Authors: Ai Mee Ching and Simon Tucker, Moore Stephens
On 13 October 2010, the Board of Taxation (the
"BOT") released a discussion paper entitled
"Review of the Taxation Treatment of Islamic Finance".
The discussion paper was released subsequent to the
Government's request for a review 'in order to ensure
that Islamic financial products have parity with conventional
products, having regard to their economic substance'.
Islamic finance refers to banking and financial products or
arrangements that are compliant with the principles of Shariah law.
One of the major differences between Western and Islamic finance
systems is the notion of interest (i.e. charging for the use of
borrowed money), which prohibited under the principles of Shariah
law. Other prohibitions include financing of industries deemed
unlawful by Shariah law such as weapons, pork and gambling.
The discussion paper presents a series of case studies that
illustrate the current Australia tax treatment (Federal and State)
on Islamic financial products in comparison to the tax outcome
arising on the finance arrangements commonly available in Western
Under the current taxation laws, there are various approaches to
the treatment of financial products, which can be the legal form
based approach, the economic substance based approach or a mix of
these approaches. For example, it is not unusual for the Islamic
financial product to have the same economic substance as the
Western financial product but due the intrinsic legal difference
between the two the products are taxed differently (i.e. as it is
common for tax provisions to look to the legal form of an
arrangement to understand its economic substance). As such the
existing tax framework will often lead to uncertainty tax outcomes
and sometimes even double taxation as well as the prohibition of
In 2004 the Victorian government recognised that the Islamic
financial products should be treated equally with conventional
finance products. Consequently one major change is removing double
stamp duty charges on property purchases. Other changes included
recognising the principle of profit sharing and allowing Islamic
contracts to avoid certain terms which are not permitted, such as
interest. At the time of writing, no other states has provided
special exemptions for Islamic financing transactions.
The discussion paper is currently open for submissions on issues
raised until Friday 17 December 2010. It is important to note that
if amendments to the existing tax law are required, the Board will
consider whether adjustments can be made to existing tax frameworks
rather than the development of specific provisions directed solely
at Islamic financial products and arrangements.
If you wish to discuss the issues raised in the BOT discussion
paper or if you require further details please contact the authors
of your Moore Stephens relationship partner.