Minerals council of australia

Submission on the Exposure Draft Materials to Provide Clarity on the Tax \ Treatment of Native Title Benefits

August 2012
SUPPORTED By:

(Co-badged by Queensland Resources Council, Tasmanian Minerals Council Limited, South Australian Chamber of Mines and Energy)

Minerals Council of Australia – Submission on the Exposure Draft Materials to Provide Clarity on the Tax \
Treatment of Native Title Benefits 
Introduction
The Minerals Council of Australia (MCA has advocated strongly about the opportunity for, and the importance of, native title benefits provided by industry being used to facilitate greater economic development and wealth creation for current and future generations of Indigenous people.  We believe that using such an approach will establish vibrant, diversified and sustainable regional communities, particularly in areas where there is limited mainstream economic opportunity.
The purpose of this Exposure Draft is to confirm that native title benefits, provided under the Native Title Act 1993 or under an agreement made under an Australian law to the extent that the payment or benefit relates to native title will not be subject to income tax (including capital gains tax. 
While we agree with the Government’s underlying policy objectives we are deeply concerned about the unintended adverse consequences from this measure.  Specifically we are concerned that it may be counterproductive to those objectives and may undermine decades of progress in relations between Indigenous Australians and the minerals industry, founded in a mutual desire for sustainable intergenerational benefit for Indigenous communities from mining operations on traditional communal lands.
As we have said throughout the course of successive Governments’ consideration of native title and Aboriginal land rights legislation, we are committed to working with Government to ensure that the taxation treatment of payments, in all of their complex forms, from agreements contribute to and do not detract from the objective of intergenerational benefit through the facilitation of social and economic development within and for those Indigenous communities.
The MCA recommends that: a better approach to the Government’s current proposals would be one which:
•	broadens the range of agreements between proponents and Indigenous groups that could receive preferential tax treatment;
•	Links preferential tax treatment to a vehicle (for example an Indigenous Community Development Corporation)  and purposes that deliver specific community and economic development outcomes for current and future generations of Indigenous Australians not the narrower class of native title claimants and holders. The MCA approach would result in:
•	Tax-exempt status for benefits used for charitable or genuine community and economic development outcomes, including funds for those purposes that are accumulated for future generations.
•	Tax-reduced/effective for benefits that are used for specific purposes which are already recognised and obtain special treatment within the existing taxation framework, such as pensions and superannuation funds.
•	Taxed as income for benefits used for other purposes including benefits provided to individuals; and
•	Embeds good governance and capacity building to support effective decision making.

Discussion
The MCA specific concerns are that the proposed amendments:
1.	do not adequately address the range of agreements that are being made with native title parties; 
2.	proceed on the basis that benefits under native title agreements are exclusively compensatory in nature in the sense that they address extinguishment, impairment and/or suspension of native title; and
3.	do not provide incentive for good governance, community and intergenerational benefit regarding management and distribution of benefits.
Types of agreements
The Government’s focus on the tax treatment of financial and non-monetary benefits (i.e. benefits) made pursuant to agreements under the NTA (or relevant State or territory legislation) which relates to an act affecting native title or native title compensation covers only a narrow range of the sorts of agreements that are made.  The MCA agrees with the Government’s stated views that native title agreements provide a valuable opportunity to establish and continue a sound relationship between Indigenous people and industry, and that native title agreement-making is an ongoing feature of economic and social relations in Australia.  These views are particularly important to our members as the development of mining projects involves significant investment and a long term presence in areas where resources are located.   Further, these areas are in many instances, remote and regional areas where there are often a high percentage of Indigenous people in the local population.   
Agreements are negotiated with Indigenous groups, usually (but not exclusively) on the basis of a group’s native title claim or determined native title.  However agreements commonly also make provision to provide benefits where native title:
•	may ultimately be found not to exist because a group has not been able to establish connection sufficient to establish native title; and
•	has been determined to be extinguished by subsequent dealings in land.
Agreements may not end up being native title related depending on the outcome of a group’s native title claim or alternatively, may not be native title related from the outset if there is no native title claim. 
In addition, an agreement may not be made under an Act of the Commonwealth a State or territory such as an Indigenous Land Use Agreement (ILUA) or an agreement under the “right to negotiate” provisions.  Agreements may involve ancillary ILUAs but can themselves be detailed commercial documents that are not made under any legislation.  
Thus the Government’s proposals do not provide clarification on the tax status of payments made under the types of agreements that are being made with Indigenous groups. For those agreements, substantial effort and cost will be required in seeking ATO determination and advice on the appropriate tax treatment. 
The Government’s proposals also encourage a narrow approach to agreement making focussing strictly on the legal effect of third party land use on native title rights and interests.  This narrow approach is contrary to the Government’s objectives in developing the proposed amendments.   The MCA notes that in commencing consultation in 2010 the Assistant Treasurer said that “the Government is committed to ensuring a more flexible, less legalistic approach to native title that delivers practical outcomes for Indigenous Australians.  The tax system can play a valuable role in this area by ensuring that it supports the resolution of claims and the management of benefits under native title agreements”.
The MCA recommends broadening the range of agreements between proponents and Indigenous groups that could receive preferential tax treatment.   
The characterisation of payments as compensatory
The Government’s proposed amendments proceed on the basis that benefits under agreements are made only to address extinguishment, impairment or suspension of native title and thus are fundamentally compensatory in nature.  Proponents however, make agreements to address a range of issues that are relevant to their relationship with groups, not just the legal effect of their titles and activities on native title.
The benefits provided to groups under agreements can be quite substantial and, while they are provided in satisfaction of any compensation liability, compensation is an unascertained sub-set of the total payment.  Further compensation is often a small portion of the total benefits which may also include benefits directed to land access, community development and measures aimed at improving indigenous employment and business development outcomes.  There is unlikely to be an agreed spilt between benefits provided by way of native title compensation and additional benefits. 
 Importantly, negotiations are greatly assisted by avoiding disputation over the percentage of benefits that are to be attributable as compensation, given the complexity of the issues in assessing how native title has been affected or will be affected and the lack of case law as a guide on quantifying compensation.  Moreover, in the case of an agreement with a native title claim group, if native title is ultimately determined not to exist then benefits under the agreement can no longer be considered compensatory.  
As mentioned above, the Government’s proposals potentially encourage a narrow legalistic focus on native title compensation in agreement negotiations rather than an approach that prioritises addressing the long term relationship between proponents and Indigenous groups.  
Governance and distribution of native title benefits
In its discussion paper Leading practice agreements: maximising outcomes from native title the Government stated its own objectives as being inter alia, that benefits received under agreements be adequately preserved and deployed for the benefit of both current and future generations. 

Similarly MCA members are concerned to ensure that:
•	benefits provided under agreements are managed and distributed for the benefit of the group, with limited capacity for individual benefit unless it is tied to ends such as relief of poverty, health, education and genuine community development outcomes ; and
•	intergenerational benefit is secured through accumulation of an adequate portion of the benefits in properly managed tax effective funds.

Where benefits are made to individuals the MCA believes that benefits should be subject to the ordinary tax treatment in the hands of the recipient.
The Government’s proposal to characterise native title benefits as fundamentally compensatory in nature and apply a non-assessable non-exempt classification to the payments even in the hands of individuals risks subverting its own policy objectives, as it removes any incentives to ensuring benefits that do qualify are managed and applied to maximise current and intergenerational benefit to the group.  
There could also be significant pressure by groups (especially those with determined native title) to modify the controls on management and distribution on benefits that apply under existing agreements on the basis that some of the benefits are compensation.
The taxation treatment of benefits provided to groups where no native title exists is not clarified at all, yet such agreements would promote the Government’s policy objectives in promoting a sound relationship between Indigenous communities and industry, which is also what the MCA and its members seek to achieve.
The Government’s objectives would be promoted if taxation advantages attached, not to the benefits, but to the entities (including charitable and discretionary trusts which appear to have been excluded from the proposals) and the purposes to which those entities can apply the benefits. The preferential tax treatment would be linked to purposes that deliver specific community and economic development outcomes for current and future generations of Indigenous Australians not the narrower class of native title claimants and holders. In summary this approach would result in:
•	Tax-exempt status for benefits used for charitable or genuine community and economic development outcomes, including funds for those purposes that are accumulated for future generations.
•	Tax-reduced/effective for benefits that are used for specific purposes which are already recognised and obtain special treatment within the existing taxation framework, such as pensions and superannuation funds.
•	Taxed as income for benefits used for other purposes including benefits provided to individuals.
 It is important that the entities meet certain standards in relation to the management and distribution of benefits, including limitations on the transfers to individuals untied to health, education or other relief of poverty or capacity building purposes (i.e. minimum management standards).  This would mean that:
•	clarity would be provided for the full range of community agreements that mining proponents are providing benefits under; 
•	agreements with Indigenous communities that addressed disadvantage in those communities would be encouraged; and 
•	good governance arrangements in relation to those benefits could be secured.
The capacity of those entities to hold benefits in perpetuity and to accumulate funds in order to address intergenerational benefit should also be confirmed.  .
This proposal would mean that where an entity does not meet minimum management standards and apply the benefits for the purposes that attract the preferential tax treatment, the preferential tax treatment would be lost.  The MCA’s proposal however, is that where benefits are subject to minimum management standards and the benefits are applied for the purposes that attract the preferential tax treatment then, whether they are compensation or not, they will attract the preferential tax treatment.
Charitable trusts are currently the most appropriate vehicle to secure intergenerational benefit. However, charitable trusts have limited purposes that do not permit community and economic development measures and there is some doubt as to the extent they permit the accumulation of funds for intergenerational benefit. .  In an attempt to overcome this restriction some parties have also included discretionary trusts in tandem arrangement with charitable trusts to enable a wider set of purposes to be addressed.  Discretionary trusts of course do not enjoy the same tax advantages that charitable trusts do. 
The MCA together with the National Native Title Council has developed the concept of an Indigenous Community Development Corporation (ICDC), an alternative trust vehicle with related governance requirements and preferential tax treatment.  Further detail on the ICDC is provided below (in Box A).
Box A.
Indigenous Community Development Corporation (ICDC)
The ICDC concept is intended as a special purpose vehicle for managing native title and other payments negotiated by traditional owners and Indigenous Groups to maximise economic and social benefits, reduce administration and provide preferential tax treatment to maximise the value of those funds.  The ICDC will provide an effective single holding place for funds negotiated through native title and other agreements that can accumulate over time to deliver a substantial service or facility for Indigenous people, their communities and future generations.
Unlike models under current tax legislation, the ICDC will have the capacity to provide incentives for Indigenous peoples to not only fund community development activities to alleviate social disadvantage, but also economic development activities enabling individuals and families to participate in the mainstream economy.  The ICDC would also support the accumulation of funds for the benefit of future generations.
An ICDC can be entered into on a voluntary basis and can be delivered at a scale ranging from small local funds to large regional funds that could be state based in some cases.  The ICDC will be underpinned by strong governance and management processes through a model constitution that includes a set of minimum key principles, supported by a mechanism for registration, capturing and sharing information and delivering governance training. The ICDC Compliance with the governance requirements will establish the minimum criteria for the preferential tax treatment.

Limitations on individual benefit

The MCA is aware that limitations on individual benefit may be seen as discriminatory on the basis that non-Indigenous Australians can enjoy individual benefits derived from their proprietary rights and interests.  Native title is a sui generic – or unique – communal title that belongs to the current and future community of native title holders.  Accordingly, measures need to be in place to ensure that benefits derived from native title agreements are applied for the benefit of the current and future community of native title holders.  The equity or non-discrimination point is addressed in that native title holders can also acquire conventional property rights and interests.  Communally held benefits derived from native title can and should be directed to wealth generation, education and other measures to lift the capacity of individuals in the group to participate in main stream economic life.  

While the unique, communal nature of native title is the substantive answer to the need to ensure that funds are applied primarily for community benefit, the minerals industry has also lessons from the past.  One of the lessons over the last 20 years has been the divisive effect in Indigenous communities of native title benefits being paid directly to individuals.  The best known example is practice of mining companies operating in the Goldfields region of Western Australia during the 1990s of making substantial payments to registered applicants in order to secure grants of tenure, which resulted in multiple overlapping native title claims being made.  Where a few individuals can secure control over benefits by virtue of a privileged position in the group, it has a divisive effect on the whole community.
Further issues
Definition of ‘beneficiaries’ 

The MCA and the NNTC express concern at the limited definition of beneficiaries which is provided in clause 1.15 of the Exposure Draft.  Specifically, the limitation of beneficiaries to Indigenous people may have unintended consequences for the investment of communal funds in community infrastructure such as remote area health services, which may also service a small proportion of non-Indigenous clients.  It should also be noted that the limited focus on beneficiaries may be inconsistent with the requirements for charitable trusts in relation to the public benefits test.  It is important that the development of this legislation is not conducted in isolation of the proposed ‘Not for Profit Sector Reforms’ in the Charitable Act.

Short term and individual focus 

The focus of the Exposure Draft appears to be on how the proposed NANE income treatment will affect the immediate recipient (potentially in most cases individuals) in the short term.  It is the MCA’s and NNTC’s view that there is inadequate consideration given to the tax treatment for investment funds (for future community and economic development initiatives and future generations).  The example provided in Clause 1.22 of the explanatory notes, if implemented, would discourage long term investment strategies, which is contrary to the objective of agreements that are about recognising impacts on native title rights of both current and future generations.  If distributions are not able to be made in this context it may not be able to be utilised as an effective catalyst for social and economic development towards Closing the Gap.  

The MCA supports the policy intent of applying preferential tax treatment to a vehicle and purposes that deliver specific community and economic development outcomes for current and future generations of Indigenous Australians.  We consider that the focus of the current Exposure Draft does not provide an optimal framework to achieve these shared outcomes. 
Conclusion
The MCA recommends that a better approach to the Government’s current proposals would be one that:
•	broadens the range of agreements between proponents and Indigenous groups that could receive preferential tax treatment;
•	Links preferential tax treatment to a vehicle (for example an ICDC) and purposes that deliver specific community and economic development outcomes for current and future generations of Indigenous Australians not the narrower class of native title claimants and holders. The MCA approach would result in:
•	Tax-exempt status for benefits used for charitable or genuine community and economic development outcomes, including funds for those purposes that are accumulated for future generations.
•	Tax-reduced/effective for benefits that are used for specific purposes which are already recognised and obtain special treatment within the existing taxation framework, such as pensions and superannuation funds.
•	Taxed as income for benefits used for other purposes including benefits provided to individuals; and
•	Embeds good governance and capacity building to support effective decision making.
The MCA is concerned that the Exposure Draft that describes how tax treatments will be applied to native title benefits has not given adequate consideration to how good governance, community and economic development, accumulation, wealth creation and intergenerational benefits are encouraged.  

The MCA requests further engagement between the Government and native title and industry groups to address the issues raised in this submission.

Should you wish to discuss any of the issues outlined in this paper in further detail, please contact Melanie Stutsel, Director Health, Safety, Environment and Community Policy at the Minerals Council of Australia on (02) 6233 0600.

Yours sincerely,

Melanie Stutsel
Director – Health, Safety, Environment and Community Policy