Edited version of your written advice

Authorisation Number: 1012972764939

Date of advice: 1 March 2016

Ruling

Subject: Changes to native title agreement - ordinary or statutory income

Question 1

Will the approval and implementation of variations to the Agreement arise in any ordinary income to the XYZ Corporation Pty Ltd, in its capacity as trustee of Trust F?

Answer

No.

Question 2

Will the approval and implementation of variations to the Agreement arise in any statutory income to the XYZ Corporation Pty Ltd, in its capacity as trustee of Trust F?

Answer

No.

This ruling applies for the following period:

1 July 2015 to 30 June 2016

Relevant facts and circumstances

Summary

Trust F is a trust that was created as a result of an agreement between native title claimants and a relevant company and others to grant tenure for an business project in exchange for compensation payments and other consideration.

Over time, changes to native title claim law and to the native title claim groups that were parties to the agreement have meant that the operation of the arrangement became uncertain, and no payments have been made to Trust F for some years.

Trust F seeks this ruling to confirm that no ordinary or statutory income would arise if certain proposed changes to this agreement are made.

Background

Native Title Claim

In 19XX a native title determination application was lodged by certain members of the A, B and C language groups with the National Native Title Tribunal under the Native Title Act (Cth). This claim "the Claim" became a registered native title claim on this date.

Since the lodgement of the Claim, the claim has been subject to numerous amendments. Over time, claim group members from the A and C language groups withdrew from the Claim to pursue separate language group based native title claims. The Claim then became a native title claim made on behalf of the B people only.

The Claim was eventually combined with a number of other native title claims made on behalf of B people. In 20YY, the Federal Court determined that the B people hold native title rights and interests in the claim area.

The Agreement

The registration of the Claim gave the claimants the right to negotiate in relation to the business project under section 26 of the Native Title Act.

In 20ZZ, the claimants entered into an agreement ("the Agreement") to authorise the grant of tenure for the project, including future tenure, in exchange for compensation payments and other consideration.

The parties to the Agreement were:

• the relevant company ("X Co"); as manager and agent for and on behalf of other entities (the "Joint Venturers")

• the Applicants and Claim Group, and

• XYZ Corporation Pty Ltd as trustee of the XYZ Foundation.

'The Claim Group' referred to in the Agreement consists of the A, B and C Peoples on whose behalf the specific Claim was originally made.

'The Applicants' referred to in the Agreement were the individuals who lodged the Claim on behalf of the A, B and C Peoples.

Trust X

The Agreement provides for the payment of long term compensation payments by the Joint Venturers to the "XYZ Foundation" under clause 7.

The "XYZ Foundation" is defined in clause 1.1 of the Agreement as the trust created by a trust deed dated on or around 20ZZ for the sole benefit of XYZ Beneficiaries with specified objects and purposes, and with XYZ Corporation Pty Ltd as the trustee. It is also known as "XYZ Foundation No. 1" or "XYZ Charitable Foundation" ("Trust X"). Trust X is registered charity.

The Trust X Trust Deed was also executed in 20ZZ, with the founder and XYZ Corporation Pty Ltd (a limited liability company) named as trustee.

The Trust Deed for Trust X states that the trust created by the Deed is discretionary in nature and that the Trustee may distribute monies to the Traditional Owners.

Clause 5.1(2) of the Deed explains the Trustee is to maintain a Traditional Owner Register of people considered to be Traditional Owners in consultation with certain people of the A, B and C Language Groups who have been recognised as having traditional ownership of the Traditional Lands.

The Recitals to the Agreement state that the Claim Group have established the XYZ Foundation, of which the Trustee is trustee, for the purpose of managing and distributing funds for the benefit of the XYZ Beneficiaries, including compensation payable under the Agreement in connection with the effect of the Project, Project Works and Project Titles on the claimed Native Title rights and interests of the Claim Group.

The Agreement sets out the terms and conditions in relation to:

• the protection of the Claim Group's interests;

• the Claim Group's and the Applicant's agreement to the development and operation of the Project and Project Works within the Claim Area, the valid grant within the Claim Area of all Project Titles and Approvals required in connection with the Project including the Project Applications and

• the payment of compensation to the XYZ Foundation, for and on behalf of the XYZ Beneficiaries, in connection with the effect of these matters on the claimed Native Title rights and interests of the Claim Group.

Under Clause 7 of the Agreement various payments are to be made to the XYZ Foundation, including:

• Milestone Payments under Clause 7.3 (four individual lump sum payments at various specified points in time)

• Production Payments under Clause 7.4 (recurrent payments to be made during the mining phase ‐ quantum depending on the extent of mining and the sale price of minerals) and

• Exclusive Area Payments under Clause 7.5 (annual payments during the period between the grant of the lease and the date commercial production commences in the XYZ area).

Establishment of XYZ Foundation No. 2 (Trust F)

Clause 9 of the Agreement permits the replacement of the Trustee and Trust X by an alternative trust (clauses 9.1 and 9.2), a new trustee and trust (clause 9.3), or the establishment of ancillary (additional) trusts (clause 9.4).

The Trust F Trust Deed was executed in December 20AA, with the founder and XYZ Corporation Pty Ltd named as trustee.

An undated Deed of Assumption was made between:

• X Co. as manager and agent for and on behalf of the Joint Venturers

• XYZ Corporation Pty Ltd as trustee of the Trust X and

• XYZ Corporation Pty Ltd as trustee of Trust F.

Recital B to the Deed of Assumption provides that, pursuant to clause 9.4 of the Agreement, the Claim Group and the Trustee have established Trust F as an Ancillary XYZ trust to which compensation under the Agreement may be paid.

Recital D to the Deed of Assumption provides that the parties enter into the Deed of Assumption to bind the Trustee in its capacity as trustee of the Trust F to applicable provisions of the Agreement.

Clause 3(d) of the Deed of Assumption provides that, for the purposes of the deed, references in the Agreement to payments being made under the agreement to Trust X are to be construed as including payments being made to the Trust F in accordance with clause 9.4 of the Agreement.

Payment of Compensation Payments to XYZ Foundation and Ancillary XYZ Trusts

Clause 9.4 of the Agreement provided that if the Trustee of Trust F and the Applicants gave to the Joint Venturers a signed Direction Notice directing that all or part of any Compensation Payments under clause 7 of the Agreement be paid into an Ancillary XYZ Trust, then the Joint Venturers must pay those compensation moneys to a trust account with a bank established on behalf of the Ancillary XYZ Trust.

The Direction Notice dated 20AA is the only formal direction notice that has been issued. It is attached to the Deed of Assumption as Annexure 1. Clause 1 of the Direction Notice states that:

The Trustee and the Applicants request that any compensation payments currently due for payment under the terms of the Agreement be paid by the Joint Venturers as follows:

• $XXX,XXX plus GST to XYZ Corporation Pty Ltd as trustee of the XYZ Foundation No. 1 (Trust X) and

• the balance plus GST to XYZ Corporation Pty Ltd as trustee of the XYZ Foundation No. 2 (Trust F).

Trust F currently receives no portion of the Compensation Payments from the Joint Venturers and is not expected to receive any in the future.

The Trustee of Trust F has no ability or power to compel or coerce the Applicant to issue a Direction Notice directing that any Compensation Payments be paid to Trust F.

Proposed Amendments to the XYZ Agreement

The Applicants and the Joint Venturers are currently in the final stages of negotiation to incorporate changes to the groupings of native title claimants under the Agreement, and to bring the Agreement into line with the current native title claim context.

The proposed changes are as follows:

• A percentage of all Compensation Payments will be made to Trust X with X% being paid to designated "Approved Trusts". The Approved Trusts will be nominated by the three different language groups originally represented in the original Claim, and will all qualify as indigenous holding entities.

• A transition period during which all future Compensation Payments will be paid to the Approved Trusts, in order to make up payments that were not received by Trust F since the inception of the Agreement due to uncertainties which arose from the changes to the Claim as it was first constituted.

• Making provision for the X% of the payments to be paid to the Approved Trusts, to be split between the Approved Trusts and paid to the different language groups in accordance with the principles and proportions outlined in the Trust F Trust Deed: X% to the B People, X% to the A People and X% to the C People.

The Trust F will continue to exist as a trust and will continue to operate in terms of the Trust F Trust Deed. No variations to the Trust F Trust Deed are being considered. The changes of the Agreement do not include any provision or requirement for the transfer of assets from Trust F to the new Approved Trusts.

Relevant legislative provisions

Section 102-5 of the Income Tax Assessment Act 1997 ("ITAA 1997")

Section 104-10 of the ITAA 1997

Section 104-25 of the ITAA 1997

Section 108-5 of the ITAA 1997

Section 116-30 of the ITAA 1997

Reasons for decision

Question 1

Summary

The approval and implementation of variations to the Agreement will not result in any ordinary income arising to the XYZ Corporation Pty Ltd, in its capacity as trustee of Trust F.

Detailed reasoning

Assessable income consists of income according to ordinary concepts and other amounts which are included as assessable income under provisions of ITAA 1936 or ITAA 1997. Ordinary income is defined in section 6-5 of the ITAA 1997.

As an Australian resident trust, Trust F must include ordinary income it receives directly or indirectly from all sources, whether in or out of Australia, in its reported assessable income.

Trust F has not received a compensation payment under the Agreement since the Direction Notice submitted by it and the Applicants in 20AA. No consideration, compensation or payment is considered in the proposed changes to the Agreement.

Therefore, there are no income tax implications for Trust F with regard to the approval or implementation of the variations to the Agreement.

Question 2

Summary

The approval and implementation of variations to the Agreement will not result in any statutory income arising to the XYZ Corporation Pty Ltd, in its capacity as trustee of Trust F.

Detailed reasoning

Statutory income includes a net capital gain calculated under section 102-5 of the ITAA 1997. In broad terms a capital gain or capital loss on an asset is the difference between what the asset costs the taxpayer and what they receive when they dispose of the asset. The net capital gain is the difference between a taxpayer's capital gains and capital losses for an income year.

Generally a capital gain or capital loss is made when a CGT event happens in relation to a CGT asset.

CGT asset

The definition of a CGT asset is contained in subsection 108-5(1) of the ITAA 1997. It provides that a CGT asset is any kind of property or a legal or equitable right that is not property. Not all things often referred to as 'rights' will be assets for CGT purposes. To be an asset, a right must be recognised and protected by law.

Trust F does not have any vested or enforceable right to receive a compensation payment under the Agreement for the following reasons:

• Any payment to Trust F is contingent upon the submission of a Direction Notice to that effect from both the Applicants and the Trustee of the Trust X.

• The Trustee of Trust F has no power to compel the Applicants to issue a Direction Notice directing that any payments be made to Trust F.

• Trust F only received one payment under the Agreement as a result of the Direction Notice dated December 20XX. There is no expectation of further payments.

As Trust F does not have a vested or enforceable right to receive payment under the Agreement, it cannot be said that it has an asset for CGT purposes.

CGT event

CGT events are the different types of transactions or events that may result in a capital gain or capital loss.

Section 104-10 of the ITAA 1997 states that CGT event A1 happens if you dispose of a CGT asset. You dispose of a CGT asset if a change of ownership occurs from you to another entity.

A taxpayer makes a capital gain from CGT event A1 if the capital proceeds from the disposal of the asset are more than its cost base.

CGT event C2 is described in subsection 104-25(1) of the ITAA 1997. It happens if the ownership of an intangible asset ends by the asset:

(a) being redeemed or cancelled; or

(b) being released, discharged or satisfied; or

(c) expiring; or

(d) being abandoned, surrendered or forfeited…

As Trust F does not have a right under the Agreement that can be considered to be a CGT asset, it follows that any transfer to another entity of the contingent expectancy of payment cannot be considered to be a CGT event. Therefore CGT event A1 does not occur.

Following the proposed changes to the Agreement, the Trustee of Trust X and the Applicants are still able to nominate that payment be made to Trust F, however they will also be able to nominate the additional Approved Trusts. Any right of Trust F to be nominated to receive funds therefore will not be changed by the proposed changes to the Agreement.

As there is no right that is being disposed of, or cancelled, it follows that there is no applicable CGT event. Therefore CGT event C2 does not occur.

Capital proceeds

Generally, the capital proceeds from a CGT event are the total of:

• the money you have received, or are entitled to receive, in respect of the event happening, and

• the market value of any other property you have received, or are entitled to receive, in respect of the event happening (worked out as at the time of the event) (subsection 116-20(1) of the ITAA 1997).

If there are no capital proceeds from a CGT event, subsection 116-30(1) operates to treat the capital proceeds from the CGT event to be equal to the market value of the asset.

As discussed above, it is considered that Trust F did not have a CGT asset under the Agreement, and therefore no CGT event occurred. Further, there is no market value to the right to be considered for payment under the agreement, as any such right or expectancy is not enforceable under the Agreement.

It follows that Trust F would not receive any capital proceeds under the proposed changes to the Agreement.

In summary, as Trust F has no CGT asset, would not receive any capital proceeds, and no CGT event would occur, there are no CGT or other statutory income implications for Trust F under the proposed changes to the Agreement.