Mr Johnson and finance sector colleagues last week released an update of their landmark 2010 report in a bid to ramp up pressure on a new government for a cut in withholding tax for foreign investors to boost local managed funds, further progress on a "Asian Region Funds Passport" and rule changes to unleash hundreds of billions of dollars of Islamic funds for infrastructure.

Hub hopes in ruins

These hopes now lie in ruins.

The Financial Review reported in May that budget changes to ease regulations on Islamic finance could unleash hundreds of billions of dollars of Middle Eastern sovereign wealth funds for investment in Australian ports, rail and road projects.

The article said the government had quietly proposed changes to tax laws in the budget to accommodate Sharia law to put Islamic funds on the same tax footing as other global funds, as recommended by the 2010 Johnson inquiry, a 2011 Board of Taxation report and Mr Johnson's follow-up report revealed by the Financial Review last week.

Just four sovereign wealth funds from UAE, Saudia Arabia, Qatar and Kuwait control $US2.3 trillion ($3 trillion) and are among the world's largest but are precluded from issuing conventional Western loans. the Middle East's $US3.7 trillion sovereign wealth funds.

Muslim takeover


But in the run up to the election, Ms Hanson seized on the Financial Review's story to attack Prime Minister Malcolm Turnbull for backing "a Muslim takeover" .

In a video post on Facebook which has had more than 751,000 views Ms Hanson claims "Muslims" are getting "interest free loans" while ordinary Australians struggle to pay their mortgages.

"This is about Muslims borrowing interest free loans in Australia. Where does it leave Australia when mums and dads are struggling to get loans, they can't get interest free loans, companies can't get interest free loans", Ms Hanson says.

Senator Nick Xenophon wants to toughen regulation on video-game gambling. Supplied

Dale Rayner, a partner at Norton Rose Fulbright, said the proposed Islamic finance changes could have opened the door to new debt capital markets, stimulate investment and boost returns to governments on asset sales.

"However, the new makeup of the Senate could bring uncertainty that undermines the momentum required to keep the changes on the agenda, let alone progress them through both houses."

Mr Johnson said a lot of hard yards had been done on other parts of the "investment manager regime" – including trialling an invigorated corporate debt market and an "Asian Region Funds Passport" being piloted with six countries.

But two outstanding items – the withholding tax cut and provision for a budget proposal for a streamlined "pass-through corporation" to facilitate investment under the Asian funds passport – are needed to complete the package, he said.


afr Mark Johnson Roundtable on why Australia has not done enough to become a global financial centre. 28th june 2016 photo by louise kennerley louise kennerley

"So many things just get thrown in the too-hard basket or there might be a deficit implication, so it may be a casualty or at least it's probably stalled," Mr Johnson told the Financial Review.

"I hope it's only stalled but who knows?"

$5bn investment at risk

Mr Johnson said the withholding tax only raised about $5 million but it could be repelling investment flows that could result in anywhere between 10 and 100 times that much revenue because of the compliance burden.

"Anybody outside the country just says, 'Australia levies withholding tax, my God, I have to get lawyers and accountants and file returns, so why do that?'

"Who knows? it could be 1000-fold."

Former foreign minister Bob Carr yesterday called Pauline Hanson's political comeback an "embarrassment" which will hurt Australia's image overseas, as Labor Leader Bill Shorten blamed Malcolm Turnbull for "opening the door" for the return of Ms Hanson with his changes to the senate voting system.