Ritter, David; Garnett, Merrilee --- "Winning a Deduction for Compensation Payments: Cape Flattery Silica Mines Pty Ltd v Federal Commissioner of Taxation" [1998] IndigLawB 41; (1998) 4(11) Indigenous Law Bulletin 21

• Winning A Deduction For Compensation Payments: Cape Flattery Silica Mines Pty Ltd V Federal Commissioner Of Taxation
• Table: Tax Implications Of Natvie Title Act

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Winning a Deduction for Compensation Payments:

Cape Flattery Silica Mines Pty Ltd v Federal Commissioner of Taxation

Federal Court, SpenderJ

97 ATC 4552

Casenote by David Ritter and Merrilee Garnett

The Native Title Act 1993 (Cth) (the 'NTA') establishes a number of possible ways in which compensation money may be paid by a government party or some third party to indigenous people.[1]

The increasing prevalence of transactions involving the payment of compensation money to indigenous peoples has raised obvious questions with respect to income tax liability and deductibility. These questions have been the subject of some intense academic speculation.[2]

The question of the tax deductibility of compensation payments made by resource companies to Aboriginal communities is a question that is of more obvious importance to resource companies, but is also of significance to indigenous peoples. Whether compensation payments by resource companies to indigenous people are tax deductible will have a large impact on both the quantum, or amount, of compensation that resource companies are willing to pay, and how the resource company will seek to structure agreements and characterise payments. In this regard, some guidance has been provided by Spender J of the Federal Court in Cape Flattery Silica Mines Pty Ltd v. Federal Commissioner of Taxation (the 'Cape Flattery' case). While the compensation agreement under examination in that case was made prior to the creation of the NTA, the case may act as a guide to compensation agreements made in a native title context.

Since 1968, Cape Flattery Silica Mines Pty Ltd (CF Silica Mines) has conducted silica sand mining at Cape Flattery in Queensland. This mining activity has continued notwithstanding profound changes in the law and to the tenure over the land in question: both in favour of the Aboriginal inhabitants of the area. In 1986, a Deed of Land Grant in Trust was issued to the Hope Vale Aboriginal Council ( the Council ), as trustee of that land for the benefit of the Aboriginal inhabitants. What is known as the Hopevale Reserve comprises a total of 110,000 hectares. Aboriginal employees now apparently make up a substantial part of the mine's workforce.

Prior to 1990, CF Silica Mines held four mining leases for the purposes of the project, each of which covered land within the Hope Vale Reserve. In 1990 CF Silica Mines required a new mining lease and the renewal of an existing lease, prompting litigation followed by negotiation between the parties. The negotiations ultimately led to a settlement under which the Council agreed to consent to the grant of tenements required by CF Silica Mines, in turn for CF Silica Mines paying a fixed percentage of its profits to the Council. CF Silica Mines also agreed to provide and fund a bursary to an Aboriginal student from the Community (the annual bursary).

In the 1993 and 1994 financial years, CF Silica Mines made compensation payments totalling in excess of $1,000,000.00 to the Council. In the financial year ending 30 June 1992, CF Silica Mines also incurred legal fees of almost $50,000.00 in negotiating the settlement between the parties. CF Silica Mines claimed deductions on each of these amounts. These payments were the subject of the case in question (the payments).

At first instance, the Commissioner for Taxation disallowed CF Silica Mines's claim for deductions on the payments on the basis that they were expenses of a capital nature. The Commissioner further ruled that, even if the payments were on revenue account, they were made at a point that was too early to be regarded as an expense incurred in gaining or producing assessable income. On appeal, CF Silica Mines submitted to the Federal Court that the payments in question were in the nature of a rental royalty, being a recurrent and regular outgoing that was part of the cost of earning its income.

On appeal, Spender J of the Federal Court found for CF Silica Mines on every substantive point. His Honour ruled that the essential character of the payments in issue was that of a series of recurrent payments in the nature of rental, for the right of occupation by the taxpayer, a right which otherwise would be enjoyed by the Community. As the quantum of the recurrent claims was calculated by reference to the value of silica sand that was won from the mining lease, his Honour found that the payments made under the compensation deeds were on revenue account. In this respect, Spender J applied the decision of the majority of the High Court in Cliffs International Inc. v. Federal Commissioner of Taxation 79 ATC 4059; [1979] HCA 8; (1979) 142 CLR 140.

Spender J further held that, as members of the community made up a substantial section of the workforce of the operations of CF Silica Mines, and good relations between CF Silica Mines and the community was important to the success of Cape Flattery's business activities and operations, that the payment of the annual bursary was to be regarded as a business expense and on revenue account.

Finally, Spender J held that the Commissioner of Taxation had to pay CF Silica Mines' legal costs.

The Cape Flattery case is a significant precedent. The message of the case is that care and expertise is required in drafting agreements between resource companies and indigenous groups so as to obtain the maximum tax-minimisation advantages for each party. However, the subtext of the case is equally important: that 'normal' commercial dealings can successfully continue on Aboriginal land.

The case has two postscripts. The first triumphant postscript is that, in late 1997, both CF Silica Mines and the Council were parties to the first determination of ongoing native title on the Australian mainland in Deeral on behalf of the Gamaay Peoples v. Charlie & Ors QG174/1997 made on 8 December 1997.

The second postscript is that, on 13 February, in a joint news release by the Commonwealth Treasurer and the Attorney General, a series of proposed amendments to the Commonwealth Income Tax Assessment Act were announced in order to clarify the tax implications of native title for native title holders and other taxpayers. These amendments are said to be conditional on the Commonwealth's current NT Amendment bill 1997 being passed by the Parliament. In other words, the native title-related tax measures will not be introduced unless the Federal Government has its way on general native title matters. One provision of the proposed amendments to the Income Tax Assessment Act will deal with fact situations similar to the Cape Flattery case. The Treasury and the office of the Commonwealth have released the table below.[3]

Table: Tax Implications of Natvie Title Act

Transaction	Existing Tax Treatment	Proposed Tax Treatment
Obtaining a native title determination and the vesting of the native title in a registered body corporate either as an agent or on trust.	The vesting of native title in the body corporate may represent a transfer of an asset for capital gains tax (CGT) purposes.	The native title will not lose its pre-CGT status upon acquisition by the body corporate.
Transfers of native title within a group of native title holders and succession from one group of native title holders to another.	Would trigger a CGT liability. but due to difficulties in applying property rights to communally-held assets it would be very difficult and costly to administer.	Exempt from CGT, thus avoiding substantial administrative and compliance costs.
Compensation payments received for the extinguishment or voluntary surrender of native title rights; this will include where the rights granted under a pastoral lease are deemed to extinguish native title.	Such payments would generally be regarded as compensation for the loss of '.. a capital asset and so be exempt from tax. However, the form in which the payment is made may attract income tax.	Exempt from CGT and income tax irrespective of the form in which the payment is made (IE lump sum, in kind or periodic payment).
Amounts paid for the temporary impairment or suspension of native title rights; that is, all receipts where native title is deemed not to be extinguished.	Payments would be taxed in the hands of individual taxpayers at their marginal rate. There would be considerable difficulties in identifying these taxpayers.	All such receipts will be taxable. Irrespective of the form of the payment, they will be taxed via a withholding tax arrangement applied at a rate of 4 per cent.
Expenses incurred by non-native title holders in dealing with the NTA such as payments for: (i) extinguishment; (ii) the temporary impairment or suspension of native title rights; and (iii) all other native title related expenses (eg legal costs incurred in responding to native title claims and expenses incurred in determining whether an area is likely to be subject to a native title claim).	Expenses that are incurred as part of the ongoing operation of the business would be deductible under sec 51(1) of ITAA 1936. Expenses that are incurred to protect the capital assets of a business would be of a capital nature and therefore not deductible under sec 51(1). This expenditure may be included in the cost base of the relevant asset.	Payments made in respect of: (i) extinguishment - not revenue deductible but may contribute to the cost base of the relevant asset for CGT purposes; (ii) payments for the temporary impairment of native title by future acts - deductible in the hands of the person making the payments, and deduction will be available over the period of impairment to which each payment relates where this is more that 13 months; and (iii) all other native title related expenses-existing tax law will apply.

David Ritter and Merrilee Garnett are Senior Associates at Dwyer Durack, Barristers & Solicitors in Perth.

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[1] Compensation may become formally payable pursuant to an application for a determination of compensation for post-1975 acts that have impaired or extinguished native title, or under a determination with respect to a proposed future act under section 35 of the NTA. Alternatively, the bargaining power that accrues to native title claimants, under the right to negotiate that is created by the NTA, may result in an agreement between a set of native title claimants and a government party or a third party which contains a compensation component.

[2] For some examples, see Companies Tackle the Tax Office Over Mabo Expenses Business Review Weekly, 26 June 1995, 92-93; Tax Issues Arising Out Of Native Title Claims Taxation in Australia 3(2) October 1994, 110-3, Native Title and Capital Gains Tax , Pasant J; CCH Journal of Australian Taxation Aug/Sept, 1994,8-11; Financial Accounting and Auditing Implications, Jackson, C and Bray, M; in Commercial Implications of Native Title, Horrigan, B (ed, et al), Federation Press, 1997.

[3] See Practice Alert , CCH Federal and State Tax News Tax Week, Issue 7, 20 February 1998, 75-76.