Edited version of your written advice

Authorisation Number: 1051377787219

Date of advice: 24 May 2018

Ruling

Subject: GST and native title

Question

May you register for GST from the date of your establishment pursuant to section 23-10 of the A New Tax System (Goods and Services Tax) Act 1999 (“GST Act”) in relationship to your activities of holding and managing native title benefits and distributing funds to the beneficiaries?

Answer

Yes

Relevant facts and circumstances

On DDMMYY the X people (“the People”) lodged a native title claim in the relevant Court of Australia over certain areas of land in the Y region of Australia (“Native Title Area”). The claim was determined by the relevant Court in [date] and resulted in the People being granted native title rights under the Native Title Act 1993 (Cth) (“NTA”).

W (comprising K Pty Ltd and Z Pty Ltd ) on behalf of the participants in the R Associates (collectively referred to as R) wished to commence mining operations in the Native Title Area.

Because the People had lodged a native title claim over the Native Title Area, the NTA required R to negotiate access to the Native Title Area with the People, including negotiations concerning the payment of compensation to the People for consenting to the mining operations occurring in the Native Title Area.

Those negotiations culminated in the parties entering into a Claim Wide Participation Agreement (“Participation Agreement”) which sets out the payments (“Mining Payments”) to be received by the People for providing their consent to the conduct of the R’s mining operations in the Native Title Area. Under the Participation Agreement, the R Mining Payments are required to be paid into a “Benefits Management Structure” which must comprise of a charitable trust and a direct benefits trust.

You are currently reporting and remitting GST on the Mining Payments you receive.

In compliance with the Participation Agreement, the People caused the establishment of the X Trust (“XYZT”) and the X Direct Benefits Trust (“XDBT 1”) which together constituted the first Benefits Management Structure

Establishment of the XDBT

Following the establishment of the XYZT and the XDBT 1, it was considered that amendments were required to the XDBT 1 in order to ensure that the XBDT 1 satisfied the definition of Indigenous holding entity contained in paragraph 59-50(6)(b) of the Income Tax Assessment Act 1997 (Cth). This would ensure that the Mining Payments (being native title benefits under subsection 59-50(5)) would constitute non-assessable non-exempt income.

Rather than amend the XDBT 1, it was determined that a simpler approach would be to create a new trust as an Indigenous holding entity and have R pay the Mining Payments to the new trust instead of XDBT 1.

This resulted in the establishment of the XDBT which was created by Deed of Trust (“the Trust Deed”) dated [date], and is an Indigenous holding entity. The XBDT replaced the XBDT 1 ceasing operations at the time the XDBT was established ([date]).

Additional Mining Agreements

The People have entered into other agreements with other proponents (“the Other Proponents”) who wished to commence mining operations in the Native Title Area, including:

W Pty Ltd (ACN W);

X Limited (ACN X);

Y Pty Ltd (ACN Y); and

Z Pty Ltd (ACN Z)

These agreements set out the payments to be received by the People for providing their consent to the proponent conducting their respective mining operations in the Native Title Area.

Pursuant to these mining agreements, the People nominated the XDBT to receive such payments (or a portion thereof).

All references to Mining Payments are references to payments received into the XDBT, including the R Mining Payments and payments received pursuant to the above mentioned agreements.

The Mining Payments represent native title benefits and the XDBT holds, manages and distributes these native title benefits for the benefit of the People. The Mining Payments would represent “native title benefits” under section 59-50 of the Income Tax Assessment Act 1997 (Cth).

Operations of the XBDT

In general terms, the XDBT is a discretionary trust as, absent the exercise of a power by the trustee in their favour, the beneficiaries do not have a vested interest in any part of the trust fund and otherwise only have a right to be considered for a distribution from the trust fund.

In accordance with clause X of the Trust Deed, the Trust Objects are to hold the trust funds for the benefit of the beneficiaries in accordance with the terms of the Trust Deed. The beneficiaries of the XDBT are the People, the XYZT and certain other related corporations. The XDBT currently has X beneficiaries.

The XDBT is required to administer a large trust fund. Excluding investment income, the XDBT received Mining Payments of:

$X for the financial year ending 30 June 2015;

$Y for the financial year ending 30 June 2016; and

$Z for the financial year ending 30 June 2017,

and in those financial years made distributions to beneficiaries of $A, $B and $C respectively, claiming input tax credits of $X, $Y and $Z respectively.

Under the Participation Agreement and other mining agreements, the XDBT will continue to receive Mining Payments on a recurring basis which are likely to total millions of dollars, including in the financial year ending 30 June 2018:

$X million from X Pty Ltd alone in the financial year; and

$Y million of R Mining Payments.

The XDBT must only invest the trust fund in accordance with Chapter X of the Trust Deed, which contains sophisticated provisions designed to ensure the sustainability of the trust fund and the implementation of appropriate investment strategies (to be documented in an Investment Policy). An Investment Advisor must be appointed to assist with the investment of the trust fund in accordance with Chapter X.

In accordance with Chapter Y of the Trust Deed, the XDBT is also required to maintain a Future Fund if it accumulates income or capital in the trust. The purpose of the Future Fund is to ensure the sustainability of the trust fund for future generations of the People. Accordingly, there are restrictions on distributing the capital of the Future Fund.

Executive Office Administration

In accordance with Chapter X of the Trust Deed, the XDBT must provide the function of the Executive Office to administer the XDBT and to assist with the day to day management of the XDBT. Under clause Y, XDBT can appoint an entity to administer the Executive Office function.

M Company is the entity appointed to operate the Executive Office function of the XDBT. The functions of the Executive Office are set out in clause X and essentially involve all activities required to operate the XDBT.

On a practical level, the Executive Office function involves the following:

Currently, X staff are involved in operating the XDBT;

Dealing with the beneficiaries on a day to day basis, including the making of distributions to beneficiaries and dealing with any queries they may have;

Managing the investment function of the XDBT, including making investment decisions in accordance with the terms of the Trust Deed;

Arranging for, attending and undertaking the secretarial, governance and administrative functions of meetings of the People and the Traditional Owner Council;

Undertaking the accounting and finance function of the XDBT, including the preparation of financial reports for sign off by the board and arranging and monitoring the audit function.

Decision Making Processes

In general, all decisions concerning the operations of the XDBT are at the discretion of the trustee. However, the decision making processes are complex as the XDBT also has to respect and observe certain other decision making processes and committees contained in, or constituted in accordance with, the Trust Deed.

Under clause X, the Traditional Owner Council is established and is tasked with the role of, among other things, providing recommendations to the XDBT. The Traditional Owner Council has input into the operations of the XDBT as the Council acts as a representative of the People.

Preparation of Plans

Pursuant to Chapter X of the Trust Deed, the XDBT must carry out its activities and operations during a financial year in accordance with an approved Annual Plan. The Annual Plan must be in a form determined by the XDBT and must take into account the matters outlined in clause X. The Annual Plan must be reviewed within three months of the end of a financial year.

Pursuant to Chapter X of the Trust Deed, the XDBT must prepare a Strategic Plan for setting out the long term objectives and advancement of the Trust Objects. A Strategic Plan is formulated for a period of three years.

The trustee must also formulate a Distribution Policy (Chapter X and Schedule X) and an Accumulation Policy (Chapters X and Y).

In addition, the individual beneficiaries are required to prepare expenditure/financial plans outlining the intended use of the funds they receive as distributions (where the distributions reach a certain monetary limit). These plans are carefully reviewed by the XDBT to ensure that distributions will be appropriately used.

Financial Reporting Obligations

In accordance with clause X of the Trust Deed, the XDBT must keep, or cause to be kept, proper accounts in respect of all financial records, receipts and payments and all dealings connected with the XDBT and must prepare financial statements.

The financial statements must be audited in accordance with Chapter X and, in addition, the auditor must prepare an Auditor’s Annual Report that must contain an opinion on the matters outlined in clause X of the Trust Deed.

The XDBT does not deduct anything from the Mining Payments for services it provides to the People. It simply provides those services in accordance with the Trust Deed.

Where necessary, the XDBT engages the services of separate specialists such as the M Company, financial advisers, and lawyers. These services are distinct from those provided by the XDBT itself.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 Section 9-5

A New Tax System (Goods and Services Tax) Act 1999 Section 9-10

A New Tax System (Goods and Services Tax) Act 1999 Section 9-15

A New Tax System (Goods and Services Tax) Act 1999 Section 9-20

A New Tax System (Goods and Services Tax) Act 1999 Section 9-40

A New Tax System (Goods and Services Tax) Act 1999 Section 195-1; and

Income Tax Assessment Act 1997 (Cth) Section 59-50

Reasons for decision

In this reasoning, unless otherwise stated,

● all legislative references are to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)

● all reference materials referred to are available on the Australian Taxation Office (ATO) website www.ato.gov.au

● all legislative terms of the GST Act marked with an asterisk are defined in section 195-1 of the GST Act

Section 23-10 provides that an entity may be registered under this Act if it is carrying on an enterprise (whether or not its GST turnover is at, above or below the registration turnover threshold ).

Enterprise

An enterprise is an activity or series of activities done in certain ways as provided for under subsection 9-20(1) of the GST Act.

In particular, an ‘enterprise’ includes an activity or series of activities done:

(a) in the form of a business;

(b) in the form of an adventure or concern in the nature of trade; or

(c) on a regular or continuous basis, in the form of a lease, licence or other grant of an interest in property.

In the Form of a Business

Paragraph 177 of MT2006/1 (The New Tax System: the meaning of entity carrying on an enterprise for the purposes of entitlement to an Australian Business Number) provides that to determine whether an activity or series of activities amounts to a business, the activity needs to be considered against the indicators of a business established by case law. Paragraph 179 provides the following guidance in relation to the tests of determining whether a business exists

179. There is no single test to determine whether a business is being carried on. Paragraph 12 of TR 97/11 states that 'whilst each case might turn on its own particular facts, the determination of the question is generally the result of a process of weighing all the relevant indicators'. TR 97/11 can be referred to for a fuller discussion on whether a particular activity constitutes the carrying on of a business

The following indicators are relevant for your activities:

● a significant commercial activity

● a purpose and intention of the taxpayer to engage in commercial activity

● an intention to make a profit from the activity

● is recurrent or regular in nature

● the activity is carried out in a manner similar to that of other businesses in the same or similar trade

● activity is systematic, organised and carried on in a businesslike manner, and

● the entity has relevant knowledge or skill.

Applying the above to your situation:

Significant Commercial Activity

The management of Mining Payments in excess of $X million per year is a significant commercial activity.

A Purpose and Intention to Engage in Commercial Activity

You are required under the Trust Deed to ensure the sustainability of the trust fund and the implementation of appropriate investment strategies. You are required to and have appointed an investment advisor to assist with the investment of the trust fund monies and are also required to maintain a Future Fund if you accumulate income or capital in the trust.

This demonstrates your purpose and intention to engage in commercial activity. Your engagement of specialists such investment advisers and lawyers reinforces this intention.

Intention to Make a Profit

Your intention to make a profit to be able to make distributions to the beneficiaries is evidenced by Chapter X of the Trust Deed, which contains sophisticated provisions designed to ensure the sustainability of the trust fund and the implementation of appropriate investment strategies (to be documented in an Investment Policy). To this end Chapter Y provides for the appointment of an Investment Advisor to assist with the investment of the trust fund.

Furthermore, Chapter W provides for a Future Fund to ensure the sustainability of the trust fund for future generations of the People. For this to occur, profits will need to be made.

Recurrent or Regular in Nature

The terms of the Participation Agreements provide for regular, periodic payments from the various mining companies. In addition, the prescriptive terms of the Trust Deed provide for certain activities to be performed on a regular basis. For example Chapter Z of the Trust Deed provides that you must carry out your activities and operations during a financial year in accordance with an approved Annual Plan. Furthermore, pursuant to Chapter K of the Trust Deed, you must prepare a Strategic Plan for setting out the long term objectives and advancement of the Trust Objects. A Strategic Plan is formulated for a period of three years. In addition these activities will be continuing for some years to come. This evidences regular and recurrent activities.

Carried out in a manner similar to that of other businesses in the same or similar trade

Your activities bear many similarities to several other trusts established for and on behalf of Aboriginal people other than the X people. The terms of your Participation Agreement are similar to other such agreements made between other Aboriginal people and mining companies. The terms of the Trust Deed and your daily activities, in seeking to provide distributions to beneficiaries, are similar to trusts representing other native title holders around the country.

Systematic, organised and carried on in a businesslike manner

You have engaged lawyers to draft the Trust Deed. The use of professionals to draft such documents, and the highly prescriptive terms within the Trust Deed, evidence a systematic, organised, and businesslike approach. For example, the engagement of the M Company (a specialist management company) to perform the Executive Office function demonstrates your intention to run the trust professionally, in a businesslike matter.

Relevant Knowledge or Skill

In relation to native title matters, planning, and negotiations with mining companies, you have the relevant knowledge and skill. Where do not have the requisite skill, you have ensured someone with that skill is engaged. For example, clause X of the Trust Deed established the Traditional Owner Council which is tasked with the role of, among other things, providing recommendations to you. The Traditional Owner Council is an important function to your operation as the Council acts as the representative of the People. A further example of this is that Chapter Y of the Trust Deed provides for an Investment Advisor to be appointed to assist with the investment of the trust fund.

At paragraph 99 in Commissioner of Taxation v Swansea Services Pty Ltd [2009] FCA 402, McKerracher J stated the following in relation to “in the form of a business”:

Rather than these words supporting a suggestion that form alone may prevail over substance, they have the effect of extending the reach of ‘enterprise’ to those activities which are in the form of a business but would not, in the ordinary meaning of ‘business’ be considered such. But the activity must still be reasonably intended to be profit making in the case of an individual and cannot for any entity simply be a private recreational pursuit or hobby. That this is so clear from the exclusions to s 9-20 of the GST Act which, relevantly, rules out private recreational pursuits or hobbies or, in the case of individuals, (other than a charitable trustee) an activity or activities done without a reasonable expectation of profit or gain.

Taking the above into account and the highly organised, businesslike nature of your activities, we are of the view that you are carrying on an enterprise.

Registration

As you are carrying on an enterprise, pursuant to section 23-10 you may be registered for GST from the start of your enterprise.