Review of the Taxation Treatment of Islamic Finance Products

On 3 May 2016, the Government announced the release of the Board’s final report on the taxation treatment of Islamic finance, banking and insurance products.

Background

On 26 April 2010, the then Assistant Treasurer and the Minister for Financial Services, Corporate Law and Superannuation announced  that the Board of Taxation would undertake a comprehensive review of Australia’s tax laws to ensure that, wherever possible, they do not inhibit the expansion of Islamic finance, banking and insurance products. This review arises from the report of the Australian Financial Centre Forum  (AFCF) (which was released by the Government in January 2010) which recommended that the Board of Taxation undertake such a review “in order to ensure that Islamic finance products have parity with conventional products, having regards to their economic substance” (Recommendation 3.6).

Terms of Reference

On 18 May 2010, the then Assistant Treasurer announced the terms of reference  for the Board’s review. The Board has been 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;
• Examine the tax policy response to the development of Islamic financial products in other jurisdictions (including the United Kingdom, France, South Korea and relevant Asian jurisdictions); and
• Make recommendations (for Commonwealth tax laws) and findings (for State and Territory tax laws) that will ensure, wherever possible, that Islamic financial products have parity of tax treatment with conventional products.

In conducting the review, the Board should have regard to the following principles as far as possible:

• The tax treatment of Islamic financial products should be based on their economic substance rather than their form.
• Where an Islamic financial product is economically equivalent to a conventional product, the tax treatment of the two products should be the same.
• 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 financial products.

After considering the views of all stakeholders the Board was requested to provide a final report to the Assistant Treasurer by June 2011.

Discussion paper, consultation meetings, submissions

On 13 October 2010, the Board of Taxation released its discussion paper on the review of the taxation treatment of Islamic finance, banking and insurance products. The Chairman of the Board of Taxation announced the release of the discussion paper via a press release. The Board has developed this discussion paper to facilitate stakeholder consultation.

To assist in the Review process, the Board conducted consultation meetings on 8 November 2010 in Melbourne and 11 November 2010 in Sydney. The consultation meetings were attended by representatives from taxation professional bodies, major law and accounting firms, various major corporations and business associations.

The Board requested written submissions on the review of the taxation treatment of Islamic finance products by 17 December 2010. All submissions received were acknowledged. Copies of public submissions made to the Board are available below.

Board’s Report

The Board has completed its review of the taxation treatment of Islamic Finance and provided its report to the Assistant Treasurer. In preparing its report the Board took into account the various submissions to the review and discussions with stakeholders and its expert panel.

Government Response

In the 2016-17 Budget the Government announced it would amend the tax laws to give asset backed financing arrangements consistent tax treatment with arrangements based on  interest bearing loans or investments. These changes will apply from 1 July 2018. These measures incorporate the Board of Taxations recommendations as outlined in their final report to Government.

This will give new financing opportunities to Australian businesses looking to start up or expand. It will also support the availability of infrastructure financing because it is well suited to longer-term and large projects. This will provide a level playing field for equivalent asset backed and conventional financing arrangements and will enable Australian businesses to more easily access investment at more competitive rates.

Further information on this review can be obtained from the Board of Taxation Secretariat on  (02) 6263 4366 or at Taxboard@treasury.gov.au.

Submissions received