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17 November 2013

Taxation of property income

A very common investment for people is property, i.e. receiving rental income.

For these purposes, property income refers to income from any type of property (rents), including land (i.e. ground rent). This post will not deal with gains made on the sale of any property.

For tax purposes, the nature and place of the property affects the way tax is levied in Israel.

Israeli properties

Residential properties

As part of government housing policy, there are a number of tax-breaks and schemes available to those who have rental income from residential property in Israel - i.e. the property is being used to live in (rather than for business purposes).

If your total monthly income from such properties - before expenses - is NIS 4,980 or less (correct for 2013), the income is totally tax free.

If your total exceeds this limit, the tax-free limit is reduced by a shekel for every shekel that you go over. So, if your income is NIS 5,080 per month, you exceed the limit by NIS 100. As such, the limit is reduced by NIS 100 to NIS 4,880, and so you are taxed on NIS 200 (5,080 less 4,880), i.e. 3.93% (200/5,080) of your income is taxed.

Against this income, you can claim expenses, but only according to the percentage of income that is taxed. Using the above example, you can claim only 3.93% of your total related expenses.

Typical expenses for properties are: repairs and maintenance (but not renovations), management and/or agent fees, insurances and mortgage interest (but not the capital repayments). You can also claim depreciation - a portion of the cost of the property. Typically, only 2/3rds of the cost is "depreciable" (the rest considered land), and that portion is normally depreciated at 4% per annum (i.e. over 25 year). So, on a property costing NIS 1.2 million, the annual depreciation allowance comes to NIS 32,000.

The net profit is subject to tax according to the "regular" rates, starting at 31%. This profit is also subject to Bituach Leumi, levied at 12%.

An alternative is to pay a flat 10% tax on the rents received. If you choose this option, you cannot claim any expenses whatsoever, nor can you claim any unused tax credits against this income. But there is also no Bituach Leumi charged. Furthermore, if you're not filing tax returns, the income can be reported and the tax paid using the "short" tax form for such rents - either at the post office, or online. Technically, the law requires that the tax should be paid by 30th January following the year-end for the whole of the previous year; practically, it is not a problem if you pay a little later.

It should be noted that you are not able to choose both the "exemption" and "10%" routes - it is one or the other. In order words, if you have two properties, each producing rents of NIS 3,000 per month, you cannot claim the exemption on one of the properties and pay NIS 300 per month on the other.

It is however permitted to change how the income is taxed from one year to the next.

Commerical properties

Rental income for such properties is taxed according to the regular rules for profits, with taxes starting at 31% on the profit (i.e. after deducting all allowable expenses). Bituach Leumi is also chargeable.

Such income is also subject to VAT, and the landlord should be adding VAT to the rental invoice. Since those renting are likely to be businesses, this should not be an issue; they will be able to claim back the VAT on their own returns.

Furthermore, the landlord should provide the tenant with an אישור ניכוי מס במקור - certificate from the tax office regarding how much tax to deduct at source (typically, zero). Without such a certificate, the tenant is required to deduct 35% of the payment at source, and pay it to the tax man. Of course, any tax deducted is considered as tax paid in the hands of the landlord, and can be offset against the tax bill on the tax return.

Overseas properties

Typically, income from property is taxed in the country in which the property exists, regardless of the residency status of the owner. In some Double Tax Treaties (e.g. France) that Israel has signed, Israel is not allowed to tax the income that an Israeli resident may have from that country. But in most Treaties, Israel is allowed to tax the income.

This section is also irrelevant for anyone who made Aliyah from 1st January 2007, and therefore has an exemption from Israeli tax on foreign income. This of course does not prevent the country of origin from taxing the income.

For all other situations:

There is no distinction between residential and commercial properties in terms of Israeli taxation when dealing with an overseas property. But there are two options for taxation on such income:

1. The net profit, after expenses, is subject to regular tax rates, starting at 31%. Against this, any foreign tax can be offset - up to the level of tax that would have been levied in Israel. However, Bituach Leumi is also charged on this income, and there is no allowance for foreign tax - since Bituach Leumi is not the same as Income Tax.

2. The rents are taxed at a flat 15%, with no allowance for expenses - except depreciation - and unused credits cannot be used against this tax. Under this option, no Bituach Leumi is levied on the income. Furthermore, if you're not filing tax returns, the income can be reported and the tax paid using the "short" tax form for such rents - either at the post office, or online. If you are not filing tax returns, the deadline for filing such a report is 30th April following the end of the tax year. Again though, on a practical level, it is not a problem if you report and pay a little later than that.

As with Israeli residential property income, it is possible to switch options every year, depending on what works best for you.

6 November 2013

Taxation of employment income - part 6 - Bituach Leumi

In addition to Income Tax, Israel levies Bituach Leumi (National Insurance or Social Security) on earned income (and certain passive incomes).

To all intents and purposes, this is another tax, although there are certain social benefits that accrue from making regular payments (e.g. maternity pay, disability pay, pension etc).

Bituach Leumi is calculated on a monthly basis, not on a yearly basis. There are also virtually no exemptions for salaries.

There are two rates for Bituach Leumi. The lower rate (3.5%) is for salaries of up to NIS 5,297 per month. Salaries above this amount, and up to NIS 42,435 are taxed at the regular rate (12%). Any salary in excess of this amount is not subject to Bituach Leumi. The rates and bands are correct for 2013.

The employer is also required to pay a percentage of your salary towards Bituach Leumi, and is responsible for ensuring prompt payment of both employee and employer contributions to the Bituach Leumi authority.

If you have two or more employers, the main employer will calculate the Bituach Leumi as above. All other employers are required to deduct at the full rate.

That is fine provided that your main job pays more than the NIS 5,297 per month. If they pay less, you can ask Bituach Leumi to issue a Teum Bituach Leumi in order for the other employers to give you the rest of the lower rate. This is effective only going forward, and can be done online here.

If this has affected you in the past, you can also claim back overpayments using the same site, back to 2006 if need be. In both situations, you will need the Bituach Leumi file number of the employer - in general this is the 9 digit "mispar tik nicuyim" of the employer followed by "00".

The more extreme situation will be when the combined salaries exceed the NIS 42,435 limit. In this case, the Teum going forward cannot be filed online, but only by going direct to your Bituach Lejmi office. Refunds though can be claimed in the same manner.

For those who are both employed and self-employed, the general rule is that Bituach Leumi is calculated on the salary first, and only afterward on the self-employment income.