The federal government is under pressure to tweak tax incentives that make it easier for the Islamic finance sector to flourish in Australia and allow greater cross-border transactions with Asia.
The Dubai-based global head of Islamic finance for law firm Allen & Overy, Anzal Mohammed, says there’s a push to encourage policy makers to ease regulations on such things as stamp duty and withholding tax so people who want to invest in Islamic-compliant funds don’t get hit with tax penalties.
Mohammed met Treasury officials in a bid to encourage such a move. It comes as the chairman of the Australian Financial Services Task Force, Mark Johnson, also recommended that impediments to Islamic finance be removed as part of the Board of Taxation review.
Islamic finance is based on the principles of Sharia law and bans the payment and receipt of interest. Investors instead need to make returns that are linked to profits and cannot invest in what Mohammed terms as “Sharia-repugnant” companies such as those associated with gambling, pornography or alcohol.
In early 2010, the federal government asked the Board of Taxation to review federal and state tax laws to ensure they did not unfairly disadvantage Islamic finance products.
While few bankers expect there to be a surge in Islamic finance even if the government changes any tax guidelines, Mohammed says it opens up the local market to more of these products by providing a “more level
“The key change we need is to the taxation regime to allow Islamic finance to develop,” Mohammed says.
“This discussion has been going on for a number of years and now everyone’s waiting to see what they [the government] do next.”
He also says Islamic finance is popular in countries such as Malaysia, so there may be more opportunities for cross-border transactions, as well as providing “more diversified funding sources” in an environment where there’s generally less liquidity.
He says government tweaks to legislation, whether federal or state, may change the state of play for wholesale investors but it’s not clear whether such changes will result in a bigger uptake in the retail market.
The major financial institutions are slowly moving into the Islamic finance space but a recent report by Austrade found Islamic finance is still a “nascent” industry.
The major banks are yet to offer retail investors comprehensive products and Australia’s first Sharia-compliant equity fund, Crescent Wealth, was only set up in October last year. The fund will begin offering products, including superannuation, tapping into the $1.4 trillion global Islamic investment market.
The Austrade report did note, however, that Islamic finance has potential for development, with Australia’s Muslim population hitting almost half a million and more than 60 per cent of the world’s Muslims located in the Asia-Pacific.