Questions and answers
Some common questions and their answers regarding the new financial regulations.
What are the aims of the Rabinowitz recommendations?
Today, Israelis are taxed on income, but not on earnings from capital. The aim of the recommendations is to address this anomaly, to tax savings and share investments, and to use revenues from these to reduce the high rates of tax on labor. A founding point of the committee was the too-high a tax burden on labor in Israel that discourages work, encourages tax evasion, harms growth prospects and is economically unjustified.
Who will benefit?
The middle-income earners will be the main beneficiaries. Today, marginal tax rates on those earning between NIS 10,000-35,000 a month can reach up to 60 percent (including National Insurance payments and health taxes), which is the highest rate in the world. The Rabinowitz recommendations aim to reduce this gradually through to 2008.
What's new on capital gains?
Rabinowitz proposes a 10-percent tax on nominal gains on shekel accounts and a 15-percent tax on real returns on inflation-linked savings accounts. Tax on foreign currency-linked accounts will drop from 35 to 15 percent. When it comes to the stock exchange, Rabinowitz recommends a 15-percent tax on profits, in real terms, on stocks and CPI-linked bonds, and a 10-percent on shekel bonds and short-term debt certificates (makam). All the above are measures expected to be introduced in 2003-2004.
What about pensions and other funds?
The Ben-Bassat recommendations kicked up a storm when proposed taxing advanced training funds (kranot hishtalmut). Rabinowitz recommends that these be tax free for individuals earning up to NIS 15,400 a month. Above this sum, he proposes a 15-percent tax on real profits. For pension funds, a distinction is made between monies withdrawn before and after retirement. If withdrawn before the retirement age (65 for men, and 60 for women), the recommendations call for a 15-percent tax on real gains. For after, the committee has not yet finalized its position.
Who's going to calculate how much tax will be paid and who will transfer it to the authorities?
For the most part, the banks and stock brokers will do the work, so that savers won't have to file tax returns. Taxes on share profits will be deducted by the broker, who will send the monies to the tax office every month. For savings accounts, the banks will work out how much each saver owes.
But how exactly do you pay tax on profits from share deals?
Let's say you bought a share at NIS 100 and sold it at NIS 120. The profit is NIS 20. Take away the effect of inflation, purchase and sales commissions, management fees to the bank/broker, and from what remains, a tax of 15 percent is levied and passed on to the tax office.
What is the difference between real and nominal rates?
Real rates take into account the rate of inflation. On a shekel deposit account, the interest paid is nominal and not linked to the consumer price index.
What's better - a 10-percent tax on nominal gains or a 15-percent tax on real gains?
This depends on the rate of inflation and the interest rate. For example, in the first four months of the year, the CPI rose by 3.9 percent - much more than the rate paid on bank deposits (1-3 percent). So, in real terms, the bank deposits made losses. But under the Rabinowitz recommendations, there would be a 10-percent tax to pay on these nominal gains. The committee was aware of this distortion and therefore recommended that the finance minister be authorized to adjust this tax rate on nominal interest and to adapt it to inflation. A CPI-linked savings plan would not suffer this anomaly, as for such plans, the tax applies only when returns are higher than inflation.
How will the real rate be calculated?
The inflation rate is published on the 15th of each month. So, for tax purposes, it will be assumed that any purchase of shares was carried out on the 16th.
If I profited on one sale and lost on another, can I offset the gains?
Yes. This measure will be introduced in two stages. Up to the end of 2006, losses on shares traded on the Tel Aviv Stock Exchange can be offset only against profits from share trading on the same bourse. The same goes for trading overseas. From 2007, losses on any bourse can be offset against profits on shares trading on any other bourse.
Can I offset share losses against gains on savings plans?
Not at the moment, but the Rabinowitz committee recommends further exploration of this.
Is anyone exempt from these capital gains taxes?
Yes - individuals earning below NIS 4,000 a month, pensioners on low incomes, recipients of Holocaust reparations from Germany, new immigrants, returning citizens and foreign residents.
What's the main problem with the reforms?
The new taxes will come into effect almost immediately, in 2003, while the income tax reductions will be introduced gradually through to 2008. That is, those with savings will have to pay up more now on the promise that their income taxes will go down, eventually. This could lead some to rethink their trust in the government.
In addition, the plans are based on the treasury's assumption that the economy will grow at an average rate of 4 percent every year up to 2008. While currently in a recession, this leaves a lot to the imagination.