Are you required to file a 2013 tax return?

This post is a similar post from last year, with the required amendments etc. pertinent to the 2013 tax year. The deadline for filing your 2013 tax return is Monday 30th June 2014.

The Tax Law states that every Israeli resident is required to file a tax return every year, and doing so late results in hefty penalties (in excess of NIS 1,000 for each month between the official deadline and the actual filing).

That being said, a supplementary ruling to the law grants exemptions from filing if you (and your spouse - assume this the whole way through this post) meet certain criteria.

The exemptions are in place in order to relieve the burden on the already-overstrechted tax authorities having to process tax returns for people who won't have any supplementary tax to pay anyway.

There are though certain people whose circumstances dictate that they must file, regardless of their earnings. If you fall into at least one of the following categories, you must file a return:

(1) You are a controlling shareholder (10%+ ownership including holdings of close family) of a company or similar corporation. This applies to all Israeli corporations, and many overseas corporations.
(2) Income of husband and wife is assessed together, rather than seperate calculations.
(3) You received severance pay that was spread over a number of years - one of those years being 2013 (known as פריסת פיצויים).
(4) You were required to file a tax return for 2012, but not for one of these reasons.
(5) You own shares in a non-publically traded non-Israeli corporation.
(6) The value of your overseas assets at any point in 2013 exceeded NIS 1,874,000. This requirement is not relevant for those who fall into the "10-year exemption" for new olim.

So, assuming you do not meet any of the criteria above, you are exempt from filing a 2013tax return if your income in 2013 was exclusively from the following list. If you had income from any other source, you are required to file:

(1) Salary (including pension and פיצויים) - if the gross amounts received were less than NIS 650,000 (per spouse) and tax was deducted at source.
(2) Rental income (above the exemption limit), provided that (a) the total gross rents were less than NIS 337,000 and (b) the 10% tax was paid by 30th January 2014.
(3) Foreign interest, dividends, capital gains etc, provided that (a) the total gross income was less than NIS 337,000 and (b) the tax (the rates depend on the exact nature of the income) was paid using the "short form" at the post office or online by 30th April 2014.
(4) Foreign pension, provided that (a) the total gross income was less than NIS 337,000 and (b) no tax is due in Israel under the provisions of section 9c of the tax law (beyond the scope of this post - perhaps I'll address it some other time).
(5) Israeli-sourced interest and/or linkage income, provided that either (a) it is exempt from Israeli tax or (b) tax was deduced at source and the gross income was less than NIS 644,000.
(6) Capital gains made on the sale of publically listed shares provided that either (a) it is exempt from Israeli tax or (b) tax was deduced at source and the gross sales were less than NIS 1,874,000.
(7) Other types of income which are subject to tax and tax has been deducted at the maximum rate.
(8) Other income exempt from Israeli taxes.

If the total gross income of (7) and (8) combined is at least NIS 337,000, no exemption is granted.
Furthermore, anyone whose overall income (from all sources) exceeded NIS 811,560, there is a requirement to file and pay the extra 2% tax for high earners - this tax is due on income above the quoted limit.

Whilst this looks a little daunting, in many situations the requirement or exemption from filing is reasonably clear - but if in doubt, take professional advice.

Capital Gains Tax - costs & proceeds

As discussed previously, capital gains tax arises when an asset is sold; the gain being the difference between the proceeds and the cost. It is important to define both of these terms.

Proceeds

The law sees the proceeds as the "fair-value" of the asset. This is defined as the going market-rate between two unrelated parties, with the asset not subject to any restrictions or liens. In most cases, this is the same as the actual cost. The definition is designed to exclude situations whereby an artificially low price is set; the low price does not count for tax purposes.

Cost

The law delineates six different ways that you might have received an asset in your position, and sets rules for the cost basis in each case.

1. Purchase - the cost is the amount laid out for the purchase.

2. Barter - the value of what you gave away. For this, the proceed rules above apply.

3. Gift - there are special rules that apply if a gift was received before 1st April 1968. For gifts received after that date:

- received from family member (who took an exemption from CGT on their disposal - see here for more), the cost is the cost-basis of the last person in the chain who didn't receive the asset as such a type of gift. It is important to note that the original purchase date is also the deemed purchase date for CGT calculations.

- received from anyone else, the cost is deemed to be the proceeds value for the giver of the gift (i.e. the value when gifted). This, seemingly, applies to gifts received from non-Israeli family members (who didn't need - and are not included in - the aforementioned exemption)

4. Inheritance - until 31 March 1981, Israel levied Inheritance Tax on the estate of a deceased person, based on the value of the assets at the date of death. As such:

- if you received the inheritance before 31 March 1981, your cost is the value of the asset on which Inheritance Tax was paid.

- if you received the inheritance after that date, the cost (and deemed purchase date) is the original cost to the deceased.

5. Manufacture - the amount expended to manufacture the asset. As stated in an earlier post, business inventory is not included in the CGT rules.

6. All other cases - the amount you paid for the asset.

A few general comments:

- any depreciation claimed for income tax purposes is deducted from the cost. This also includes depreciation claimed by previous owners where relevant (gift or inheritance situations).

- any costs incurred in improving the asset can be claimed.

- any costs incurred in the purchase of the asset (eg lawyers, purchase tax) can be claimed.

- assets inherited from abroad are treated under the inheritance rules above. This may lead to double taxation when estate/inheritance taxes were paid; and advice should be taken in each case. The tax office have a system (over and above what the law says) that may be a solution - but it doesn't work in all cases.