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25 May 2015

Taxation of trusts - part 4, Taxation basics

The default position (except for the Family Trust, as mentioned here) is that the trust itself is liable to pay the taxes on the trust income. It is the trustee who is required to file the tax returns and who is responsible for ensuring that the taxes are actually paid.

The rates of tax applicable are the highest rates applicable to individuals, i.e. 48% plus the 2% surtax for total taxable incomes above NIS 811,560 (2014).

That being said, the tax rate is also limited on certain passive incomes in the same way as for an individual, e.g. 25% on most interest, dividends and capital gains, 10% on Israeli residential property or 15% on foreign rental incomes.

It should be noted that the exemptions and tax credits that apply to individuals do NOT apply to trusts. As such, there is no exemption for low-earning trusts who have interest income (compare here) or Israeli residential income (compare here).

There are though situations whereby the settlor or beneficiary can pay the taxes on the trust income. In such cases, the taxpayer can use their allowances and credits as if the income was earned themselves. They cannot though claim exemptions from tax on a personal level, if the exceptions are limited to certain income levels (e.g. residential property income):

Settlor as taxpayer:

1. The trust is revocable.
2. There is only one settlor, who is an Israeli resident and is still alive. The spouse of the settlor is also considers a settlor in such a case provided they are also Israeli resident.
2. Such an election must be made in the first tax return for the trust/settlor, and the decision cannot be revoked.

Beneficiary as taxpayer:

1. The trust is irrevocable (see here)
2. The income that is to be reported by the beneficiary must have been distributed within six months of the end of the tax year, or when the tax returns are filed; whichever is earlier.
3. Any undistributed income must be accounted for and taxes paid at the trust level.
4. The distribution is assumed to have come from the various income sources on a pro-rats basis, unless the trust deed says otherwise.

4 May 2015

Voluntary Disclosure - update

Last night, the accountant world of Israel got together to review the Voluntary Disclosure procedure after the first eight months of the new system being in place.

The facility was announced back in September, and you can read more about it here.

Let's not forget that the main carrot being dangled by the tax authority is immunity from prosecution. That peace of mind is no small thing - the last thing anyone wants is the tax authority to knock on their door in the middle of the night (or any other time for that matter).

At the same time, the primary goal of the tax authority is to encourage more people to come into the system and start paying their taxes on an ongoing basis.

Whilst not a huge amount was learned, there were a few important points that were clarified:

  • The tax authority are interested in people sorting out tax crimes (of all natures) going back 10 year (i.e. no further back than 2005). For prior periods, the tax authority needs to be satisfied that the source of funds is clean, and the burden of proof is on the taxpayer in question to prove that the funds were not from monies that should have had Israeli tax paid on them. If proof cannot be forthcoming, expect an "imputed tax" to be levied.
  • The "short" route qualifications are treated fairly leniently, i.e. they want more people in this route. This should allow for quicker audits by the tax inspectors - although whether this happens in practice remains to be seen.
  • The "anonymous" route is designed to give the taxpayer piece of mind regarding the tax due before disclosing their name. The representative said that he has not heard of a single case where the amount has been reneged on once the name has been disclosed.
  • The approval stage (checking that the taxpayer has no started investigation) is taking much longer than expected. The authorities are trying to improve this aspect; but it is not entirely in their hands.
  • In and of itself, the receipt of the form sent out by the tax authority requesting information (see more here) does not necessarily imply prior information; much depends on why the person received the form and whether it has anything to do with the unreported income.
  • To date, approximately 1,600 requests have been made.
  • The tax authority representative said that tax paid incorrectly to a foreign country (e.g. due to Double Tax Treaty provisions) that cannot be recovered "will be taken into account". He declined to elaborate further as to how that would be done.
  • Paying the tax - and thereby sorting out the civil side of the issue - puts you in s much better place in terms of potential criminal proceedings. And so, even for those who don't want to go into the full disclosure scheme should report their income and pay the tax due, even if they don't get the "get out of jail" card.

Don't forget, applications for the "short" or "anonymous" routes must be submitted by 6 September 2015.

I cannot sufficiently stress how important it is to sort these matters out now. With information sharing taking huge strides by tax authorities around the world, there simply won't be the possibility of hiding current, future or past undeclared incomes.