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NEWS

Islamic Finance , Property Purchase And Stamp Duty

Tuesday, February 09, 2016

Islamic Finance, Property Purchase and Stamp Duty 

Islamic law, or Shariah, requires that interest forms no part of any transaction, meaning that the vast majority of loan products available in Australia do not conform.

Let's forget for a moment that politics, religion and money are the big three no-go topics for polite conversation, and tackle all three at once. When the Financial Systems Inquiry kicked off, there were calls for Joe Hockey to include Islamic finance in its scope. While it was not included, it is important to clarify the sometimes sensational headlines regarding Islamic finance, by breaking down exactly what it is, why it exists and how it works. Approximately two per cent of the Australian population seek banking, loan, investment and insurance products that conform to Islamic law (or the Shariah). Depending on the extent to which someone complies with Shariah, this means they may only participate in transactions that represent tangible assets. They may also seek loan and investment products that do not charge or earn interest, do not present uncertainty, and do not finance products, services or activities banned under Islamic law, such as alcohol, gambling, pork or pornography. Yield generally arises from profit sharing, while risk is also shared, which can present some complications when it comes to insurance.

Islamic finance, investment and insurance products that are designed to work within Islamic law are available in Australia. For those that allow people to purchase property and commercial equipment, at least, the end result is very similar to what you would expect to see with any other loan product. Examples of Shariah-compliant loan products include:

 

• The lender, an Islamic finance institution, purchases an asset and

• Sells it to a client, with payment by instalments over an agreed period. The sale price is higher than the purchase price to account for the profit that the lender would usually earn from interest.

• An investor provides finance to an entrepreneur for a commercial enterprise. Risk is carried by the investor, and the partners determine the share of profits.

• Both partners contribute capital for a commercial enterprise, which may be run by one or both of the investors, or by another party, agreed by the investors. The partners determine the share of profits, but risk is shared according to the original capital investment.

 

One notable difference between Islamic finance and other common loan types in Australia is the treatment of stamp duty.

"As I understand it, the financier must pay stamp duty on the purchase. The property is then 'leased' to the 'lessee' who must, in most states and territories, pay stamp duty (again) when the property is transferred to them at the end of the payment cycle," explains Peter Kennedy, MFAA Compliance Manager.

The two transactions are clear in the first example above: one at the start, when the financier purchases the property, and another at the end of the payment period, when the property is transferred to the client.

The only Australian state that charges stamp duty on such transactions only once is Victoria. This removes a significant impediment to property purchase and makes participation in wealth building within Australia more accessible for followers of Islamic law.

 

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Source: The Mortgage and Finance Association of Australia (MFAA)

 


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