registered charity

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.

A 'distributing body' is defined in section 128U of the Income Tax Assessment Act 1936 (the "ITAA 1936") as:

a) and Aboriginal Land Council established by or under the Aboriginal Land Rights (Northern Territory) Act 1976;

b) a corporation registered under the Corporations (Aboriginal and Torres Strait Islander) Act 2006; or

c) (repealed)

d) any other incorporated body that:

i. is established by or under the provisions of a law of the Commonwealth or of a State or Territory that related to Indigenous persons; and

ii. is empowered or required (whether under that law or otherwise) to pay moneys received by the body to indigenous persons or to apply such money for the benefit of indigenous persons, either directly or indirectly.

The X Trust is a trust, and therefore, it will not satisfy the definition of an indigenous holding entity under paragraph (a) of subsection 59-60(6) of the ITAA 1997 because a distributing body must be a body corporate.

X Trust is not a registered charity, so it cannot satisfy the definition of an indigenous holding entity under paragraph (c) of subsection 59-50(6) of the ITAA 1997 on that basis.

However, because X Trust is a trust, it is possible for it to be an indigenous holding entity under paragraph (b) of subsection 59-50(6) of the ITAA 1997, but only if its beneficiaries are limited to 'indigenous persons' or 'indigenous holding entities'.

The X Trust Deed was amended via a Deed of Variation. It was acknowledged that the definition of 'beneficiaries' in the X Trust Deed prior to the Deed of Variation did not satisfy the requirements of paragraph (b) subsection 59-50(6) of the ITAA 1997.

The purpose of the Deed of Variation was to limit the beneficiaries under the Trust Deed to those persons whose native title rights and interests are affected by the acts consented to in clause 4 of the X Agreement.

Following the Deed of Variation, clause 2.1 of the Trust Deed now reads:

Beneficiary means

(a) each member of the X claim group;

(b) each trust in which only members of the X claim group can be beneficiaries (present, contingent or prospective);

(c) the Approved Body Corporate, provided it is a corporation registered under the Corporations Act (Aboriginal and Torres Strait Islander) Act 2006; and

(d) the Charitable Fund, provided it is a Registered Charity.

PROVIDED THAT the settlor or any person claiming under or in right of the settlor at any time will be excluded from the class of beneficiaries.

Conclusion

It is accepted that clause 2.1, as amended by the Deed of Variation, now limits the beneficiaries of the X Trust to either indigenous persons or Indigenous holding entities. As such, following the execution of the Deed of Variation, the X Trust qualifies as an indigenous holding entity under paragraph 59-50(6) (b) of the ITAA 1997.

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