Federal budget promotes Islamic-style financing
The Federal Government’s latest budget has effectively introduced tax breaks on asset-backed financing arrangements from next year, potentially creating new Islamic financing and sovereign wealth opportunities for financiers and borrowers.
Islamic financing is subject to religious principles which forbid usury interest rates and gambling but allow for asset-backed financing arrangements.
The most typically used Islamic financing contract is either a murabaha, where a borrower purchases a commodity on a deferred payment basis, or an ijara, which is effectively an instalment-based leasing arrangement.
There is a fundamental requirement that returns must be earned from profit-derived transactions. In pursuit of this return, Islamic finance contracts are based on acquiring interests in underlying assets or revenues with a strong ethical and lower-risk focus.
Islamic financing has been common in the west for decades and is safe, competitive and affords opportunities.
According to the Top 500 Islamic Financing Institutions report published by The Banker in November 2015, it is estimated global Islamic finance compliant assets were worth $1,273 billion in 2015.
The Australian taxation system does currently accommodate non-interest bearing loans.
Islamic investors therefore accrue multiple capital gains tax, land tax and stamp duty obligations as titles in assets often change hands – in some cases, multiple times.
Subject to the relevant bill being passed, this will change on July 1, 2018, and the new arrangements will apply to transactions supported by assets, including deferred payment arrangements and hire purchase arrangements.
As part of the Ten Year Enterprise Tax Plan, the Turnbull government has committed to taxing asset-backed financing arrangements as if they were ‘traditional’ loan agreements.
This follows on from the Taxation Board’s 2011 Islamic financing report, Review of the taxation treatment of Islamic finance.
It’s unclear how the arrangements will be legally implemented but the changes have the potential to significantly boost the Islamic funding sector and revitalise capital markets in Australia.
Financiers and borrowers are prepared for the new tax incentives and are anticipating a rise in demand for Islamic funding, whilst increasing the profitability of any current contracts.
Banking consultant Niall Prinder said many people looking for safe and ethical investments might be attracted to Islamic finance.
“There are also broad implications for stimulating growth in long-term projects in the infrastructure, agriculture and mining sectors, as well as for providing an alternative funding source for property and development,” Mr Prinder said.
He said there could be a market for products based on Islamic financing among groups and people culturally familiar with it.
AMES Australia Senior Journalist