The delegation, led by New South Wales premier Barry O'Farrell and including financial services professionals, will explore regulatory and legal issues at a roundtable discussion with the Dubai Export Development Corp on Tuesday.
With proximity to southeast Asia, where Islamic finance is growing rapidly, Australia could play a role in the industry, officials believe. But efforts to pass the necessary legislation at a federal level have been slow, so the state government wants to get involved.
"The state government is very interested and trying to be proactive in getting Middle East and local players together to work out a deal," said Salim Farrar, senior lecturer at the University of Sydney Law School.
Passing legislation governing Islamic finance will require a series of politically charged debates, Farrar said.
But support is building in the business community, said Talal Yassine, managing director at Sydney-based Crescent Wealth. "Clearly there is going to be a push to get Islamic finance up in Australia."
Australia faces a challenge shared by other jurisdictions new to Islamic finance: taxation. Certain Islamic finance structures, particularly sukuk or Islamic bonds, can attract double or even triple tax duties because they require multiple transfers of title of the underlying asset.
Obtaining tax amendments to alleviate this appears difficult to push through the minority government of Australian Prime Minister Julia Gillard.
"At the federal level developments are going nowhere fast," said Matthew Stutsel, national head of taxation for consultants KPMG in Sydney.
The Australian Board of Taxation released a discussion paper in October 2010 which prompted consultation meetings and submissions. The final review was delivered to the government's assistant treasurer last June. But no further action has been taken, and the public release of the report "is a matter for the Government to decide", a Board of Taxation statement said.
The government's attention has been focused on mining and carbon tax initiatives, and an attempt to deliver a budget surplus; extending tax breaks in other areas might not sit well with voters. Elections are due in 2013.
But while federal-level discussions have been difficult, New South Wales is interested in Islamic finance partly because of the need to fund state projects such as upgrading railway networks and refinancing public utilities. Islamic investors operate large pools of investment funds in southeast Asia and the Gulf.
Attracting investment into infrastructure and other sectors is an important part of the state government's efforts to position Sydney as a leading international financial centre, the Australian official said.
Stutsel said work was being done within the state government on infrastructure proposals. "The issue is largely going to be withholding tax on sukuk, where we would be looking to leverage a tax law change," he said.
Tax incentives might, for example, be offered for Islamic investors in public-private partnerships. Typically, 10 to 15 percent of New South Wales infrastructure has been delivered using PPP, according to a government report. Granting special tax treatment for such projects cold avoid the need for a full tax amendment.