Muslims complying with Islamic principles, including Sharia law, have a different approach to the lending of money than Australia’s traditional approach. The Islamic financial system promotes risk-sharing and under Sharia law, Muslims are prohibited from entering into a loan agreement that requires interest to be paid. Instead, the lender will repay the loan, in addition to a ‘gift’, which is often greater than a commercial bank’s interest rate.

In addition, Sharia law prohibits secured loans, and instead provides that accepting faith that the lender will repay the loan is required.

Issues arise in Australia when a loan is made by one company to a related company, which is compliant with Sharia law principles as the Australian Tax Office considers this a dividend and not a valid loan at arm’s length under Australian tax law.

This assumption can be rebutted provided there is evidence to show that while the loan does not satisfy the requirements generally required by the ATO, the loan is compliant with Sharia law principles and therefore will not be considered a dividend.

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It is possible for financial arrangements made under Sharia law to be recognised by the Australian Tax Office as legitimate.  However it wise to seek advice early in the process. Waterhouse Lawyers are experts in helping their clients in these circumstances.