The 4-3 majority decision is a big victory for New Zealand-born Brendan Thoms, who is fighting against deportation after serving time in prison.
However, the court was unable to agree as to whether Papua New Guinea-born Daniel Love is Aboriginal, casting some continued uncertainty over his case.
Neither man holds Australian citizenship, but both identify as indigenous, and each has one Australian parent.
The pair held Australian visas until they were cancelled in 2018, after they were jailed for serious crimes.
The men are seeking damages for false imprisonment after being placed in immigration detention pending their deportation.
Last year barrister for the two men, Stephen Keim SC, invoked the case of Mabo which acknowledged the history of indigenous dispossession.
“To remove Aboriginal Australians from the country would be another, if not worse, case of dispossession,” he said.
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