Taxation treatment of Islamic finance products in Australia

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 murabaha. Murabaha 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 murabaha product to be treated equally to a conventional product for Australian taxation purposes, the profit mark-up component common to murabaha transactions must be treated as if it were interest. However, the Board does not consider the implications for Muslims if the murabaha profit mark-up is treated as interest. The objective of this article is to investigate the following two questions: can murabaha be viewed as SharίꜤa-compliant by Muslims if mark-up is treated as if it were interest; and, if murabaha is viewed by Muslims as no longer SharίꜤa-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 murabaha 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 SharίꜤa-compliant nature of Islamic finance products such as murabaha