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Australia Looks At Taxation Of Islamic Products

by Mary Swire, Tax-News.com, Hong Kong

20 October 2010


The Chairman of Australia’s Board of Taxation, Dick Warburton, has released a discussion paper on the Board's review of the taxation treatment of Islamic finance, banking and insurance products.

It was announced in April this year that the Board would undertake a comprehensive review of the country's tax laws to ensure that, wherever possible, they do not inhibit the expansion of Islamic finance, banking and insurance products.

The report of the Australian Financial Centre Forum (also known as the Johnson Report), which was released by the government in January this year, recommended that the Board undertake such a review "in order to ensure that Islamic finance products have parity with conventional products, having regards to their economic substance."

The Board was also asked to identify impediments in current Australian tax laws (at the Commonwealth, State and Territory level) to the development and provision of Islamic financial products in Australia; and examine the tax policy response to the development of Islamic financial products in other jurisdictions, including the United Kingdom, France, South Korea and other relevant Asian jurisdictions.

The Board was asked to report to the Assistant Treasurer by June 2011. To facilitate public consultation, the Board has developed and issued the discussion paper as a basis for further discussion.

It points out that, while conventional banking and finance is based on interest bearing loans or investments, or equity financing arrangements, the underlying arrangement in Islamic banking and finance is based on the trading of assets, profit and loss sharing investments or leasing arrangements.

The Board’s terms of reference therefore ask whether the Australian tax treatment of Islamic finance products should be based on their economic substance rather than their form. Where an Islamic finance product is economically equivalent to a conventional finance product, the tax treatment of the two products should be the same.

Furthermore, if the Board concludes that amendments to the tax law are required, the Board should consider whether adjustments can be made to existing tax frameworks rather than the development of specific provisions directed solely at Islamic finance products.

Its review will therefore look at how aspects of the Australian income tax, capital gains tax, stamp duty and goods and services tax (GST) regimes apply to Islamic finance. For example, it will look at the special arrangements for the taxation of trusts and partnerships, and the fact that certain asset financing arrangements, such as hire purchase and leasing, are treated as subject to GST.

TAGS: capital gains tax (CGT) | tax | investment | banking | financial services | corporation tax | goods and services tax (GST) | Australia | stamp duty | tax reform | islamic finance | services

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