[KUALA LUMPUR] Australia is taking an alternative route to try and kickstart Islamic bond sales, five years after setting out on the road to remove double taxation on the debt.
With a tax board recommendation to do away with stamp duties on Shariah-compliant securities stalled since 2011, the government is now proposing scrapping a so-called withholding tax paid by bondholders on interest received from asset-backed securities.
Sukuk sales have almost doubled in the past five years to US$36 billion in 2015 and are a mainstay of the US$2 trillion global industry. The amendment, announced in the federal budget in May, "sends a strong message to the Islamic investor community that we're keen to do business," said Imran Lum, Islamic capital markets associate director with National Australia Bank Ltd in Sydney.
Around 2 per cent of Australia's 23 million people are Muslim and Crescent Wealth, a Sydney-based investment company, estimated the total assets under management that comply with religious tenets will rise to A$22 billion (S$22 billion) by 2020.
Uncertainty surrounding the tax treatment of Islamic bonds, however, is hampering the development of the market, according to Sue Ann Khoo of PricewaterhouseCoopers LLP in Sydney.
"The devil will be in the detail," said Reynah Tang, a tax lawyer at Johnson Winter & Slattery in Melbourne. "Stamp duty continues to be an impediment so, until that is addressed, I would anticipate a limited impact unless perhaps the relevant assets are non-land related." Interest payments are prohibited under Shariah law, so sukuk pay profit rates from an underlying asset, which typically equates to revenue streams from properties subject to stamp duty.
Education is also key for countries wishing to adopt Islamic finance, requiring trained economists, scholars, legal experts, regulations and approvals boards.
Under the proposal in the May budget, along with the tax board's recommendation, the government plans to extend a withholding tax exemption to Islamic bonds that have similar features to debentures or those securities that currently qualify for such relief.
The Board of Taxation 2011 report also recommended that local state authorities should provide Islamic finance transactions relief from stamp duty because it's among the main impediments to the provision of such products in Australia.
"In Australia, stamp duty on transfers of assets is a key revenue stream for the state governments, and any significant change will require state governments to buy-in," said Dale Rayner, a banking and finance lawyer with Norton Rose Fulbright in Brisbane.
It remains to be seen whether the May budget proposal will be passed. Australia is in the midst of an eight-week election campaign that pits Prime Minister Malcolm Turnbull's Liberal-National coalition government against the main opposition Labor party. The two sides are tied ahead of the July 2 ballot, according to the most recent Newspoll.
"The uncertainty of the tax treatment of Islamic finance products income is only one of the key impediments," said Ms Khoo at PricewaterhouseCoopers.
"Given the government's recognition of the importance of access to diverse funding such as Islamic finance and increasing use of Islamic finance in Australia by foreign investors, we would encourage the government to consider any amendments to the rules to apply sooner."
Removing some of the barriers would attract more Islamic capital from the Middle East and South-east Asia, said Ms Khoo. Currently, the key foreign players using Shariah financing in Australia are from Middle Eastern and Malaysian property investors, she said. The tax proposal is a "recognition by the government that it is important for Australia as a net capital importer to access diverse sources of foreign capital," she said.
"Islamic finance is a growing area and Australia is well placed to capture the opportunities it presents through our close proximity to South-east Asia and our strong trade relationship with the Gulf Cooperation Council," said National Australia Bank's Mr Lum.
"If we provide a framework to facilitate these types of investments, I'm sure you'll see a variety of investors seeking a range of different products. "