Australian budget opens door to Islamic finance

May 9 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. 

(Reuters / 09 May 2016)

---
Alfalah Consulting - Kuala Lumpur: www.alfalahconsulting.com
Islamic Investment Malaysia: www.islamic-invest-malaysia.com

Australia's NAB seals maiden Islamic financing deal

Aug 27 National Australia Bank Ltd has closed its first onshore Islamic financing deal, a A$19.9 million ($14.2 million) arrangement to fund a real estate purchase by Sydney-based asset manager Crescent Wealth.

The funding platform designed by NAB, the country's No.4 lender by market value, could help open Australia to Islamic investors from the Gulf and Southeast Asia that seek to adhere to religious principles such as bans on interest and gambling.

Crescent Wealth used the four-year financing for a A$30.75 million commercial property acquisition in South Melbourne, with plans to build a portfolio of commercial assets across the east coast, said Talal Yassine, managing director of Crescent Wealth.

"It marks a significant moment for the industry in Australia as the funding was supported by an Australian retail bank."

Until know, such deals had to be purely funded by equity, but the sharia-compliant structure would help to significantly remove transaction risk, in particular for foreign investors, said Yassine.

"We plan to secure a second asset by year end and again, will be leveraging the existing structure we have with NAB."

Crescent Wealth, established in 2011, currently has over A$100 million in assets under management across five Islamic funds which include cash, real estate and domestic and international equities.

In April, the firm set up an office in Malaysia and is now considering applying for a boutique fund management license.

TAXES

Islamic financing has struggled to gain traction in Australia due in part to tax issues which can penalise the asset-based nature of such transactions.

Structures such as sukuk, or Islamic bonds, can attract double or even triple tax charges because they require multiple transfers of title of the underlying asset.

The Australian Board of Taxation presented an Islamic finance paper to the government in June 2011 aiming to address such issues, but Canberra has yet to give a response or release the final review.

In the meantime, Britain, Luxembourg, South Africa and Hong Kong have all passed tax amendments to facilitate such transactions. All have issued sukuk over the past year.

The NAB used a structure known as wakala, where one party acts as an agent for another to manage a pool of assets. Wakala is widely used overseas, with Hong Kong using the format for its second issuance of sukuk in May, a $1 billion deal.

(Reuters / 27 August 2015)

---
Alfalah Consulting - Kuala Lumpur: www.alfalahconsulting.com
Islamic Investment Malaysia: www.islamic-invest-malaysia.com

Solar Sukuk Marks Australia’s Debut Choosing Labuan Haven

Australia is set to become the newest entrant to the Islamic debt market this year as a solar-power joint venture seeks to sell a debut sukuk in Malaysia’s offshore tax haven of Labuan.

SGI-Mitabu, run by The Solar Guys International and Mitabu Australia Pty, has revived a plan to offer A$150 million ($117 million) of the securities in the third quarter to finance the building of a plant in Indonesia, M. Rusydi, Mitabu’s director, said by phone from Brisbane on Feb. 10. The company is coming to Malaysia because Australia still hasn’t approved laws allowing for the sale of sukuk since first proposing a plan in 2010.

The offering may serve as a model for Australian companies to tap the $1.7 trillion Islamic banking industry, according to Kuala Lumpur-based consultancy Amanah Capital Group Ltd. Malaysia, the world’s biggest Shariah-compliant debt market, has attracted sukuk issuers from Japan, which also lacks legislation that avoids double taxation on capital gains and income streams. Labuan, an island off the coast of Borneo, was established as a financial hub in 1990.

“Such financial transactions benefit the Australian economy by opening up more sources of funding,” Suhaimi Zainul-Abidin, treasurer of the Gulf Asia Shari’ah Compliant Investments Association, said in a Feb. 10 e-mail from Singapore. “But, it may be premature to expect a sudden spurt in the number of Australian companies issuing sukuk.”

Tax Incentives

SGI-Mitabu’s debt sale was first announced in December 2012 with a target issuance date of June 2013. The offering was delayed while the Indonesian government approved the location of the new plant as an economic zone, said Rusydi.

Labuan, which is also an offshore oil and gas hub off the coast of eastern Sabah state, doesn’t charge stamp duties on revenue streams from sukuk’s underlying assets or on capital gains. The island offers an income tax rate of 3 percent and has attracted 10,352 companies since its inception, according to the Labuan International Business and Financial Centre’s website.

About 2.2 percent of Australia’s 23 million population are Muslim, according to U.S. government data. A bill to give equal tax treatment to Islamic bonds was presented to parliament in 2010 and the National Taxation Board submitted a study in July 2011. There’s been no major development since.

Shariah-compliant finance presents an avenue for Australia to open its capital market, boost competition and encourage social inclusion, Bernie Ripoll, a former parliamentary secretary to the Treasurer, said in an April 2013 speech.

Lacking Prominence

The lack of progress could be partly due to the changes in the Australian government, said Reynah Tang, a tax partner with law firm Johnson Winter & Slattery in Melbourne.

“Back at the time the original proposals were happening, the thinking was that Islamic finance would become a more regular feature of our capital markets,” Tang said by phone on Feb. 11. “It hasn’t been very prominent in more recent years.”

While Australia is stalling, other nations are seeing opportunities in Islamic finance. The U.K. became the first non-Muslim country to sell sukuk in 2014, followed by debuts by Luxembourg, Hong Kong and South Africa. Investors bid for 10 times the 200 million pounds ($305 million) offered by the U.K.

Global sales of Shariah-compliant notes, which pay returns on assets to comply with Islam’s ban on interest, climbed 7 percent to $46.3 billion in 2014 from a year earlier and reached a record $46.8 billion in 2012, data compiled by Bloomberg show. Issuance totals $1.7 billion so far this year.

Malaysia’s Attraction

Malaysia has attracted sukuk sales from Japanese companies such as Bank of Tokyo-Mitsubishi UFJ (Malaysia) Bhd. and Nomura Holdings Inc., while Toyota Motor Corp. issued Islamic debt via its local unit. Export-Import Bank of Korea set up a combined Islamic and conventional bond program in the Southeast Asian nation in 2008 but never sold a sukuk portion.

National Australia Bank Ltd., the nation’s fourth-biggest lender, has been exploring the possibility of selling Shariah-compliant notes since at least 2011. Citilink Finance Australia Ltd. was also planning a sale that year, although neither has ever materialized.

Some institutions are already offering Islamic services in Australia. MCCA Ltd. and Islamic Co-operative Finance Australia Ltd. both provide Shariah-compliant property and car financing. Kuwait Finance House KSC offers Islamic treasury products and investment services, and Sydney-based Crescent Funds Management (Aust) Pty Ltd. supplies property and stock funds.

“SGI-Mitabu’s sukuk issuance is a very good catalyst for Australia’s Islamic financial market,” Abas A. Jalil, Kuala Lumpur-based chief executive officer at Amanah Capital, said in an e-mail interview Wednesday. “Once the Australian market becomes more familiar with Islamic finance, the process of amending the laws relating to sukuk taxation will be expedited.

(Bloomberg Business / 12 February 2015)

---
Alfalah Consulting - Kuala Lumpur: www.alfalahconsulting.com
Islamic Investment Malaysia: www.islamic-invest-malaysia.com