YOUR TAXES: Group perk and severance pay changes

A roundup of recent Israeli tax developments that result in a tightening up of group perks and an improvement in the severance-pay exemption.

By LEON HARRIS
August 24, 2010 23:15
2 minute read.
graph

financial graph 311. (photo credit: stock photo)

 
X

Dear Reader,
As you can imagine, more people are reading The Jerusalem Post than ever before. Nevertheless, traditional business models are no longer sustainable and high-quality publications, like ours, are being forced to look for new ways to keep going. Unlike many other news organizations, we have not put up a paywall. We want to keep our journalism open and accessible and be able to keep providing you with news and analyses from the frontlines of Israel, the Middle East and the Jewish World.

As one of our loyal readers, we ask you to be our partner.

For $5 a month you will receive access to the following:

  • A user experience almost completely free of ads
  • Access to our Premium Section
  • Content from the award-winning Jerusalem Report and our monthly magazine to learn Hebrew - Ivrit
  • A brand new ePaper featuring the daily newspaper as it appears in print in Israel

Help us grow and continue telling Israel’s story to the world.

Thank you,

Ronit Hasin-Hochman, CEO, Jerusalem Post Group
Yaakov Katz, Editor-in-Chief

UPGRADE YOUR JPOST EXPERIENCE FOR 5$ PER MONTH Show me later Don't show it again

Here is a roundup of recent Israeli tax developments that result in a tightening up of group perks and an improvement in the severance-pay exemption:

GROUP PERKS

Be the first to know - Join our Facebook page.


Nowadays, many employers tend to gross up (insure that the employee receives the intended benefit net of tax) and tax the value of some perks (fringe benefits) paid to a number of employees on a group basis, not via their paychecks. Some employers even received confirmation to do so from their local tax office, while some just did it anyway.

However, this now has to stop. The state ombudsman in his audit report has declared this method to be forbidden for two reasons. First, it presents a wrong picture of the real salary of the employees concerned. Second, it may lead to a potential reduction in state pensions paid by the National Insurance Institute.

Therefore, the Israel Tax Authority has decided to put an end to this method because it has no tax rationale. If the part of the benefit can be allocated to a specific employee, then it is part of that person’s salary and should be reflected in the person’s paycheck. If the benefit cannot be allocated to a specific employee, it is an excess (nondeductible) expense and a 45 percent income-tax installment is generally payable thereon by the 15th of the following month.

With effect from January 1, 2011, all confirmations from the ITA allowing gross ups on a group basis outside the paycheck will cease to be valid, and annual reporting of such arrangements on Form 126 will no longer be possible. No delays or extensions will be allowed in this regard. (The state ombudsman apparently has teeth!)

SEVERANCE-PAY RELAXATION



The Israeli tax law grants a tax exemption for amounts received following termination of employment or death, equivalent to the last monthly salary multiplied by the number of years’ employment, up to a monetary limit prescribed by law. The prescribed monetary limit for EACH year of employment is NIS 11,390 upon termination and NIS 22,800 upon death.

For termination, it does not matter what the circumstances were surrounding your departure: resignation, dismissal, got a better offer elsewhere, etc. Other detailed rules also exist, including the ability to spread the severance pay over several years for tax calculation purposes.

The ITA director is authorized to increase the exempt amount to 150% of the last monthly salary times the number of years’ employment, if the individual does not have any pension rights regarding the years entitling him or her to severance pay. Commencing in 2008, an order was issued that requires every employer to contribute to a pension plan for each employee.

Therefore, the ITA has issued an instruction to its tax-assessing officers to automatically increase the exempt portion of severance pay to 150% of the last monthly salary times the number of years’ employment, but subject to the same monetary limits of, currently, NIS 11,390 or NIS 22,280 per year.

This instruction is effective only for people who left their employment on or after July 25, 2010, the date the change was announced.

As always, consult experienced tax advisors in each country at an early stage in specific cases.

leon@hconsulting.com

Leon Harris is an international tax specialist at Harris Consulting & Tax Ltd.

Related Content

The Teva Pharmaceutical Industries
April 30, 2015
Teva doubles down on Mylan, despite rejection

By GLOBES, NIV ELIS