Australian budget opens door to Islamic finance

The Australian government has proposed removing tax barriers to asset-backed financing arrangements as part of its federal budget, a move likely aimed at facilitating interest-free transactions used in Islamic finance.

Islamic finance is gradually catching on in Australia, with National Australia Bank Ltd helping fund a A$160 million ($114 million) Brisbane property purchase in February, after its maiden Islamic finance deal in August.

Under its 2016/17 spending plan, the government would seek to ensure the tax treatment of asset backed financing is similar to other arrangements which are based on interest bearing loans.

The measure would become effective only in 2018 and apply to transactions supported by assets, including deferred payment arrangements and hire purchase arrangements.

The two most common Islamic finance contracts are murabaha, where a client buys a commodity on a deferred-payment basis, and ijara, an installment-based leasing arrangement.

Islamic finance follows religious principles such as bans on interest and gambling but the asset-based nature of such contracts means they can incur double or triple tax charges because they require multiple transfers of titles of underlying assets.

The proposal comes almost five years after the Australian Tax Office first presented a paper on Islamic finance to the government for its review. (Reporting by Bernardo Vizcaino; Editing by Shri Navaratnam)

Copyright reserved to Reuters 2016

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