Taxation Treatment of Islamic Finance Products in Australia

Abstract

In October 2010, the Board of Taxation released a Discussion Paper titled Review of the Taxation Treatment of Islamic Finance. Since the release of this Discussion Paper, there has been no legislative reform in Australia to accommodate Islamic finance products. In the Discussion Paper, the Board reviews the taxation treatment of Islamic finance products, such as murābaḥa. Murābaḥa is known as ‘cost plus profit financing’ and involves the sale of a commodity by a financial intermediary to a purchaser at a cost plus mark-up profit rate. The Board argues that in order for a murābaḥa product to be treated equally to a conventional product for Australian taxation purposes, the profit mark-up component common to murābaḥa transactions must be treated as if it were interest. However, the Board does not consider the implications for Muslims if the murābaḥa profit mark-up is treated as interest. The objective of this article is to investigate the following two questions: can murābaḥa be viewed as Sharīʿa-compliant by Muslims if mark-up is treated as if it were interest; and, if murābaḥa is viewed by Muslims as no longer Sharīʿa-compliant, could this cause Australia to become less attractive for Muslim investors? This article will undertake a comparative analysis by examining the implications of treating murābaḥa mark-up as if it were interest from various Australian and UK perspectives. This article argues that before legislative amendments are introduced to cater for Islamic finance products, further research is needed on the Sharīʿa-compliant nature of Islamic finance products such as murābaḥa.