You can deduct non-interest expenses that are required to earn income too, so does it matter?


Exactly. You're deducting a business expense, so to speak.


Yup, the tax office doesn't give a shit if you are paying a mortgage, paying off some sort of halal loan, or purchasing seven goats a month to trade for use of the property.


Tax bill of one goats please.


So, according to what I’ve read, in Islamic finance the interest is replaced by “rent”? I suppose that rent serves the same purpose as the interest so it should be tax deductible as a business expense. That said, the whole thing seems exceedingly fishy. They claim it’s “profit sharing” so presumably that rules out negative gearing, since negatively geared properties make a loss, and thus wouldn’t pay “rent” to the Islamic financial institution?


Now now, multiplying funds borrowed by desired compounding rate of return of 30 years and then breaking that amount up into weekly repayments and calling them rent is totally not the same thing as charging interest, nah mate, don't be silly


Yeah theres a cost associated with borrowing funds, but dont worry - its not interest. Why not? We call it something else!


Honestly, if your neighbours god exists and is actually against interest, do you think some made up technicality is going to convince them it was okay when they judge your soul or whatever? You’re darn well paying interest no matter what it’s called and so just claim it and accept the (?eternal) consequences, or don’t incur it. To incur it and not claim it is to take the spiritual hit without all the short term financial benefits.


Apparently the whole of hallal banking does believe this.


Well they managed to convince themselves that there is a god... so it's no surprise that they've also managed to convince themselves that their convoluted system of charging fees as a percentage of loan amount is totally, definitely and for sure different to interest.


This is actually how banks in Middle Ages Europe operated for centuries, usury was also a sin in Christendom, the Vatican came up with convoluted reasons why it was ok for a long time because they themselves were debtors


Generally they got around the loophole by allowing Jews to work in banking, since they werent Christian or bound by church's legislation. Jews were pretty happy since they werent generally permitted to own Land - or to seek employment through many other means. Medieval Credit markets is basically the main reason a very superstitious/biggoted Europe tolerated small populations of religious minorities.


Mostly yes, but the biggest banker of all was a German catholic named Jacob Fugger, made the medici’s look like plebs


I remembered him from the Civilisation 6 video game — he was a 'Great Merchant' who you could recruit to your cities. His name always gave me a bit of a chuckle.


This is a common stereotype that isn’t true at all. Plenty of large Christian banking families during the Middle Ages existed as well such as the Medicis, Bardis, Acciaiuolis, Mozzis, Fuggers, Peruzzi etc were all Christian families. The Cahorsins and Lombards while not specific families, were groups of people big in banking in the Middle Ages and were predominately Christian. That’s not to say there were no Jewish bankers, there were. But most people preferred not to use them for obvious reasons. Many actually started as traders, buying what we now call futures in a lot of commodities at the time. They also offered insurance, and initially did offer loans as well before Christian banks took over, and they likely continued to afterwards but with little success. Where there’s smoke, there’s fire. But this stereotype is often over exaggerated because people don’t like Jews.


I agree that it is exaggerated to the point of conspiracy theories etc. But it is an accepted part of History that european Jews (esp those in cities) worked in Industries that Christians couldnt. Theres nothing wrong with that whatsoever - and it can be broached/discussed by sane, non anti-semitic people as well. The Jews in banking stereotype does spread a lot of false equivalences. For example, despite Banking, Jews had no political or social power or influence whatsoever in medieval Europe - and their economic position while in certain instances better than some peasants, was far below clergy, royalty, Knights, etc. Banking =/= Power back then, the way that it does today. Party because contracts were non-enforcable, and there was no concept of fractionable reserves or Fiat. Re your second point Medicis etc werent really middle age, they were renaissance - by that point the church was less powerful, and religious doctrine was more absolutist. Im talking proper medieval Europe.


Fair point about the Medicis, but there were still large Christian banking families throughout the Middle Ages and they were still quite powerful, albeit only in certain regions. Jews did have a lot of small lending shops, but they were only regional and were very small. Often when people talk about it, they seem to think Jews collectively ran major banks which is what I mistakenly thought you were saying, and is purely false. Back in the Middle Ages, Christians banks were a lot larger and more powerful. Where small Jewish lenders were successful, was providing loans and insurance to poor farmers working the rich families land, and had their income derived from crops. They often needed loans to rent the land they farmed, and larger banks rarely provided loans for this due to the risks. Jews would also offer insurance in case there was a bad crop.


While the out come is the same the method is different. There is no debt. A mortgage requires you to pay in full so if after 25 years you no longer want the home you are still liable for the remaining money and can be exploited by that. With Islamic finance should you opt out at 15 years you have no obligations to repay anything and are not bound to any financial comittement. Sure you lose money, but your credit rating doesn't get hit with a fore closure and you aren't pushed into bankruptcy due to an outstanding loan. Sounds like you managed to convince yourself of something too


In regular finance if you no longer want the house after 15 years you can sell it, pay off the loan and walk away. Happens all the time. If you find yourself unable to pay the loan, the bank can sell the property, recover their loan amount, and pay you the difference. What happens to the property in Islamic finance if you walk away after 15 years? What happens if you no longer have the ability to pay the "not a loan"?


In normal banking, you pay for debt by paying interest. However, if you want to collateralise it with something (such as a house), you can sell the collateral, but if you don’t sell it for enough to pay off the whole debt, you’re still going to have to pay off the debt. In Islamic banking, when the bank gives you money, they become part owners for a period of time and then they gift their remaining share. Easiest way is for a business loan, they receive a profit share up until a certain date. For a home loan, they get partial ownership and you rent the place to yourself paying the bank a certain % until they gift you the property at a preconceived date. If either venture fails and you have to sell but don’t recoup the whole debt, it’s forgiven. That’s the biggest difference, in normal banking, if you sell and can’t pay off all the debt with the sale, you’re still in debt, but not for Islamic banking. The “rent” is essentially charged at the same price as what the interest would be, so excluding some wording and how it’s structured legally, it’s the same. But the main thing (and why usury is banned) is you’re still in debt until you pay it off regardless of how successful the venture was.


Thanks. That is a difference of significance. Essentially you are saying the bank takes on more risk. One would assume the finance rate needs to be higher to compensate the bank for taking on the additional risk? Or at least higher initial scrutiny.


A bit of both. They have higher rates, but they’re also a lot stricter with who they loan money to and how much. As a result, while rates are higher, they’re not as high as you might expect since you’re not partially subsiding loans for riskier borrowers.


So there's no debt but you lose money? Sure mate What does a credit rating matter if there's no debt?


I'm not even religious but when people say shit like this it makes me cringe. Cmon man...


did you reply to the right comment???


Incredibly bigoted.


Is it? Or is it calling a spade a spade and acknowledging that "interest" is the simplest and most honest word that describes getting some cream back when lending money?


The interest part is identical bar some wording and legal structures, but that’s not what the issue is with usury and the main difference. In normal banking, if you sell the collateral and are still not able to pay off all of your debt, you’ll still be in debt, which is a major reason why usury is a sin and people can get stuck in debt. In Islamic banking, the debt is forgiven in this place and that’s part of the risk the bank takes on. They’ll actually charge higher rates as a result and are harder to get loans from, but it ensures they do a lot more ethical lending since they have an equity stake and lose when you do.


Criticizing a religious practice doesn't automatically make you a bigot. You think that not charging interest, but charging proportional fees is reasonable and sensible?


I think that the statement "Well they managed to convince themselves there is a god..." is incredibly bigoted and is being weaponised in the above comment to belittle people who believe in a higher power.


Yes, but you’re criticising something that isn’t the main difference. The main difference isn’t what they charge, but what they do if the venture you need debt for fails. If you get a loan at a standard bank, and you sell the collateral but can’t fully pay off your loan with that sale, you’ll still be in debt. Islamic banks forgive this debt, and thats the main difference. Another one is a business loan, where you’ll still be paying the debt off even if you’re business fails in a normal bank, whereas Islamic banks forgive the loan. The interest payments aren’t the difference and they don’t try to pretend it isn’t. It’s that they’re forced to be more responsible with their lending since if you lose money, they will as well.


Not charging interest is most definitely a big deal


Yes, but it’s not why it’s allowed. It’s a technicality. The issue with usury that Islam has, is you profit from the loan regardless of how the other side goes. Islamic banks don’t do this since they have to forgive the loan in this scenario, which is why they’re allowed. Most don’t care about the interest aspect, but many followers might which is why they change that part. But, the main aspect is the loan forgiveness part.


No, that's what you like to think. It refers to any unethical or immoral profits to the lender, but historically was specifically interest. But I'm done applying any kind of rational or logical thought to the th is s because it's absurd by definition. I hate *all* religions.


Yes, usury (which is slightly different to riba) is in relation to interest rates, as is riba which is actually what Islam forbids. But the reason why is due to potentially getting stuck in debt. You’re own self admitted racism is preventing you from acknowledging the difference and how you were wrong. I’m just calling you out for spreading misinformation. And no, it’s not what I’d like to think, it’s based on my own dealings with Islamic banks (from a business perspective- I’m not Islamic).


Except for the royalty that actually own and run the banks..


Islamic finance and Islamic banking is an established product. Put simply, the bank buys the house and you rent it from them for the term of the mortgage, so you pay rent rather than interest. Your neighbour needs to find a financial institution that offers this.


If that is the case then a) it’s not interest I agree, and b) why would anyone think they could do that for an IP?! Would they rent it from the bank and sublet it to someone else? This makes OPs question make even less sense. And at the end of the contract term, does the bank give you the property? Or is this just like a cheaper, weirder tend


Religion requires many leaps of logic. I’m sure you’ll be able to find another one that allows you stay true to your faith yet be financially lucrative.


I agree with you 100%. I'm agnostic, this question isn't for my situation - it is for my neighbour


Your neighbour may want to consult an Islamic scholar with experience in the area. Presumably to engage in Islamic finance, there is such a scholar that's signed off the relevant arrangement.


Or just learn to deal with living in the real world. Or go live in an islamic country.


I mean if their neighbour wants to get a loan at an Islamic bank, it’s really nobody’s business but their neighbours. There’s no no need to get upset about it.


Unfortunately the real world is filled with religion. Most people are religious.


So? They are still charging interest for loans.


My advice would be to accept the interest and ensure to donate 100% it for eid


>I’m sure you’ll be able to find another one that allows you stay true to your faith yet be financially lucrative. Just need to find mo's blind spot, God is busy smiting evil, gays etc to have the bandwidth for tax.


Atheism requires just as many leaps of logic. It took far more faith for me to be an atheist, than it did for me to be a Christian.


There is no leaps of logic in Islam. I challenge you to read the Quran and find any flaws with it. I'm happy to discuss. I challenge you to come up with a similar book, if not, similar chapter, if not, similar verse to the Quran.




​ ![gif](giphy|2DC6wokc8O17Zj9FTV)


Yep. Your right. Islam is the only religion that helps me understand an interventionist god that allows childhood cancer


*gestures at the state of the world*


There are several parts that don’t make sense (but do make sense when transcribed into Syriac funnily, suggesting parts of the Quran were not originally in Arabic), whole parts that contradict other parts (which Islam essentially admits with the concept of ‘abrogation’). Plus islam isn’t just the Quran, it’s also the Hadith. Are you a quranist? Do you not follow the sunnah?


What creature was Mohammad riding on when he travelled from Mecca to Jerusalem in a single night?


>I challenge you to come up with a similar book, if not, similar chapter, if not, similar verse to the Quran. There are literally dozens of religious texts across the world that are similar to the Quran. The Jewish Torah. The Christian Bible. The latter day saint Book of Mormon. The Hindu Vedas. The Buddhist Sutras. Heck, even the atheists have The God Delusion. This challenge has been met over and over and over again.


As a mostly agnostic individual, I find this sort of logic/loop holes idiotic. Does interest stop being interest, just because someone calls it a yearly/monthly fee? What sort of mental gymnastics does an individual need to do, to come to terms with this? I think organized religion is rubbish personally, but if you are a devout that does not allow interest, just accept not being to purchase property in Australia, unless it's outright. Calling interest something else, does not change what it is. And getting your loan through a religious financial institution, does not change the fact that it's a loan. By the way, I have a few Muslim friends and one of them explained why interest is looked down on in Islam and honestly it made sense. The whole angle of greed/maximizing profits made sense. That being said, nobody gives anything for nothing, except charity, and even that isn't truly free. So I don't see a way around interest or *cough* regular fees.


Depends on whether the expenditure is in relation to debt. Debt is defined in the tax act so it doesnt matter what the fairies and unicorns say it is.


The names and details aren't that important. If you're spending money to make money, you can probably claim it as a business/investment expense.


I love that Allah can be fooled by following the letter of the Qur'an, but not the spirit. Seems a little disrespectful to the 'almighty' to try using loopholes to get around divine commandments. None of my business, though.


It’s a meaningless distinction. Whatever isn’t principal repayment is a tax deduction. So if they call it fees etc, it will be tax deductible.


This is what I love about religion, same guys that use 'islamic finance' (believe me it is such a joke, but my muslim brethren just gobble that shit up like its gospel cause some guy with a beard came up with the concept and put some bs certification on it) are trying to take advantage of the system that utilises the infidel's negative gearing system. Tell your neighbour he/she should have consulted an accountant before diving into such an investment. Good luck. Peace and blessings.


Picking and choosing aspects of religion that suit you, whilst trying to ignore/get around the inconvenient parts? That's new!


Changing the word interest to rent doesn’t make it halal.


Yeah it does. That's literally what Islamic banks do, so who am I - a happy atheist, to argue about that.




Which is why it doesn’t make it ok. It’s made for Muslims to not feel bad about it being called interest. Interest is an unjust system anyways


This is so dumb. They have to pay fees instead. Ok sure, god didn't read the small print. Disclaimer : I hate *all* religions equally.


Objectively speaking, these financial products have certain advantages, mainly that it is now in the lender's interest that their customer is successful and does well. Think of these products as Fixed interest profit share loans vs Variable rate loans and it will make more sense. At the end of the day, it's all about money!


They can figure out a way to make a 1 hour marriage licence "halal" so they can sleep with a prostitute, I'm sure they can find a way to square this circle too.


Islamic banking is one of the fastest growing sectors in finance. The answer to your question is that it depends on how the loan is set up. If your neighbour has a normal loan from a bank then he gets charged interest. Then the interest is deductible. However if he's using traditional islamic financing then what happens is that bank buys the property and then sells it straight away to you at a profit (check out my pun). The total amount is repaid over a period of time. The profit component has been determined to be tax deductible by the ATO and you get hit with stamp duty, land tax etc twice because there's two transactions happening here. It really says a lot about the financial literacy of this sub but if you aren't sure of a topic then stop posting or at least use google so you don't look like an dumbass because interest payments on a loan are not the same thing as fees or capital gains.


Do you have a source on then paying stamp duty twice?


Thank you for this. This is the clear, well-explained answer I was looking for rather than religious attacks and debates...but then again this is reddit. *In a Jason Bateman voice* I don't know what I expected


So does this mean that under Islamic banking you're essentially getting a fixed rate loan? Also, do you know what happens if someone "defaults"? Is there such a thing in Islamic banking?


Upvoted for the clear and concise explanation. The majority of the replies here reminds me that this country still has a problem with racism, and that this sub is a property centric sub so most posters have shit financial literacy.


![gif](giphy|YtbH63GKxLwYw) Seems very complicated.


It's really not, did you ever buy anything paying in instalments?


So the bank buys the property at the sale price, marks it up and then sells it on immediately to the owner, incurring costs twice and including the cost of capital in the markup. God/Allah allows for this financial sleight of hand because a mufti from Pakistan (?) says it’s OK, and hence the “profit” (which is presumably calculated to give an annual rate of return) is then paid back over 30 years.


It's not a slight of hand, the bank has the debt burden if they choose to have a debt burden (that's up to them, they could use reserves if they want). The buyer has a payment plan, with no debt.


Does this mean they are effectively getting a fixed interest rate for the entire life of the loan?


Absent government intervention, I'm sure its both worse for the consumer and a major risk for the institution


There is no interest rate, but the bottom line would be the same as a fixed rate loan if both ran to completion.


If the buyer has a future obligation to pay money, then its a debt. That's the definition of debt. What happens if the buyer can't meet their future payment obligations? The house will revert to the bank, and the bank will sell it to reclaim their money. That's the definition of a foreclosure. How does the bank make their money? They charge the buyer a fee for the use of the banks capital, which is paid with the capital over time. That's the definition of interest.


The buyer does not have a future obligation to repay, but it is usually in their best interest to do so, so they usually do. You can walk away from any instalment payment plan, but it's going to cost you, usually, have you ever done so? The bank should make a profit margin, same as a corner store does on a candy bar, that isn't interest.


What happens to the house if you walk away?


The owner would resell it to someone willing to pay, I suppose. The person that walks away would most likely be eligible for a partial refund, those details would be in the sale contract.


In other words the bank gets their cut of the balance remaining on the "not a loan" and the seller gets the rest of the money paid out? Sounds suspiciously similar to me.


If you’re truly being faithful to Mohammed, you can’t claim the non-interest as a deductible.


But isn’t a cost? Otherwise not specified?


It's charity, to the tax man


Many years ago I came across this as a new concept for the financial services sector when the first Islamic bank was being set up in Australia. The concept was that if you needed a $500,000 loan at say 5% (assume flat interest) for 10 years adding up to $750,000 over the period, you borrowed $750,000 with no interest and repaid that. Back then it was all too difficult but there was a review in the process that concluded in 2018 and seems to have addressed the issues. This difference is not called interest but the profit element or service fee in the finance arrangement. From the ATO perspective, it is treated similar to interest and since 2018, there have been changes to how this type of arrangement is treated and the profit element is treated in kind as similar to an interest component in a regular loan. There is a little bit of a mention of it on the [ATO community discussion forum](https://community.ato.gov.au/s/question/a0J9s00000019z5EAA/p00014686) The other methods of financing and one type is a lease type arrangement where the costs are built into the lease and the transfer of the property ownership goes to the buyer at the end of the lease. I note the NAB launched Islamic financing a couple of years ago. [NAB Islamic financing](https://news.nab.com.au/news/nab-launches-a-first-in-islamic-business-financing/) I have no recent exposure to the topic as I have long since left the sector. As always, it is best to speak to an accountant or registered tax specialist, preferably one with experience with Islamic loans.


That quote from NAB is gold >Designed to meet Islamic Law requirements, the product structures financing as a lease where ‘rent’ and ‘service fee’ are paid instead of ‘interest’. So ah, we changed the descriptor on the statements, and now we are all good.


As in any "contract", the wording is important.


Has anyone done analysis to determine which scenarios the "borrower" would be better off under an Islamic finance arrangement? Given interest rates are rising rapidly I can imagine it might be competitive with other products.


>The other methods of financing and one type is a lease type arrangement where the costs are built into the lease and the transfer of the property ownership goes to the buyer at the end of the lease. I would think unless the "service fee" is variable, most of these arrangements would be the equivalent of a fixed interest loan. The ones that I saw when this was first trying to be introduced were essentially the cost of financing was built into the amount borrowed up front as part of the principle and the repayment was fixed over the term as the payment. I know APRA didn't like that at the time and I can see issues with respect of the loan to valuation ratio. Essentially any loan that is for over 80% of the value of a property is deemed a junk loan unless secured by mortgage insurance and these financial packages could easily be over that 80% mark or be uninsurable with respect to mortgage insurance. The basis of this Sharia Law is in the Christian Bible too (Islam and Christianity are both Abrahamic religions as is Judaism). For Christians, it is Proverb 22:7 — Neither A Borrower Or A Lender Be. Christians and Jews don't take it literally and build their life around it.


Agreed, but I was trying to brainstorm applications outside residential property. In any case, NAB's product is only available for commercial clients borrowing more than $5M.


There are existing non-bank Islamic financiers in the retail and commercial markets. Islamic Bank Australia is a new entrant that is specially a bank (as opposed to a credit union. building society or other financial services provider). Islamic Bank Australia [https://youtu.be/W1ZG6nLfFks](https://youtu.be/W1ZG6nLfFks) Others that have used Islamic finance [https://youtu.be/EPH1CWj7Snc](https://youtu.be/EPH1CWj7Snc) The latter also mentions the NAB.


It also sounds messy if the loan gets paid off early. Under the system you described, if you paid off the loan on day one, you’d end up paying a lot of extra fees. Sure the fees can be forgiven, but at that point you’ve just remade a regular loan.


Haha Muslims have to lie to themselves about not paying interest to be halal. Damn man, do they think theyve tricked allah. Just call it interest.


I don’t think ATO cares what you call it, but is it worth risking going to hell for eternity?


Some banks roll up the interest payments into the repayment and don't brand it as interest.


Side note. Is your username from that video of the fish market dude? Come and have a look. 1 pound fish. 1 pound 2 pound 3 pound fish. Come on ladies come on ladies. 1 pound feeeeesh. 1 pound feeesh.


Haha yes thats the video - that guy is the songbird of a generation


Ha, my sides, my god damn sides! It’s too much. 😂😂😂😂


Well what they are doing is forbidden in their religion how ever it is spun. So as the saying goes in for a penny in for a pound. Mental gymnastics always work for those that are religious. Just call it islamic accounting and let them sleep easy. 🤣


A rose by any other name.


This is surely a piss take


Maybe His God can shed some light on it


Dear God this is why state and religion should not mix.


Muslims can’t earn money generated from interest. They can pay it if it’s charged though. Overthinking a non-issue here Any deductible expense can still be factored in at tax time


So Muslims cant keep their money in a bank that gives anything higher than 0% interest or it is considered haram? Thats interesting


You’re not understanding how it works. The bank can collect interest all it wants. The Muslim person can be a customer of the bank, and also not earn interest on their money.


I think you misread my comment as it reiterates exactly what you said. "Muslims can't earn money generated from interest." Meaning a Muslim can't have an interest rate (higher than 0% or it is considered haram (think of a typical savings account). This means for a muslim's money held in a bank account, not money borrowed getting interest tacked on


The comments here are pathetic.


Don't know why there's so many people wanting to discuss 'religion'. This is an ATO tax question. The answer is available from the ATO already, but for your convenience, the answer is YES. Islamic finance products are tax deductible for rental properties. You can put the 'profit share paid to islamic bank' in the interest expense section OR you can put it in the other expense section along with all other expenses in maintaining that investment property.


jfc anti-religious sentiment invariably winds its way on posts like this. grow up


i’m quite appalled by this comment section. just because you disagree with a person’s beliefs doesn’t give you the right to insult them. downvoting anyone who actually tries to advise OP or stand up for their religion? really? its childish and makes aussies look bad. disappointing, really.


Muslim is the best religion


I don't understand why we tolerate this crap in our society. If someone wants that, go to the country that has that stuff. AND live in utter desperate circumstances.


go off bigot. what an ignorant comment.