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29 June 2014

The new one-page tax form for low earners

With much fanfare, the tax authority announced last week a one-page tax return for the smallest of businesses. The form can be found here.

The form is designed to allow the smallest businesses - who wouldn't reach the tax threshold anyway - to just report their income, without the extra pages relating to deductions and credits.

However, it must be noted that the tax authority reserves the right to ask for a full tax return anyway, as well as any other paperwork deemed necessary; making this process somewhat meaningless is my opinion.

Who can use the report?

The explanation notes (which can be seen here) list five possible scenarios to be allowed to file such a return. These can be summarised as follows:

(1) If one or both spouses has small freelance businesses, the total business turnover of the business - added to that person's other earned income is less than NIS 60,000 in the tax year.

(2) If one of the spouses does not have a freelance business, their only income - if any - is from salary and/or pension. This income must have had tax deducted at source in full according to the law, AND they can have no other income.

It should be noted that someone with a disability allowance can also use this form and report the income exempted under the disability allowance.

Who cannot use the report

There is a long list of people who cannot use the short report:

(1) Someone who should have done a Teum Mas, and didn't.
(2) Someone who is required to file a tax return as a result of spreading pitzuyim (severance payments) over a number of tax years.
(3) Shareholder (10%+) in a corporation
(4) Non-Israeli resident
(5) Israelis with foreign income and/or significant foreign assets
(6) Settlor, trustee or beneficiary of a trust
(7) Partner in a business partnership
(8) Someone with losses (current-year or carried forward from prior years) - presumably this is assuming that you wish to claim the losses
(9) Someone wishing to claim a tax refund
(10) Someone who has unearned income (e.g. rental) - since these are taxed at higher rates, with the exclusion of investment income which was fully taxed at source by the bank/financial institution
(11) Some with investment income which was not fully taxed at source
(12) Someone who was declared bankrupt
(13) Someone with total income (from all sources) exceeding NIS 811,560 (for 2013) - they are liable to pay the 2% high-earners tax
(14) Anyone who has made payments on account to the tax office (e.g. mikdamot, rental tax payments, capital gains etc.)

As you can see, it is fairly difficult to meet the criteria. And even if you do, it's not such a big deal to put the same information into the full tax return and simply tick the box which says that you (and your spouse) are Israeli resident - which would give the same outcome!

Another potential down-side is that Bituach Leumi may over-tax you as there is no room to claim deductions that are allowable in that calculation e.g. disability allowance and Keren Hishtalmut payments.

17 June 2014

Taxation of pension income

The taxation of pension income is one of the most complicated areas of law due to the various and numerous exemptions available.

Fully exempt pensions
Pensions which are not subject to tax whatsoever include the Bituach Leumi old-age and bereavement pensions and reparations received by Holocaust survivors. Also fully exempt are disability pensions, whether received from Israel or abroad.

A person receiving a survivors pension can receive the first NIS 8,470 per month (correct for 2014) tax free. Of any excess, 35% of the pension is also tax free, with the rest subject to tax.

Other pensions

In short, the exemptions start when the taxpayer reaches pensionable age; currently 67 for men and rising from 62 to 64 for women. Before that age, pensions are fully taxable (in general), and also subject to Bituach Leumi (although the Bituach Leumi paid does reduce the tax burden in such cases)
Foreign pensions (i.e. paid by non-Israeli providers)

Once you reach pensionable age, 35% of the pension is tax free, with the rest subject to tax according to your marginal rate of tax. However, in most cases the tax on the entire pension (i.e. before the 35% limit) is limited to the tax that would have been paid in the host country had the taxpayer been a resident in that country and only had the pension income. This can lead to many people not being taxed on such pensions. Of course, Double Tax Treaties should also be checked to see if any pension can be exempted in either Israel and/or the country of origin.

Israeli pensions

In short, everyone is eligible to a certain amount of their pensions to be exempt from tax. The exemption is a fixed amount for each person, and is not linked to the actual pension to be paid. The exemption is calculated as a percentage of NIS 8,470 per month (correct for 2014) - but obviously the exemption cannot exceed the total pension to be paid. The exact percentage depends on the amount of tax-exempt severance pay that the pensioner received during the last 32 years of their salaried work-life; the calculation is complicated and this is not the forum to explain it in detail. Suffice to say that (1) if you took the maximum tax-free severance pay, your percentage is set to 8.5% and (2) if you took no tax-free severance pay, your percentage is set to 43.5%. Anything in the middle will give you a percentage somewhere between 8.5% and 43.5%.

The above percentage range is relevant for the 2012-2015 years, and is set to rise in the future:
  • In the years 2016-2019, the range is set to rise to 14% - 49%
  • In the years 2020-2024 the range is set to rise to 17% - 52%
  • From 2025 and onwards the range is set to rise to 32% - 67%.
That being said, it would not be unheard of for the rules to be changed in the interim, so be sure to be aware of any (proposed) changes.

It is also important to take proper advice when considering taking tax-free severance pay, based on the above - the reduction in percentage of exempt pension affects your taxable pension for life!

9 June 2014

The tax assessment שומה

Once you have filed your tax return properly (see here for more), the tax authority will issue an assessment of the taxes that you owe based in what you have filed. This is normally on three blue-backed pages (first single-sided and the other double-sided) of A4 size. They also send some explanatory pages.

The first page is the summary of income and the tax calculation. The very bottom of the page is reserved for a payslip with which you can pay the taxes that you owe. Interest for a few weeks is normally built into the calculation; there will be a date by which you must pay before more interest kicks in.

The second and third pages show you a breakdown of the assessed income, tax due and deductions and credits given. You should check that these agree with what you filed, or understand why they are different.

The authorities will also normally issue a second assessment after having reviewed the return in a cursory matter. This is normally looking for small mistakes, such as mis-copied numbers or disallowed donations.

In the event that you are due a refund, the blurb at the bottom will tell you which bank account they have for you. You can ignore the notice which says that the refund will be processed within 45 days. By law, a refund must be paid within 90 days for those required to file (and practically it can take longer) and up to a year for those who file voluntarily.

The authorities can also request more information to be furnished before issuing a final assessment. For future reference, attach this information to subsequent returns.

The tax authority reserves the right to audit any tax return. By law, they have to start the process by the end of the third year after the tax return was filed. E.g. any return filed in 2013 can be selected for auditing until 31 December 2017. In certain circumstances, it is possible for earlier years to be audited as well, but this is very rare. The auditor will normally try, in the first instance, to reach an agreement with you - but be aware of any Bituach Leumi issues that might crop up when amending a return.

If you spot a mistake, or discover some extra paperwork after you've filed (this normally would be for extra tax credits or deductions), you are entitled to request an amendment to the assessment. This is done by way of letter. In general, you can amend up to 4 years after the tax return was filed.

1 June 2014

Negative Income Tax Grant 2013 - מס הכנסה שלילי

A number of years ago, the government introduced a scheme designed to help workers earning very little. This grant, based on average monthly earnings in the previous tax year (hence the term "income tax"), was initially available only to those living in certain parts of the country.

Who is eligible?

You must meet the following criteria:
1. Be aged 55+ or aged between 23 and 54 and have at least one child.

2. You, together with your spouse, own no more than a 50% stake in any land or property (worldwide) that is not your residence.

3. Your average monthly earnings in 2013 (salary or freelancer, based on actual months worked) was between approx. NIS 2,050 and NIS 6,717.

It should be stressed that you are not eligible for months on which you received salary from a family member, or a company controlled by a family member.

Furthermore, maternity pay received from Bituach Leumi is treated as earnings for these purposes.

4. If you were required to file a tax return for 2013, you did so on time.

5. The claim must be made by 30th September 2014, so you need to move fast!

6. Any employer filed their employer-summary form on time (form 126). If they did not, you will be asked to provide the authorities with form 106 in order for them to fully process your claim.

How much is the grant?

The grant, per month of eligibility, is based on your average monthly earnings and can reach as high as NIS 705. The full table is as follows:

Monthly grant (NIS)
Average monthly income (NIS)
- woman (1 or 2 children)
- single father responsible for 1 or 2 children
- married father (1 or 2 children)
- aged 55+ without children
- woman (3+ children)
- single father responsible for 3+ children
- married father (3+ children)
The amounts here are based on the 1st June 2013 figures, and should have increased with inflation on 1st June 2014 - I have yet to see the revised figures.
In certain circumstances, the amount due to you will be reduced. This is the case if you are in receipt of one (or more) of the following:

1. Pension income, excluding disability or survivor pensions.
2. Bituach Leumi grant for work or other accident.

Similarly, your spouse's income could reduce your grant.

A simulator (Hebrew only) has been provided by the tax authorities here. It's worth having a look at if you think your claim is borderline.

How to make the claim

The claim is made at a post office branch (and only there), and must be made in person. Be careful though: not all post offices are officially branches - check the postal service website before setting off.

You need to take with you your ID card (Teudat Zehut) and a cheque (of formal notification of account details from the bank).

The clerk will hand you a form on which you state:
  • Number of employers in 2013 for both you and your spouse.
  • Whether you we're self employed in 2013
  • Postal address
  • Bank details
You will get to keep a portion of the form, which will have details regarding how to monitor your claim. You can monitor your claim online here (Hebrew only).

How you get paid

If you are an employee only, you will receive your grant in two or three equal payments directly into your bank account, depending on whether you get the form in by the end of June 2014 or later.

If you are (also) self-employed, the grant is offset against your 2013 tax liability. If you have excess grant, it will be offset against the next three year's tax liabilities (i.e. 2014, 2015 & 2016). If, after that, there is still some grant left over, 75% of the remainder will be paid directly into your bank account on 15th July 2018.