Losses

It is a fact of life that sometimes a business or investment doesn't work out. In this situation, you are going to end up with a loss; i.e. More money was spent than recouped.

In general, a loss can be used to offset other income or gains, as per the rules set out below.

But before that, there are three important rules about claiming losses that apply across the board:

A. If you make a loss in a situation where theby the profit would not have been taxable, the loss in such a situation cannot be claimed.

B. It is normally required that a loss be offset as soon as possible. If it is not, you will lose the right to use the losses in the future.

C. You can only carry forward losses into a new tax year if you file a tax return for the year you want to carry forward from. This is to allow the tax authority to check and agree the permissibility of the losses. This is of particular importance in the Voluntary Disclosure procedures.

Onto the details...
 

Israeli losses

1. Business losses can be offset again any other income earned during the same year that the loss is made. You are allowed to refrain from offsetting losses against capital gains, interest or dividend income, provided that the rate of tax on those incomes is no more than 25%.

2. Business losses that could not be used in the year in which they occurred can be offset against business profits (only) in subsequent years. You are required to use the losses at the earliest opportunity. If you stop doing business, you can offset such losses against salary income.

3. A loss from property can only be offset against future profits from the same property.

4. Capital losses can be offset against capital gains; first against the real gain. If you have inflationary gain, for each shekel of loss you can offset 3.5 shekel of inflationary gain. (see here for more on capital gains calculations).

5. Losses from share sales can also be offset against share income (i.e. dividends, bond interest etc.). For income from the same share, this is unlimited. For other shares, you can only offset provided that the tax rate is no higher than 25%. This rules out significant shareholders whose dividends are taxed at 30% (since 2012)

Overseas losses

6. In general, such losses are treated the same way as Israeli losses, but the offset is to be carried out against other overseas income only. The implication is that you may lose out on the foreign tax credit.

7. Passive losses can be offset against other passive income. Furthermore, rental losses can also be offset against the capital gain made on the sale of the property. Passive income includes interest, dividends, capital gains, property, commissions etc, provided that these are not earned as part of a business.

8. Business losses are to be offset first against business income or capital gains, and then against passive income.

9. Capital losses are first to be offset against overseas gains and only then against Israeli gains. The rules regarding offset against income are identical to those regarding Israeli capital losses.

How to file a tax return in Israel

So you're filing an Israeli tax return, either because you are required to do so (see here for more) or because you want due (and presumably are due a refund, see here for more).
The first step is to gather all of the relevant information regarding your income (for both spouses if relevant) during the year in question, as well as the relevant certificates and proofs that you may need in order to claim deductions and credits, as appropriate, as well as proofs of tax withheld at source.
All of this will be inputted into the main tax form (form 1301). Be careful though, there may only be three pages to the form, but there is a huge amount of information on there, and if necessary you will have to include other forms and appendices. Some of your year-end summary forms will tell you which box number to put the details into, but many other forms do not and you will need to work out where they properly go.
Particular attention needs to be paid to the capital gains appendices; the income from here does NOT carry through to the main tax return. Similarly, foreign taxes paid do not follow through from the foreign income appendix to the main return.
If you use an accountant, much of this should be fairly straightforward to them, but don't expect them to know everything! Be prepared to answer queries that they may have.
Once everything is ready, you are ready to file. The first step is to file the numbers electronically. This is done either online (here, requires registration) or by the accountant directly into the tax computer. At this stage, a calculation of taxes due and paid will show (NOT Bituach Leumi), although internet filing does NOT show payments made on account via mikdamot (see here for more).
If you have filed on the internet, you will get a copy of the tax return to print out and sign. It is important to file this version as it confirms the electronic filing via the barcode that is generated.
There is a second stage to filing though, and that is physically handing in the return, together with all supporting pages and proof of electronic filing, to the tax office. You can hand in the paperwork at any of the offices around the country and they will pass it onto the right office if need be.
 
I cannot stress the importance of making a copy of your return before filing, and having the copy stamped as "received".
 
Once the tax return has been filed, the authorities will issue an initial assessment, normally within 2-3 weeks. This should be based on your filed return, and will show any tax due or refundable. If you owe monies, there will be a payslip that can be used at the post office.
 
If you are due a refund, this will be processed as follows:
 
1. If you are not required to file a return, the authorities will want to check the return before approving the refund. Typically this takes 2-3 months, although the law allows a full year for the refund to be paid from the date of filing.
 
2. If you are required to file a return, small refunds will normally be refunded fairly swiftly (within a week or two of the assessment). For larger refunds (from approx. NIS 20,000 and above), the authorities will pass your file on to be checked by a supervisor. The law requires the refund to be paid within 90 days of filing the return, but this is often ignored by the tax authority, and you may have to wait (significantly) longer.

The authorities didn't hold back a refund to be checked, you can expect a second assessment to be issued a number of months later, once some clerk has had a chance to look a little closer at your return. It is possible that something may come up (most likely source being disallowable donations) and there may be a balance of taxes to be paid. Normally, that would be the last correspondence from the authorities, although there is of course the possibility that your affairs may be audited at a later date.