The UNCTAD Survey 2009-2011 ranks Australia in the top 10 of the most attractive countries in which to invest. Whilst domestic growth eased in 2009, it is picking up and the general consensus to date is that most of the problems directly related with the GFC did not significantly affect Australian financial institutions.
Most recently the IMF April 2010 World Economic Outlook report singled out Australia as having the best prospect for economic growth in the developed world. Summarising the report, The Age newspaper on 22 April 2010 states:
As a destination for investment Australia has many inherent advantages. Australia is politically stable, it has a strong corporate and financial regulatory framework and a highly skilled workforce. These attributes together with the continuing global demand for Australian resources and agricultural commodities enable Australia to promote itself as a safe investment destination, capable of delivering enhanced economic returns to investors.
Australia has always been dependent on foreign investment to build infrastructure and develop its industries. Given our resources and commodities based economy, both of which are capital intensive, Australia will continue to compete for foreign capital.
It is as a direct result of this need for foreign investment that Australia is continuously reforming its laws and regulations to maintain an attractive environment for foreign capital (see Appendix 1). This includes reviewing laws to ensure accessibility to new and alternative sources of capital. This is recognised in the report commissioned by the Australian Financial Centre Forum and released in January 2010 (the Johnson Report), where it is stated that:
So, in the context of wholesale investment products is Australia "Sharia-ready"?
It is an incontrovertible fact that there are fundamental differences between Islamic finance and conventional modes of finance. However, it would be incorrect to conclude that by virtue of these fundamental differences extensive tax and regulatory changes are required before Sharia-compliant transactions can take place in Australia.
Islamic finance has now been accommodated in a number of non-Islamic countries. In almost all of those countries the main challenge in accommodating Islamic finance related to the tax treatment of Sharia compliant transactions.
In Australia there are two levels of taxation – Federal and State/Territory level. The Federal Government has responsibility for income tax (including capital gains) and goods and services tax. Each Australian State and Territory imposes its own stamp duty and land tax laws.
Most tax systems attach the liability to income tax based on "pigeon-holing" transactions and attributing to them a particular tax treatment. That is, by looking at the form of the transaction rather than its substance. With Islamic modes of finance whilst the form of the transaction fits within one "pigeon hole", the substance of the transaction is likely to fit within a different "pigeon hole". However, in 2009 Australia introduced a comprehensive regime for taxation of financial arrangements ("TOFA").
TOFA is a fundamental change to how a traditional tax system works. TOFA looks to the substance of a transaction and attributes tax liability, regardless of the form of the transaction. For income tax purposes, the TOFA regime, in its existing form, is capable of creating a level playing field between certain Australian based Islamic finance transactions (including certain types of Sukuks) and their conventional equivalents. Further minor enhancements would be required to cater for certain other types of Sukuks. In relation to stamp duty laws, the State of Victoria spearheaded the move to accommodate Islamic finance transactions by amending its stamp duty legislation in the early 2000s. The Victorian Stamp Duties Act specifically caters for retail Sharia compliant real estate lending products without imposition of double duty. Discussions with the State Revenue Commissioners of certain other States has showed a willingness by the other States to apply their stamp duty laws in a manner which will not impose double stamp duty.
What is the rate of tax applicable to foreign institutional investors?
For a number of years Australia was perceived within the international investment community as a high tax jurisdiction. However, this is no longer the case. Since 2003 it is fair to say that Australia's international taxation rules have been so vastly improved that Australia is now a serious contender for a larger share of foreign capital, especially given the Australian macroeconomic conditions.
One such reform has been the introduction of a withholding tax regime for foreign investors in Australian collective investment schemes (called "managed investment trusts").
Prior to this reform, foreign institutional investors in Australian managed investment trusts would have been liable to 30% tax on income, capital gains and profits.
Under the new rules, on and from 1 July 2010 certain foreign investors would be subject to a 7.5% final withholding tax on income and gains other than, dividends, interest and royalties (which are subject to special withholding tax rates) and certain capital gains that are already exempt for foreign investors.
At 7.5% the managed investment withholding tax rate is lower than the interest withholding tax rate of 10% applicable to certain types of financing arrangements between Australian borrowers and offshore lenders and one of the most competitive in the world. This means that when assessing a prospective opportunity on a post-tax rate of return an investment in Australia may provide an enhanced rate of return.
What about the non-tax regulatory framework for Sharia compliant investments?
Australia has formal foreign investment rules and regulations.
Applications are made to the Foreign Investment Review Board in relation to foreign investment in certain designated assets and industries. The pre-establishment screening process is intended to provide foreign investors with straight-forward, low cost and timely decisions.
Australian also has various financial markets and securities regulations. These are designed to ensure that financial markets participants deliver on their promises and to maintain the integrity of the financial markets. Australian securities rules and regulations can accommodate Islamic funds management activities without the necessity for extensive modifications.
By way of example, the particular representations that the issuer of an Islamic financial product makes may be different to the representations made by an issuer of conventional financial products. The difference reflects the attributes of the financial products that makes them Sharia-compliant. However, there is no difference between the legal nature of the promise made by issuers of financial products - whether they are Islamic or conventional - to honour their representations. Similarly, the legal consequences of failure to honour those representations will be the same regardless of whether the financial products are Islamic or conventional.
Accordingly, while existing regulatory rules may require slight "tinkering" to accommodate certain instruments, the Australian regulatory standards that currently govern conventional financial products can readily accommodate regulation of Australian based Islamic financial products.
Is Australia the place to make Sharia compliant investments?
This depends on your investment objectives. However, recent events surrounding certain Sukuk structures in the Middle East supports risk management initiatives for Islamic institutions through geographical diversification of Islamic assets.
In addition, given the tax reforms in recent years and the resources and commodities based nature of the Australian economy - which can provide alterative asset classes to increase the depth and breadth of Islamic capital markets instruments - it is clear that Australia warrants serious consideration by Islamic financial institutions interested in growing their financial intermediation services and range of Islamic financial products.
Australian Government continuously reforming its laws and regulations to maintain an attractive environment for foreign capital
|February 2008||The Assistant Treasurer (The Hon Chris Bowen) announced that the Board of Taxation will undertake a review of the tax arrangements applying to managed funds that operate as managed investment trusts (MITs) as a key part of the Government's commitment to make Australia the financial services hub of Asia.|
|13 May 2008||The Treasurer (The Hon Wayne Swan MP) and Assistant Treasurer (The Hon Chris Bowen) announced that the Government will reduce the level of withholding tax from a non-final rate of 30 per cent to a final rate of 7.5 per cent on certain distributions from Australian managed investment trusts (MITs) to foreign resident investors. This will provide a major boost to Australia's goal of becoming a financial hub in the Asia-Pacific region|
|16 June 2008||The Minister for Superannuation and Corporate Law (the Hon Nick Sherry) announced the release of the joint Treasury-ASIC consultation paper Cross Border Recognition: Facilitating Access to Overseas Markets and Financial Services. The paper provides the framework for Australian investors to more effectively access other well regulated capital markets, advisers and products.|
|20 June 2008||The Assistant Treasurer (The Hon Chris Bowen) announced the passage through the Senate of the Tax Laws Amendment (Election Commitments No.1) Bill 2008. The legislation will make Australia's withholding tax rate one of the most competitive in the world.|
|31 July 2008||Sydney hosted the Financial Services Hub Summit, addressed by the Prime Minister, Kevin Rudd, and NSW Premier, Morris Iemma. The Summit is a joint initiative of the NSW and Commonwealth Governments, with the participation of the Victorian Government. The aim is to develop policies and strategies to enhance Australia's position as a regional financial services hub. The Prime Minister announced the establishment of a dedicated team within the Treasury to address and implement ideas raised at the summit.|
|25 September 2008||The Assistant Treasurer (The Hon Chris Bowen) introduced into Parliament amendments to the eligible investment business rules in Division 6C of the Income Tax Assessment Act 1936. The measure is aimed at reducing compliance costs for Australian managed funds and a key part of the Government's commitment to make Australia the financial services hub of Asia.|
|26 September 2008||The Assistant Treasurer (The Hon Chris Bowen) established the Australian Financial Centre Forum (AFCF) to progress the Government's initiative to position Australia as a leading financial services centre in the region. The AFCF is a Government and industry partnership comprising: a Chairman, Mr Mark Johnson; a Panel of Experts, consisting of six senior financial sector representatives; the Treasury Taskforce; and a Reference Group, which will be the main consultative body and includes representatives from the peak financial sector industry associations, the State Governments and Austrade.|
|2 October 2008||The Minister for Superannuation and Corporate Law (the Hon Nick Sherry) launched the 2008 editions of the Australian Financial Markets Association (AFMA) Australian Financial Markets Report and Austrade's 2008 Financial Services Benchmark Report: Australia – A Global Financial Services Centre, which report on developments and trends in Australia's economy and financial markets. These Reports reinforce the Government's agenda of securing Australia's future as a financial service hub.|
|12 May 2009||The Assistant Treasurer (The Hon Chris Bowen) announced that the Government would implement the Board of Taxation's interim advice on the taxation of managed funds to provide deemed capital account treatment for gains and losses made on disposal of investment assets by MITs, subject to appropriate integrity rules. This measure will page 5 provide more certainty and ensure Australia's tax regime is competitive in attracting foreign funds.|
|1 June 2009||The Assistant Treasurer (The Hon Chris Bowen) announced the release of a Treasury discussion paper on capital account election which details the proposed changes to the taxation treatment of disposals of investments by MITs.|
|24 August 2009||The Treasurer (The Hon Wayne Swan MP) and the Minister for Financial Services, Superannuation and Corporate Law (The Hon Chris Bowen MP) announced the transfer of supervision of Australia's financial markets from the ASX to ASIC, the corporate regulator. The change will enhance the integrity of Australia's financial markets and take another step towards establishing Australia as a financial services hub in the region.|
|7 October 2009||The Minister for Financial Services, Superannuation and Corporate Law (The Hon Chris Bowen) launched the Australian Financial Markets Association (AFMA) Report and Austrade's 2009 Benchmark Report.|
|2 December 2009||The Minister for Financial Services, Superannuation and Corporate Law (The Hon Chris Bowen) released a consultation paper and draft legislation facilitating reforms to the supervision of Australia's financial markets. The preparation of legislation is the first step towards implementing the take over by ASIC as supervisor of real-time trading on all of Australia's domestic licensed markets|
|10 December 2009||The Assistant Treasurer (The Hon Nick Sherry) released for public consultation the Government's draft Managed Investment Trusts (MITs): capital account treatment legislation.|
|15 January 2010||Minister for Financial Services, Superannuation and Corporate Law (The Hon Chris Bowen) announced the release of the Australian Financial Centre Forum's report on Australia as a Financial Centre (the Johnson Report). The report was commissioned in September 2008 as part of the Government's commitment to secure Australia's future as a leading financial services centre.|
|10 February 2010||The Assistant Treasurer (The Hon Nick Sherry) announced expansion of the definition of "managed investment trust" in relation to withholding tax rules. The changes are intended to provide greater certainty as to the operation of the MIT withholding tax rules and will enhance the competitiveness of Australian managed funds industry in attracting future foreign investment.|
|11 March 2010||Minister for Financial Services, Superannuation and Corporate Law (The Hon Chris Bowen) announced that the Parliament has passed the reforms in the way that financial markets in Australia are supervised, passing the responsibility for market supervision to ASIC. The reforms are intended to enhance the integrity of Australia's financial markets and will contribute to the goal of making Australia a financial hub.|
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The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.