21 August 2012

Manager
Corporate Tax Unit
Business Tax Division
The Treasury
Langton Crescent
PARKES ACT 2600 

Email: nativetitle@treasury.gov.au

Tax treatment of native title benefits

Dear Mr Thompson,
The Native Title Office, Torres Strait Regional Authority, is the Native Title Representative Body for the Torres Strait region.  The Native Title Office, welcomes the Australian Government’s announcement that it will drive reforms to the Native Title Act 1993 (Cth) to ensure a sustainable and fair native title system that creates economic and social opportunities for Indigenous Australians.  Thankyou for the opportunity to comment on the exposure draft of the amendments to the tax treatment of native title benefits.  Our submission is attached.
If you would like to discuss any aspect of our submission please contact Megan Butcher on (07) 4069 0858.

Yours Sincerely,

Peter Krebs
Principal Legal Officer (Acting)
Native Title Office, Torres Strait Regional Authority

Attachment: Native Title Office submission – Tax treatment of native title benefits
To be exempt from income tax, a non-profit organisation must meet the requirements for one of the types of exempt entities in the tax law.  Registered Native Title Body Corporates (RNTBC) (which are most common in the Torres Strait region) are unlikely to meet the requirements for income tax exemption.  A fundamental reason for this is that most allow distributions of income directly to members. 
RNTBCs are typically a trust structure with a corporate trustee.  They are registered under the Corporations (Aboriginal and Torres Strait Islander) Act 2006 which means that they are subject to corporate taxation.  The consequence of this in terms of the proposed reforms is that the entity will be subject to income tax on any non-native title benefits.  They will need to separately account for income and expenses in relation to such things as fees for service, taxable grants, income from commercial activities and investment income.  In addition, they will need to ensure that they quarantine any expenses in relation to their non-assessable non-exempt income.  
Scope of the proposed special tax treatment
Our view is that the proposed amendments do not go far enough in clarifying the tax treatment in respect of benefits from acts affecting Indigenous land interests.  By restricting the special tax treatment to native title benefits Indigenous land rights provided by other legislation, such as the Aboriginal Land Rights (Northern Territory) Act 1976 and other similar state based Indigenous land rights laws, will still be taxed under ordinary rules. 
Mining withholding tax
The Income Tax Assessment Act 1936 imposes a withholding tax on payments made in respect of mining on Indigenous land.  Subsection 12-320(1) of Schedule 1 to the Taxation Administration Act 1953 requires an entity to withhold an amount from a mining payment that it makes to a distributing body.  The amount to be withheld from the mining payment is 4% of the amount of the payment.  Income to which mining withholding tax applies is non-assessable non-exempt income – that is, it is a final withholding tax.  
The proposed amendments reduce the scope of the mining withholding payment by ensuring that it does not apply to a native title benefit.  However, the Native Title Office belives that retaining the Mining withholding tax in any form is inconsistent with the Government’s policy and should be repealed.  These payments are essentially the same as a native title benefit except that there is no native title determination.  
If the mining withholding tax is retained the Government’s policy in this regard should be explained (beyond that stated in paragraph 1.25 of the explanatory memorandum).  The explanatory memorandum also should make it clearer that the mining withholding tax will continue to apply to mining payments (that are not native title benefits) in respect of mining activity affecting Indigenous land interests.  
Administration
The Native Title Office appreciates the Government’s decision to apply the changes retrospectively.  To assist in the ongoing administration of these changes we suggest that the ATO be provided funding to: 
•	identify and assist any relevant entities in seeking a refund of any income tax paid in relation to native title benefits from 2008-9 to 2011-12; and
•	produce guidance material for RNTBCs and other Indigenous lnad holding entities. This might include:
o	examples of classes of income that would be NANE and the tax consequences of this (for example, that deductions incurred in relation to this income cannot be claimed);
o	examples of income that would still be assessable and the types of related expenditure that can be claimed;
o	the importance of keeping separate accounts for different sources of income; and
o	working with the newly established Australian Charities and Not for Profit Commission to assist Indigenous charitable entities and tax exempt entities in understanding their tax obligations.
Capital gains and losses
The intent of the amendments is to make it clear that native title benefits will not be subject to income tax (including capital gains tax).  It is not clear how the amendments as proposed will give effect to this aspect of the policy as I don’t believe that the term ‘benefit’ will cover a capital gain or loss.  To remove any doubt, capital gains and losses that arise from CGT events in respect of native title assets (such as contractual rights, the creation of a trust or transfers in respect of native title interests) should be expressly disregarded in the law.  
If the exposure draft does achieve the desired outcome in respect of capital gains and losses it would be useful to include in the explanatory memorandum an example of how the capital gains / losses aspect of the the amendments would work.
Tax treatment of transfers of deed of grant in trust or reserve land under the Torres Strait Islander Land Act 1991 (Qld)
The above issue will become increasingly important as land held by local government or the State of Queensland is transferred under the Torres Strait Islander Land Act 1991 to RNTBCs.  Once a transfer has occurred the RNTBC is more likely (as the Trustee of the Torres Strait Islander Freehold Title) to be exposed to capital gains tax events, such as from negotiating payments for third party contractual rights that affect native title.
In addition, as the holder of the Torres Strait Islander freehold title RNTBCs may experience greater income flows.  The definition of native title benefit needs to be sufficiently clear for RNTBCs who hold Torres Strait Islander Freehold title and Native Title to be able to classify and account for benefits appropriately.