Journal of Australian Taxation
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TRANSFERRING NATIVE TITLE TO A BODY CORPORATE UNDER THE NATIVE TITLE ACT 1993 (CTH) - CAN CGT ARISE?
By Warren Black
This article examines the CGT implications surrounding the native title rights and interests from the native title holders to a prescribed body corporate when the Federal Court makes a determination that native title exists in relation to a community. It considers the potential CGT liability which exists and how this can be avoided by the careful tax planning, in particular, whether the body corporate should elect to hold the native title rights and interests as agent for the native title holders or a trust.
Previous articles on the tax implications surrounding native title have examined issues involving payment of compensation to native title holders by a government or companies (especially mining companies) from the point of view of both the recipient native title holders and, where appropriate, the payee company.
A largely unexplored area, however, is the potential CGT liability for native title holders created by the operation of the Native Title Act 1993 (Cth) ("NTA"). Under s 55 of the NTA, where the Federal Court makes a determination that native title exists, a body corporate must be established to hold native title rights and interests on behalf of the native title holders.[1] The functions of this body corporate are outlined in the Native Title (Prescribed Bodies Corporate) Regulations 1994 (Cth), which includes managing the native title rights and interests and entering into agreements on behalf of native title holders.[2]
The question arises as to whether there are any tax consequences associated with the transfer. Take for example a typical group of native title holders ("NTH community"). They have just obtained a Federal Court determination confirming that they hold native title over land surrounding the Murray River in NSW. The native title rights and interests are duly transferred to a body corporate, called the "NTH body corporate".
Are there any tax consequences associated with this transfer?
Under the Income Tax Assessment Act 1997 (Cth) ("ITAA97"), the transfer of native title from a group of native title holders to a body corporate will constitute an acquisition for CGT purposes by the body corporate post - 19 September 1985.[3] Although this transfer in itself will not give rise to CGT, it opens up the possibility of CGT applying to any subsequent dealings with native title rights and interests by the NTH body corporate.[4]
For example, assume that the NTH community agree through their body corporate to surrender some of their native title rights to a mining company in exchange for compensation. Even if an underlying asset approach is taken in accordance with Taxation Ruling TR 95/35,[5] the native title has been acquired by the NTH body corporate after 19 September 1985 at market value at the date of transfer.[6] CGT could potentially apply to any subsequent dealings by the NTH body corporate with their newly acquired native title rights and interests.
To counter this, amendments were announced by the Treasurer on 13 February 1998 to ensure that dealings with native title by a body corporate after the initial transfer would not attract CGT.[7] However, there was no indication by the Treasurer that the amendments would be retrospective. Furthermore, there is no indication as to when they will be presented to Parliament, and in view of tax reform, it is unlikely that we will see these amendments in Parliament for a long time, if at all.
Therefore, it appears that subsequent dealings with native title by the NTH body corporate after native title has been transferred to them will prima facie give rise to CGT. In the author's view, however, this result may be avoidable, as there are situations where the transfer of native title by a community of native title holders to its body corporate will not amount to an acquisition of an asset for CGT purposes. That is, relief may be available via the company rollover provisions or the legal/beneficial ownership exception available for certain CGT events.[8]
I will consider both possibilities in turn.[9]
Finally, an important feature of the NTA is that it specifically deems a body corporate to hold native title rights and interests as agent unless the native title holders specifically elect to hold it on trust.[10] Clearly, this is an important distinction and therefore, the tax implications of the respective choices needs to be separately considered.
In examining the tax implications of such a transfer, I will examine the position under the ITAA97. This issue may also be relevant before 1 July 1998 due to the possibility of transfers of native title to body corporates and subsequent dealings before that date. Accordingly, I will also refer to the corresponding provisions of the Income Tax Assessment Act 1936 (Cth) ("ITAA36") in the footnotes to this article.
Under the ITAA97,[11] here are no CGT implications where there is a change in the legal ownership of an asset unless there is also a change in the beneficial ownership of the asset. The question arises as to whether a transfer by each individual in the NTH community of their part-interest in native title to the NTH body corporate constitutes a change in beneficial ownership.
It is suggested that it does, as each individual has disposed of their part-interest to a company, which is a separate legal entity.[12] Even if the NTH community constitutes an unincorporated association[13] for the purpose of the ITAA97, despite some suggestion that a transfer of an asset from one entity to another does not constitute a change in beneficial ownership where the controlling individuals behind it are unchanged,[14] this is contrary to the separate entity doctrine in company law, ie that a company is a separate legal entity from its shareholders.
It is therefore submitted that such a view is unlikely to be applied in respect to the CGT provisions. The effect is there will be a change in beneficial ownership for CGT purposes.
A crucial issue in determining whether rollover relief would be available for the NTH community is whether it constitutes an "unincorporated association" at common law (and therefore a company under the Act).[15] The income tax position will differ depending on the situation. If the NTH community is a company, we will look to the "company-to-company" rollover provisions. If not, we must look to the "individual-to-company" provisions for each individual native title holder (which is a much more cumbersome procedure).
At common law, an unincorporated association is essentially two or more persons bound together by a common purpose[16] by mutual undertakings by the members, in which there are rules to identify who controls the organisation and its funds and upon what terms a member can join or leave the association.[17] Exactly what constitutes an unincorporated association at common law is unclear. Some authorities suggest that it only covers bodies with a sufficient number of members to become incorporated,[18] while others suggest that it only includes bodies with more than the maximum number of members required legally to carry on the business as a partnership.[19]
Whichever approach is taken, it is submitted that in most cases, a group of native title holders operating according to their traditional laws and customs in relation to land will constitute an unincorporated association at common law.[20] The effect is that the transfer of native title will be from one company (the unincorporated association), namely the NTH community, to another company (the NTH body corporate).
From here, the question is whether rollover relief will be available to the NTH community under the company-to-company rollover provisions. Under the ITAA97,[21] the following requirements need to be met:
(a) A resident company must dispose of an asset to another resident company. This is clearly the case in our situation. The NTH community has disposed of their native title rights and interest to the NTH body corporate.
(b) The body corporate and the unincorporated association must be members of the same wholly owned group. Essentially this means that the NTH body corporate must be a wholly owned subsidiary of the NTH community unincorporated association, ie. the NTH community must own all of the shares in the NTH body corporate.[22] Whether this is the case is unclear. On the one hand, it is arguable that the NTH community as an unincorporated association effectively owns all of the shares in the NTH body corporate, as the same people constituting the unincorporated association also own all the shares in the body corporate. On the other hand, it is the individual members constituting the NTH community who own the shares, not the NTH community as an unincorporated association. The correct view is therefore unclear as the provisions were originally drafted to cover transfers within wholly owned groups; situations such as this were never contemplated. In my view, however, the latter view is to be preferred, ie. the individual members own the shares and therefore, the bodies are not members of the same wholly owned group.
(c) The native title must not be trading stock. This is clearly the case.
(d) The body corporate must not be exempt from income tax. As stated earlier, I have assumed that such body corporates are not exempt. If they were exempt, the problems outlined in this article will not even arise, as CGT would not be payable in respect of any dealings with native title, even if the transfer of native title resulted in a post-19 September 1985 acquisition by the NTH body corporate.
(e) The taxpayer must make a written election in their return for the year the disposal takes place. Making such an election would be up to the native title holders.
If the NTH body corporate can overcome the hurdle of not being a wholly owned subsidiary of the NTH community unincorporated association, as native title was acquired by the NTH community pre-20 September 1985. the NTH body corporate would also be deemed to have acquired the native title before that date.[23]
The effect is that any subsequent dealings with native title by the NTH body corporate will not be subject to CGT.
If the NTH community is not an unincorporated association at common law, the individual to company rollover provisions,[24] would need to be satisfied. Although the procedures are more cumbersome in that each native title holder in the NTH community has to individually elect for rollover relief (as they each have a part interest in the native title by virtue of joint ownership), the requirements for rollover relief would be easier to satisfy. (This is, of course, assuming that the members of the NTH community of native title holders receive non-redeemable shares in the NTH body corporate[25] and individually elect for rollover relief to apply.)
In summary, there is a possibility that rollover relief may be available to ensure that the transfer to the NTH body corporate is not an acquisition for CGT purposes. If so, this will prevent the native title holders from being liable to CGT on future dealings by the NTH body corporate. However, it is by no means certain that rollover relief will be available and indeed, on my preferred views, it will not be available. Therefore, the possibility of CGT applying remains very real where a body corporate holds the native title rights and interests on behalf of the native title holders.
Again, similar CGT issues arise if the NTH community elect to transfer native title to the NTH body corporate to hold native title on trust.[26] Unlike agents, there is no CGT rollover relief available for assets transferred to a trust. Nor would the beneficial ownership exemption[27] assist. The reason is although s 104-10(2) prevents CGT Event A1 (ie disposal of a CGT Asset) applying where there is no change in beneficial ownership, the fact that there is no change in beneficial ownership does not prevent CGT Event E2 applying (ie. transferring a CGT Asset to an existing trust) unless s 104-60(5) applies (discussed below).[28]
One must therefore turn to other provisions of the ITAA97 for assistance. Under the Act, as already mentioned, the only possible relief arises under s 104-60(5), which ensures that CGT Event E2 will not apply where:
(a) you (that is, the person who owned the asset immediately before the trust was created) are the sole beneficiary of the trust and;
(i) you are absolutely entitled to the asset as against the trustee (disregarding any legal disability); and
(ii) the trust is not a unit trust. (emphasis added)
If the NTH community can satisfy the above requirements, CGT would not apply. Again, the crucial issue is whether the NTH community constitutes an unincorporated association. The reason is if they are not an unincorporated association, the above requirements would not be satisfied as there are multiple beneficiaries (meaning s 104-60(5)(a) would not be satisfied). On the other hand, if the NTH community is an unincorporated association, both s 104-60(5)(a) and (a)(ii) would be satisfied as the trust is not a unit trust and the NTH community would be a separate legal entity which would be the only "person"[29] owning the native title.
Therefore, assuming that the NTH community is an unincorporated association, the crucial issue is whether sub-sub-paragraph (a)(i) applies. In determining this issue, we must ascertain the meaning of "absolutely entitled as against the trustee". Although there is little case law on the meaning of this expression, the concept as used in the Australian CGT provisions is derived from the UK CGT provisions. Therefore, UK cases can assist us in interpreting the meaning of the expression.
In Tomlinson v Glyns Executor & Trustee Coy,[30] it was held that a person is absolutely entitled once they are in a position to direct the trustee how to deal with the asset and to give a good receipt for anything which they part with.[31] And in Booth v Ellard,[32] Oliver LJ suggested that if several separate property owners pooled their interests via a trust so that the interests before and after were unchanged, nobody would suggest that there was a disposal of anything other than the legal ownership only, and it would be "capricious and unjust" to suggest otherwise.
As to whether an unincorporated association can be absolutely entitled, in Wharton v Masterman,[33] the House of Lords held that the concept of absolute entitlement applies equally to an incorporated or unincorporated association. And in Frampton v IRC,[34] Peter Gibson J held that although an unincorporated association was not a separate legal entity at law, for the purposes of the UK tax legislation, it was a separate entity. Therefore, the association was absolutely entitled, not the individual members.
Turning to our situation, namely native title holders who have their native title interests held on trust by a body corporate, the Native Title (Prescribed Body Corporate) Regulations 1994 (Cth) ensure that the trustee of the body corporate is controlled by the native title holders, as the trustee can only operate the trust for their benefit. Only day to day management decisions can be decided by the trustee; any matters affecting the trust property requires the consent of the native title holders.[35] Even though the trustee does have some control over the trust property, it appears that a community of native title holders have the ability to direct the trustee how to deal with their native title rights and interests.
Accordingly, it is submitted that the NTH community will be absolutely entitled as against the trustee of the trust. The effect is, assuming that the NTH community of native title holders are an unincorporated association at common law, the exception in s104-60(5) is satisfied, meaning that there are no CGT consequences under the ITAA97.
The same result would occur under the 1936 Act for dealings before 1 July 1998[36]
Therefore, it appears that provided the NTH community is an unincorporated association, there will be no deemed acquisition by the NTH body corporate for transactions before, on or after 30 June 1998. The effect is subsequent dealings with native title by the body corporate will not give rise to CGT.
As seen above, there are potential CGT difficulties in relation to native title communities holding an interest in native title due to the NTA's requirement for native title to be transferred to a body corporate. This potentially can result in an acquisition by the body corporate for CGT purposes, thereby rendering any future dealings liable for CGT. Although the proposed amendments would ensure that these problems do not arise in future, it is unlikely that they will be enacted due to tax reform.
Nevertheless, relief may be available to the native title holders, whether or not they elect for the native title to be held by the prescribed body corporate on trust or as agent. For a body corporate holding native title as agent, whether or not rollover relief is available will depend on whether the community of native title holders are an unincorporated association at common law, and if so, whether or not they would be exempt from income tax. For a body corporate holding native title on trust, the crucial issue is whether or not the community of native title holders are an unincorporated association at common law, as this will determine whether or not they are entitled to the exemption contained in CGT Event E2 (s 104-60(5)) for sole beneficiaries who are presently entitled to the asset as against the trustee.
As seen above, it is the author's view that native title holders would be better advised to elect to hold native title on trust rather than as an agent. The reason is it is far more likely that the exemption is CGT Event E2 will apply if native title is held on trust than it is that rollover relief will be available if native title is held by a body corporate as agent. This is due to the problems in showing the necessary relationship between the native title holders and their community pursuant to the company to company rollover provisions.
Finally, even if native title holders are unable to get relief from CGT liability on subsequent dealings by their body corporate, the author suggests that it is highly likely that in practice, the Commissioner would not seek to obtain tax in these situations. There are obvious practical difficulties in collecting tax from members of remote native title communities. Furthermore, in the author's view, it would be grossly inequitable to tax native title holders on dealings with pre-20 September 1985 native title in this particular situation, thereby exposing them to the continual uncertainty of such complexities.
Warren Black is currently employed at Arthur Robinson Hedderwicks in Melbourne, after working at the Australian Taxation Office for 10 years. He practises exclusively in tax . Warren has degrees in Commerce and Law from the University of Western Australia, graduating in law with first class honours. His honours thesis was on "The Tax Implications of Native Title Compensation Payments", for which he received the Mallesons Stephen Jaques prize in Western Australia. Warren has also previously published articles in the Journal of Australian Taxation.
[1] Such a transfer may also occur where native title is recognised by the parties by agreement under the Act or outside the operation of the Act. For example, in the Crescent Head Agreement reached between the NSW government and the Dhungutti people (see Media Release PR 96/41 dated 9 October 1996), the NSW government recognised that the Dhungutti People had native title, and had the agreement registered as a native title determination.
[2] See r 4. Although it should be noted that under r 5, if the act will affect the native title holders' rights and interests, the consent of the holders must be obtained before the act can be done.
[3] ITAA97, s 109-5(1); ITAA36, s 160M(1).
[4] Although there could be tax implications arising out of the receipt of compensation by the body corporate, I am only concentrating on the tax consequences of transfer of native title from a community of native title holders to a body corporate, particularly CGT.
[5] In Taxation Ruling TR 95/35, the Commissioner accepts that where there is a disposal of an underlying asset, he will "look through" any right to compensation or similar rights which have also been disposed of and treat the disposal as being of the underlying asset. (Under the ITAA97, rather than a disposal, we would look at whether there was a CGT event relating to the underlying asset.) Where the underlying asset was acquired pre-20 September 1985, there would therefore be no CGT implications.
[6] ITAA97, s 112-20(1); ITAA36, s 160ZH(9).
[7] See Joint Media Release issued on 13 February 1998 by the Treasurer and the Commonwealth Attorney General.
[8] ITAA97, s 104-10(1); ITAA36, s 160M(1A). Although it is not really an "exception" as such, I have called it as such for ease of reference.
[9] Which provisions apply will depend on whether native title is communal or individual (ie. as the Native Title Act leaves open the possibility of individual native title). However, as individual native title rarely arises in practice, I am assuming a communal native title for the purposes of this article.
[11] CGT Event A1 in ITAA97, s 104-10; ITAA36, s 160M(1A).
[12] Saloman v Saloman [1897] AC 22.
[13] That is, as is discussed further below, if the community constitutes an unincorporated association, it will be a company under s 6(1) of the ITAA36.
[14] Curzon Offices Ltd v IR Commrs [1944] 1 All ER 606 at 607 (per Goddard LJ).
[15] ITAA97, s 995-1 defines "company" to include an unincorporated association.
[16] Provided it is not a business purpose.
[17] Conservative & Unionist Central Office v Burrell (1981) 55 TC 671 (per Lawton LJ).
[18] That is, as s 114 of the Corporations Law allows 2 members for a proprietary company, this will be enough to constitute an unincorporated association, provided the 2 members are in substance operating as a company or association; Kingsbury v Commissioner of Taxation [1901] NSWStRp 10; (1901) 1 SR (NSW) 7, 8 (per Danley J).
[19] See, for example, discussion in Butterworths Australian Tax Practice at para 6/270.
[20] See, for example, Horsley MG, The Law and Administration of Associations in Australia (1976) 6, who suggests that cultural, religious or similar associations established with mutual undertakings will constitute an unincorporated association at common law.
[21] Section 126-50; ITAA36, s 160ZZO.
[22] ITAA97, s 975-500; ITAA36, s 160G.
[23] ITAA97, s 126-60(3); ITAA36 s 160ZZO(1)(e).
[24] ITAA97, s 122-15 to s122-25; ITAA36, s 160ZZN.
[25] ITAA97, s 122-20: ITAA36: s 160ZZN(2) requires the shares to be non redeemable for rollover relief to be available.
[26] There is prima facie an acquisition post-19 September 1985.
[27] ITAA97, s 104-10(2); ITAA36, s 160M(1A).
[28] Note also that under the ITAA36, s 160M(1A) is expressly subject to s 160M(3)(a), which deems a change of ownership to occur upon the creation of a trust by transferring an asset.
[29] ITAA97, s 995-1 expressly defines "person" to include a company.
[31] That is, it is more than simply being "absolutely entitled" to the trust property in equity.
[32] [1980] 3 All ER 569 per UK Court of Appeal.
[33] [1895] UKLawRpAC 15; [1895] AC 186.
[34] [1985] STC 186.
[35] Regulations 4 and 5.
[36] ITAA36, s I60M(3)(a)(i).
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