Tax reform can boost the Indigenous economy

Tax reform can boost the Indigenous economy

The long term economic empowerment of the Indigenous population, we believe, would be greatly enhanced by the creation of four types of investment bodies, each with specific taxation characteristics.

Grant Wardell

Lead Tax Director

KPMG Australia

Indigenous Australia circle design – purple and teal

Grant Wardell-Johnson, Leader, Australian Tax Centre, KPMG Australia and
Prof Marcia Langton AM, Foundation Chair in Australian Indigenous Studies, Redmond Barry Distinguished Professor, University of Melbourne

Grant Wardell-Johnson and Prof Marcia Langton AM

The long term economic empowerment of the Indigenous population, we believe, would be greatly enhanced by the creation of four types of investment bodies, each with specific taxation characteristics.

The ideas in this paper are preliminary. They would need to be considered by Indigenous community leaders and adapted accordingly. Each contains a revenue cost, but if they were properly drafted to benefit the Indigenous community as intended, the long-term benefits would be likely to greatly outweigh the costs.

Investment vehicle – Indigenous Community Development Corporation (ICDC)

The Federal Government could introduce a company specifically designed for an Indigenous community to hold assets, make investments, and receive income from royalties. It would be modelled on a proposal by the Taxation of Native Title and Traditional Owner Benefits and Governance Working Group.

The Native Title Act 1993 has resulted in hundreds of Indigenous Land Use Agreements. The ICDC would be an alternative for the Indigenous members of charitable trusts, corporations with Deductible Gift Recipient status, and other Indigenous corporations that receive payments on behalf of traditional owners of a land area subject to an agreement with a company or entity.

It would be clear that the ICDC holds assets and receives income for the benefit of the specific Indigenous community it represents. Managers of the ICDC would owe a fiduciary duty to that community. This would clarify uncertainty that currently exists in some circumstances where funds are held by individuals.

The ICDC would be able to invest a portion of its funds in active local Indigenous businesses within certain bands. This would enable investment in Indigenous business ventures now, balanced with the preservation of low income-producing assets for the future. Indigenous corporations could unlock the economic potential of their assets for the benefit of present and future generations. They would be freed from the restrictions of charitable trust obligations and limitations.

The ICDC would have tax exempt status. However, given this vehicle would have a strong commercial focus, and is not intended to be the beneficiary of philanthropy, Deductible Gift Recipient status would not necessarily be appropriate. This would be a point of further consultation. The ICDC would need to comply with high standards of corporate governance. It would be audited by external auditors and reviewed by an independent regulator such as ASIC or ORIC. Accounts of each ICDC would be public documents and easily available on a website



Quote: Tax compliance provides a discipline for small businesses, which can give rise to an understanding of ‘the numbers’ and better decision making.

Entrepreneurial vehicle – Indigenous Business Enterprise

A number of bodies have recommended the formation of an Indigenous Business Enterprise (IBE). The latest Indigenous Jobs and Training Review (the Forrest Review), for instance, recommended the federal government provide for a tax exempt body if certain Indigenous thresholds on ownership and employment are met.

We would recommend the formation of an IBE which has certain attractive tax characteristics, but does not fall outside the corporate income tax system completely. This is because tax compliance provides a discipline for small businesses, which can give rise to an understanding of ‘the numbers’ and better decision making.

Our proposal would involve three features:

  1. The IBE would pay a small amount of tax where profitable. The tax rate should depend on the percentage of Indigenous ownership. Thus an effective 5 percent tax rate would apply in cases of 100 percent Indigenous ownership. This would rise to 10 percent where Indigenous ownership exceeds 75 percent, and rise to 15 percent for an ownership percentage between 50 and 75 percent. This would also involve an Indigenous employment target of, say, 40 percent. However, a further 50 percent discount on the tax rate could apply where a 60 percent Indigenous employment threshold is met.
  2. A CGT discount to vendors selling a business to an IBE. An additional 50 percent capital gains tax discount could apply to a vendor selling a business to an IBE, provided there were no back-to-back sale arrangements. This would encourage the sale of businesses to Indigenous entities and enhance the prospects of economic parity between the Indigenous and non-Indigenous population.
  3. An IBE would be able to transfer taxation benefits of depreciation and capital allowances to a corporate investor. This transfer, if properly structured, would lower the cost of acquisition of capital equipment for Indigenous businesses and lower the risk of investment for corporations.

Large Indigenous Projects

There is a significant need for large scale projects in northern Australia and remote areas in particular. The concept here is to provide a 10-year tax holiday for investment that exceeds a certain threshold, say $50 million, and meets certain criteria on Indigenous employment, ownership, board membership and, if appropriate, remoteness. The tax holiday could be scaled back in cases where criteria are partially met.

Indigenous Equity Funds

It is important there are investment funds that can encourage the growth of small Indigenous businesses into medium size ones, and medium size Indigenous businesses into large ones. Such funds would require specific expertise. They should be commercially motivated and not based on philanthropy.

Training costs could be paid for by the federal government through such equity funds and consideration should be given to federal government fund matching on a dollar-for-dollar basis. A similar model has been proposed for certain innovation funds and this could be replicated.

Such investment funds would be transparent for tax purposes and thus not give rise to additional taxation costs for an investment.

There is now effective consensus that the long term economic empowerment of Indigenous Australians cannot be built on welfare provisions and must be built through employment and entrepreneurial activity. The creation of these four investment body types would create valuable scaffolding to support the economic activity needed to drive the necessary results.

Recommendations on tax reform to boost the Indigenous economy

KPMG Australia acknowledges the Traditional Custodians of the land on which we operate, live and gather as employees, and recognise their continuing connection to land, water and community. We pay respect to Elders past, present and emerging.

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