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.
They say their Aboriginality – by descent, self-identification and community acceptance – is bolstered by their longstanding residence in Australia. Mr Love is a citizen of Papua New Guinea and Mr Thoms is a New Zealand citizen.
Last year, Stephen Keim SC, barrister for the two men, 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,” Mr Keim said.
He also said: “What we say is, to interpret the ‘aliens’ clause in the constitution to say it’s all right to remove Aboriginal Australians from the country they have occupied for 80,000 years on the mere basis that they happen to be born overseas is another dispossession and raises similar challenges to that considered by the court with regard to Terra Nullius.”