Taxation of Native Title Payments: Convergence, Divergence and Reform

A recent UWA Law Review article analyses the ways in which the tax interests of Indigenous groups and resources companies converge and diverge and the practical impacts of the 2013 native title taxation reforms

WHAT YOU NEED TO KNOW

• After some years of neglect, the tax issues arising under native title land access agreements have recently become more important for advisers and in-house lawyers to understand, as the quantum of payments has increased and the Federal government and regulators have focused more attention on the issues.
• A recent UWA Law Review article co-authored by Ian Murray of Ashurst provides a comprehensive overview of the tax issues that practically matter in the context of recent native title land access agreements and benefits management structures: see link.
• In considering the tax issues from the perspectives of both Indigenous groups and resources companies, the article analyses areas of convergent and divergent interests for these groups, which is of strategic significance when negotiating land access agreements.
• The article also examines the impact of the Tax Laws Amendment (2012 Measures No 6) Act 2013 (Cth) "native title benefit" concession reforms, in light of practical experience in seeking to apply the provisions to land access agreements and benefits management structures.

Background

The relevance of taxation issues under native title land access agreements has grown over the last decade as the quantum of native title payments has grown and as the Federal government and regulators have focussed more attention on the issue. This relevance, along with the associated desire to achieve improved governance of native title payments, has led to more sophisticated and complex native title agreements and benefits management structures. Accordingly, it is incumbent on advisers and in-house lawyers to consider the issues at the agreement negotiation stage, not the implementation stage.

Ian Murray of Ashurst has recently co-authored an article for the University of Western Australia Law Review entitled The Taxation of Native TitlePayments for Indigenous Groups and ResourceProponents: Convergence, Divergence and Reform (2015 39(2) UWALR 99). The co-authors each regularly advise resource companies and Indigenous groups, therefore ensuring that the article covers practical tax issues from the perspectives of both Indigenous groups and resource companies.

Convergence and divergence of interests

Tax issues such as GST and PAYG withholding tax for failure to quote an ABN provide an area where Indigenous groups and resource companies have a strong incentive to adopt:

• uniform approaches for determining whether native title payments are taxable supplies; and
• uniform administrative approaches for internal accounts and payments systems,

in order to cope with uncertainty about the relevant suppliers.

For instance, the parties could do so by agreeing to a cooperative approach to applying for private binding rulings or by more clearly agreeing which parties are undertaking the primary obligations for which payments are made. In this regard, if there has been a native title determination and the determination is that a prescribed body corporate holds the native title rights and interests, then it may be possible to ensure that the prescribed body corporate is the primary supplier.

Similarly, for mining withholding tax, the tax is imposed on the native title party recipient of the native title benefit but the resource company payer is obliged to withhold an equivalent amount. Accordingly, both parties would benefit from certainty as to the amount that is subject to tax and that must be withheld.

However, divergent interests also exist. Resource companies are likely to prefer characterising native title payments as being for on-going assistance or a social licence to operate and are likely to prefer ongoing production payments to up-front milestone payments, in order to support income tax deductibility. This approach, though, would render the connection with underlying native title rights and interests more remote, thus harming the Indigenous group's pre-CGT capital arguments as well as their ability to access the 2013 "native title benefit" concession reforms.

The 2013 "native title benefit" concession reforms

The Tax Laws Amendment (2012 Measures No 6) Act 2013 (Cth) "native title benefit" concession reforms have only a limited impact on the extent to which Indigenous group and resource company interests converge or diverge. However, they provide a powerful new ground for Indigenous groups to obtain non-assessable income (in the form of non-assessable non-exempt or NANE income). The price of this is the need to:

• determine a basis for apportioning payments between those relating directly or indirectly to an act that is wholly or partly inconsistent with the continued existence, enjoyment or exercise of native title, and those payments relating to other matters (such as benefit sharing to generate a social licence to operate) – there is likely to be pressure to do so in the native title land access agreement itself;
• amend benefits management structures (or the requirements for such structures set out in overarching land access native title agreements) to ensure that the component entities meet the requirements of Indigenous holding entities, so that the NANE income can flow through the benefits management structure to the ultimate individual members of an Indigenous group; and
• maintain appropriate administrative records to enable separate ascertainment of NANE and non-NANE amounts as they flow through the benefits management structure.

For more information about the 2013 reforms, see our Native Title Update, Native Title Tax ExemptionNow Law, published on 26 June 2013.

Next steps

• Consider whether you are taking account of the relevant tax issues in your native title land access agreements, especially where a convergence of interests between Indigenous groups and resource companies enables cooperation to reduce tax risk.
• Consider whether your land access agreements or benefits management structures have the administrative systems in place to enable the 2013 "native title benefit" concessions to be accessed.