Australia’s potential as a destination of choice for Islamic investment has never been fully realized. Its abundance of real assets – real estate, commodities and infrastructure assets would be well suited to Islamic investors. However, investment to date has been modest and disparate – partly due to prevailing conditions in the global economy, the effect of which is compounded by the uncertain legal and regulatory regime for Islamic finance. However, there have been some developments in this space which hold promise for better things to come.
Review of 2016
This year holds some very promising news for Islamic finance with the most significant being the federal government’s intent to implement the recommendations of the Board of Taxation’s enquiry on Islamic finance. Back in 2010, the then Treasurer charged the board to undertake a comprehensive review of Australia’s tax laws to ensure that, wherever possible, they do not inhibit the expansion of Islamic finance, banking and insurance products. In its most recent budget, the Australian government announced its intent to change tax rules from the 1st July 2018.
The budget papers made reference to tax reforms associated with ‘asset-backed financing’ which the government conceded was a reference to Islamic finance. To date, no detail has been provided nor has any draft legislation been released for comment. However, the government had indicated that these measures would be directed to support infrastructure investment and large and long-term projects, which would indicate the types of Shariah compliant instruments that the government intends to address.
On the deals front, things have been slow with the perception from most Islamic investors that the Australian government must first resolve the uncertainty of tax treatment. That said, the Australian Taxation Office has issued a number of income tax rulings on Islamic finance which is another avenue by which Islamic investors have obtained certainty (minus specific legislative amendments).
The favored asset class in Australia for Islamic investors is still real estate with a number of commercial asset acquisitions in the course of 2016. The low cost of debt in Australia combined with well-tenanted, fully-leased assets make commercial office assets attractive. The most significant enabling factor has been the forays of National Australia Bank (NAB) as a provider of Shariah compliant debt in Australia. Imran Lum, an associate director at the NAB, has driven the NAB’s business in this space through its Islamic capital markets division, and this which has opened the doors to some significant investors.
There are a number of Islamic investors who are still undertaking residential real estate development, but as supply is becoming quite abundant, particularly for central business district residential apartments, this activity has waned over the last year.
Preview of 2017
The most significant area for investment potential in Australia remains infrastructure, but to date, no Islamic investor has participated in any of the high-profile infrastructure projects in Australia.
It may well be that we need to wait for the proposed legislative amendments to attract investors; however, there is still the prospect of these Islamic infrastructure investors opting for the income tax ruling path (as their real estate counterparts have already done) to obtain certainty of tax treatment.
This may create renewed interest in 2017 in this space among Islamic investors, with their conventional counterparts from the GCC and Malaysia already heavily and actively participating in Australia.
The industry awaits the release of material by the government supporting the proposed tax reforms which should provide the certainty that investors have been seeking. This development will also be welcome by the consortia of infrastructure partners who thus far have been reluctant to interfere with existing structures to cater to Islamic investors (in the absence of specific tax reforms).
The views expressed in this article are the author’s own.
Asad Ansari is the Islamic finance tax leader of financial services and investments at Deloitte, Australia. He was also appointed to the Board of Taxation’s review on Islamic finance. He can be contacted at [email protected].