Taxman Takes New, Hard Look at Israel's Kibbutzim

Israel Tax Authority officials want to assess members of privatized kibbutzim just like other taxpayers, based on their gross income. And the kibbutzim are fighting back.

Kibbutz members eating at the dining room of Sha'ar Ha'amakim, where the talk of the town is Bernie Sanders.
Rami Shllush

There was a time when each member of an Israeli kibbutz ate in a common dining room, raised their children collectively, shared property and got paid the same monthly stipend. From a tax perspective, the collective farms were treated as a partnership. But kibbutz life has changed over the last 20 years. Now, some 220 of the country’s 270 kibbutzim are what is popularly known as “privatized,” which means families live in their own homes, many work outside the kibbutz and their monthly pay varies widely, reflecting the earning power of the members.

Now the Israel Tax Authority wants to start treating kibbutz members just like all other taxpayers and has lobbied to have the change inserted into the Economic Arrangements Bill – the supplementary legislation to the budget that the Knesset will be voting on later this year. And the kibbutzim are fighting back.

“When everyone worked on behalf of the kibbutz, everyone’s money went to the kibbutz and taxes were calculated on that basis. They amalgamated all the credits that members were entitled to for their children – all the children of the kibbutz – and their combined income, and calculated everything as one,” said a source at the tax authority, who asked not to be identified.

“We decided that the time had come to create some order out of this. We can’t have a situation where one sector pays taxes differently than the rest of the economy,” he added.

The new way of assessing kibbutz members’ taxes would only apply to privatized kibbutzim, not to those that operate according to the old collective system, he said. Tax officials argue that the deductions taken by the kibbutz on privatized kibbutzim are relatively small, and most members keep the lion’s share of their earnings.

Raviv Ishay begs to differ. He’s an accountant from the Kibbutz Movement who has held talks on the matter with the Tax Authority.

“The tax code has a generally accepted system appropriate for kibbutzim, and that’s a partnership,” he said. “Everyone’s income goes into the kibbutz and everyone is taxed on what he gets out from the kibbutz. If that’s the right way to tax an accounting firm, why isn’t it the right way for a kibbutz? Under the law, a business can decide to be a partnership.”

Nir Meir, secretary-general of the Kibbutz Movement, said that changing the tax rules would undermine the whole system of mutual support for the kibbutz’s weaker members.

The partnership question goes to the heart of the dispute between the taxman and the kibbutzim.

The collective farms say that under Clause 63 of the tax code, they are, by definition, partnerships. The kibbutz collects all salaries earned by members from outside work, and keeps part of it for things such as pensions and the kibbutz’s joint expenses. From what’s left over, members are then paid an amount agreed-upon in advance – and that net figure is what members pay their personal income tax on.

For example, a kibbutznik who earns 50,000 shekels ($13,140) a month is required, under the tax law, to hand over the money to the kibbutz because it’s regarded as the collective’s income, not his or hers. He/she can then expect to get back something in the order of 20,000 shekels for daily expenses, after deductions for pension contributions and other costs. By the same measure, a member earning 15,000 shekels a month would receive about 10,000 shekels.

Both are paying a tax rate based on their income after deductions, putting them in much lower tax brackets.

The proposed reform of kibbutz taxation would tax a member’s gross income – before the kibbutz makes its deductions. Members would be entitled to the same credits and other benefits as ordinary taxpayers, but in the end kibbutznikim as a whole would be paying more tax.

The Tax Authority estimated that the change would yield an extra 300 million shekels annually in income tax payments, and another 200 million shekels for the National Insurance Institute.

David Weinstein, an attorney from Kibbutz Alumim, argues that kibbutzim, even the privatized ones, should be given special tax treatment because they’re required to provide a minimum income to each of their members. In addition, they have to provide for all their basic needs, including education and welfare, and take care of members who can’t fully support themselves.

But he concedes that there’s room for imposing different tax rules on collective and privatized kibbutzim. “On a collective kibbutz, this income is apportioned equally between members, and tax is calculated by the credits everyone’s entitled to,” Weinstein said. He added that members should also be taxed on benefits they receive in kind, not just on their cash income.

“In privatized kibbutzim, it would be appropriate that tax rules be adjusted to reflect the real situation, so that everyone pays based on the salary paid by the kibbutz, like partners in a business partnership,” he said. “A partner can bring in 10% of the firm’s revenue, but a get a salary representing just 4% of profit.”