Australia's Board of Taxation released a Discussion Paper on
13 October 2010 as a first step in its Review of the Taxation
Treatment of Islamic Finance Products. The Government announced
terms of reference for the review on 18 May 2010, and the Board has
been asked for a final report by June 2011.
The Discussion Paper includes:
A summary of Islamic finance principles and common Islamic
A discussion of the current Australian tax laws which apply to
Eight case studies which are each an example of a common
Islamic finance product with a summary (and often inconclusive)
analysis of its treatment under current Australian law, including
GST and duties as well as income tax rules, and in some but not all
cases a broad suggestion of how it should be taxed under new rules.
Each case study closes with a list of questions for which responses
are sought as part of the consultation process.
A brief overview of approaches taken to the taxation of Islamic
finance in seven other countries.
The eight case studies and the nature of the questions asked
suggest that the Board is likely to approach this topic on a
transaction-by-transaction basis, identifying in detail the
characteristics of a particular form of transaction, and focussing
any new rules strictly around that particular form.
In some cases, for example a project financing adopting a
musharakah mutanaqisah (a partnership where one party has
a diminishing interest over time) and an Islamic insurance
arrangement known as a takaful (where parties use a
collective investment vehicle to protect themselves from specific
risks), the Board has asked "What is the potential demand for
this product in Australia?" and "Can the potential demand
be quantified?". These questions suggest the Board are also,
as a preliminary matter, seeking to ascertain whether particular
Islamic finance structures would be popular enough in Australia to
warrant particular attention.
It is hoped that the focus on particular case studies and the
narrow scope of the questions asked does not lead to detailed and
highly prescriptive legislative changes which limit rather than
encourage the future development of shari'ah compliant
financing products in Australia.
It is also worth bearing in mind that, as Islamic finance
products are often asset-based, stamp duties are often a
fundamental tax hurdle to their feasibility. While the Board of
Taxation has been asked to include in its review state taxes (such
as duties and land tax) which may impede development of Islamic
finance products in Australia, any recommendations the Board makes
as regards state taxes may prove difficult to implement without the
support of the states, and a co-ordinated approach between the
states is often hard to achieve.
Submissions are requested by 17 December 2010.
In the United Kingdom, Norton Rose LLP were very involved with
the tax changes that were introduced to facilitate Islamic finance
in that country. The end results were relatively straightforward
changes to the tax legislation which sought to place Islamic
finance transactions (although not referred to as such, but rather
as "alternative finance arrangements") on a similar
footing to an equivalent conventional transaction. Norton Rose
Australia is intending to make submissions on the Board of
Taxation's Discussion Paper, and would welcome your comments
— please contact the authors on this page.
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.
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