Tax and Religion: Never the Twain Shall Meet?

Brett Freudenberg

Griffith University - Griffith Business School; Griffith University - Griffith Law School

Mahmood Nathie

University of South Australia - Division of Education, Arts and Social Sciences

May 7, 2010

9th International Tax Administration Conference, Sydney, April 8-9, 2010

This paper focuses on the emergence of Islamic banking and finance in global financial markets and efforts by governments (through regulatory and tax initiatives) to facilitate it. Particularly, this paper focuses on the fundamental question as to whether it is constitutionally possible for Australia to implement such tax reforms to encourage and facilitate faith-based transactions.

Recently there have been calls for Australia to become a financial hub - particularly in south East Asia. One aspect of this is the recognition of faith-based financial alternatives in the marketplace. This consideration includes ensuring that tax laws are synchronised and do not unduly hinder or restrict the orderly development of such alternatives. The Islamic financial markets stand out as one example. In 2007 it was estimated that the market for Islamic finance products were worth in excess of US$700 billion associated primarily with the world's Muslim population.

However, one core element to the structure of Islamic financial transactions is the necessity to ensure religious compliance with, for example, not involving the usage of riba (interest). Being different to conventional finance, Islamic finance has attracted both interest and scepticism, partially because of the paucity of academic research on the subject - with Australia being no exception (Amin, 2007). However, the structural nature of some of these faith-based financial models can sit awkwardly with Australia’s tax system. For example, housing finance using an Islamic product is, in certain circumstances, structured more like a pre-determined fixed sum hire purchase agreement compared to an outright conventional purchase with payment of interest on the amount borrowed.

The need for research in this area is critical as some countries like the United Kingdom, Malaysia and Singapore, have introduced reforms to their finance and tax laws to recognise the use of and facilitation of Islamic finance. There have been calls in Australia for similar reforms to be considered as part of Australia's quest to become a regional financial services hub (Bowen, 2009).

Juxtaposed between competitive forces among nations, it is important to consider whether Australia's tax system is impeding the development of an emerging Islamic finance market. Also, given Australia's multi-culturalism it is important to consider whether Australia's legal system (including tax) can be broaden to ensure greater fairness between its citizens regardless of their faith.

While the idea of facilitating more faith-based transactions may seem economically rational - a fundamental question needs to be addressed - is it appropriate for Australia’s tax laws to be amended to facilitate other religions. This paper will explore this fundamental question before considering how this idea may be facilitated. This paper addresses the theoretical considerations of tax and religion and critically assesses the implications of Islamic finance in light of Australian constitutional law, tax neutrality and economic efficiency.

Number of Pages in PDF File: 24

Keywords: Islamic finance, tax, australia, financial hub, reforms, banking

JEL Classification: K34, E44, E62, F30, G8

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Date posted: May 11, 2010 ; Last revised: November 23, 2015

Suggested Citation

Freudenberg, Brett and Nathie, Mahmood, Tax and Religion: Never the Twain Shall Meet? (May 7, 2010). 9th International Tax Administration Conference, Sydney, April 8-9, 2010 . Available at SSRN: https://ssrn.com/abstract=1601696 or http://dx.doi.org/10.2139/ssrn.1601696

Contact Information

Brett Freudenberg (Contact Author)
Griffith University - Griffith Business School ( email )
Brisbane, Queensland 4111
Griffith University - Griffith Law School ( email )
Nathan Campus, GU
Nathan 4111

Mahmood Nathie
University of South Australia - Division of Education, Arts and Social Sciences ( email )
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