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 violent assault crimes.
The men are seeking damages for false imprisonment after being placed in immigration detention pending their deportation.
Lawyer Claire Gibbs said the case went far beyond the issue of citizenship.
“It’s about who belongs here, who is an Australian national and who is part of the Australian community,” she told reporters outside court.
“It’s about the use of alien powers, which we believe the government has been using inconsistently, unfairly and, now we’ve proven, unlawfully.”
The decision recognises indigenous connection to country and means Aboriginal Australians can no longer be removed.
Ms Gibbs called on the government to immediately release Thoms from immigration detention in Brisbane.
“He’s been there for 501 days and he’s very anxious to be released and to be reunited with his family after all of this time,” she said.
Lawyers are confident they will be able to prove Love’s indigenous background in a future court hearing.
He is currently being held on the Gold Coast.
Last year, barrister for the two men, Stephen Keim, 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.
By Daniel McCulloch