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Australia Seeks Tax Changes on Sukuk: Islamic Finance

(Corrects interview location of UBS in 14th paragraph and clarifies Westpac’s product offering is nationwide in 23rd in the first version of a story published on Oct. 20.)

Australia plans to change laws to ensure Islamic finance products are taxed fairly as the government seeks to attract investors from the Middle East and Asia, paving the way for sukuk sales.

The national taxation board will hold talks next month in Sydney, Canberra and Melbourne on how to best ensure that Islamic finance transactions are treated the same as equivalent non-Islamic deals. The board noted this month that mortgages that comply with religious principles may lead to stamp duty being paid twice, as the financier buys the property and then sells it to his client. Under a conventional mortgage there is only one sale that attracts the duty.

While Australia’s 365,000-strong Muslim population is 2 percent the size of Malaysia’s, the largest sukuk market, making the industry more accessible would generate demand, the government has said. Australia is looking to join countries from Egypt to South Korea in seeking to ease barriers to Shariah- compliant products and tap the industry’s $1 trillion in assets, which the Kuala Lumpur-based Islamic Financial Services Board predicts will reach $1.6 trillion by 2012.

“Islamic finance is a rapidly growing part of the global financial system and Australia is in an excellent position to capitalize on that growth,” Assistant Treasurer Bill Shorten said in an e-mail response to questions from Canberra on Oct. 18. Islamic finance will provide Australia with access to more offshore capital, he said.

Natural Resources

Australia’s natural resources will provide companies seeking to sell sukuk with the underlying assets to back the debt and conform to the religion’s ban on interest, according to Zaid Ibrahim & Co., Malaysia’s biggest law firm.

Middle East money managers are interested in Australia investments that offer higher yields than most developed markets as well as potential returns from gains in the currency. Australia’s dollar advanced 7.1 percent this year against its counterparts among the Group of 10 currencies, second only to the yen.

“Australia wants investment from Gulf countries and that’s the reason they are taking it very seriously,” Abu Umar Faruq Ahmad, chairman of the Shariah Supervisory Board at the Sydney- based Islamic Co-Operative Finance Australia Ltd., said in an interview. “I see a lot of interest from the Gulf,” said Ahmad, who is also an assistant professor of Islamic finance at Hamdan Bin Mohammed e-University in Dubai.

There are a small number of companies offering Islamic financing in Australia, the tax office said this month, including the Muslim Community Cooperative Australia, a Melbourne-based mortgage provider, and Islamic Co-Operative Finance Australia.

‘Tweak Regulations’

Australia’s tax office will report by June 2011 on how the government can ensure the industry gets equal level of treatment, the government said on its website on Oct. 13.

“Islamic finance is a booming sector and Australia should be part of the action,” Trade Minister Simon Crean said on Feb. 12 in Melbourne.

Malaysian law firm Zaid Ibrahim, which has offices in Sydney and Melbourne, is advising “a few” Australian companies on overseas sukuk issuance and Middle East investors looking to buy Islamic assets in Australia, Chairman Nik Norzrul Thani said in a phone interview on Oct. 18 from Jakarta.

“It’s very important for them to understand that they may need to tweak regulations a bit to facilitate sustainable Islamic finance” businesses, said Nik. “An amendment is needed to create a neutral playing field, and so having tax neutrality as opposed to tax favoritism.”

Limited Demand

Demand for sukuk will be limited in Australia because the market is small, according to George Boubouras, head of investment strategy at UBS AG’s Australian wealth-management unit.

“At this stage, it’s not influential, but it’s a structure that can grow going forward,” he said in an interview from Melbourne this week.

Global sales of sukuk, which pay asset returns instead of interest, fell 23 percent to $12 billion in 2010 from the same period a year earlier, according to data compiled by Bloomberg. Issuance totaled $20.2 billion last year, up from $14.1 billion in 2008.

Shariah-compliant debt returned 12 percent this year, according to the HSBC/NASDAQ Dubai US Dollar Index, while bonds in developing markets gained 16 percent, JPMorgan Chase & Co.’s EMBI Global Diversified Index shows.

The gap between the average yield for global sukuk and the London interbank offered rate has narrowed 14 basis points this month to 359, according to the HSBC/NASDAQ sukuk index. The spread widened eight basis points yesterday and shrank 109 basis points so far this year.

Tax Implications

The yield on Malaysia’s 3.928 percent Islamic note due in June 2015 has dropped 23 basis points to 2.48 percent this month, prices from Royal Bank of Scotland Group Plc show. The yield difference with the Dubai Department of Finance’s 6.396 percent sukuk due in November 2014 widened 16 basis points this month to 387. The gap widened 17 basis points yesterday.

Asian Finance Bank Bhd., the Kuala Lumpur-based unit of Qatar Islamic Bank SAQ, is working with the government in New South Wales as an advisor for Islamic financial services and held meetings with Australian government officials, Mohamed Azahari Kamil, head of the lender, said in an interview yesterday.

“They are looking at the possibility of all the tax implications because to develop Islamic finance they have to ensure tax jurisdiction is much better than the conventional,” Mohamed Azahari said.

‘Stimulate Discussion’

To compete with Singapore and Hong Kong as a regional financial hub, Australia needs fewer rules and lower taxes on overseas investors and financial institutions, the Australian Financial Centre Forum said in a Jan. 15 report.

Companies including Westpac Banking Corp. are already offering Shariah-compliant products to tap demand from Islamic investors for Australian assets.

LM Investment Management Ltd., based in Queensland, started LM Australian Alif as Australia’s first Shariah-compliant fund, according to its website. Westpac Banking began offering nationwide commodity-trading services targeting Islamic institutions in February.

Next month’s talks will help the government’s plans to give Islamic finance providers the same opportunities as conventional debt buyers as Australia seeks to attract investors from Asia and the Middle East, Shorten said.

To contact the reporters on this story: Soraya Permatasari in Kuala Lumpur at soraya@bloomberg.net; Marion Rae in Canberra at mrae3@bloomberg.net.

To contact the editor responsible for this story: Sandy Hendry at shendry@bloomberg.net.

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