We live in an age where we are getting smarter all the time. But it isn't easy. The professional knowledge we had at age 25 probably has to be overhauled by the time we are 40 and again by the time we are 55. All this takes time and expense.
What happens if your employer offers to help by sending you on a course at the company's expense? Will you be taxed on a deemed fringe benefit? This question has been vexing us for years in Israel and elsewhere. However, the law has now been amended and the Israeli Supreme Court has just handed down a judgement that largely clarifies things. But you may not like the result - even the Supreme Court didn't like its own judgement.
First, what does the Income Tax Ordinance say? Taxable income includes salary or gain from employment; any benefit or allowance given to an employee by his or her employer; payments given to an employee to cover his expenses including â€¦ the acquisition of professional literature â€¦ but not payments that are deductible as an expense by the employee â€¦ all this whether given to the employee in cash or in kind, directly or indirectly or to someone else for his benefit (ITO Section 2(2)).
So the employee won't be taxed on any benefit which he can deduct as an expense. Expenses are deductible if they are incurred wholly and exclusively in the production of income (ITO Section 17). Unfortunately, this does not cover study expenses including the acquisition of academic education or acquiring a profession - except for professional training to maintain whatever already exists (ITO Section 32(15)). This is taken to mean that the cost of keeping existing knowledge up to date is deductible, and hence not a taxable benefit.
As for obtaining a degree or obtaining a new professional qualification, a limited tax benefit is available for a limited period. The benefit is a one-half of a "credit point" that will cut your tax bill by NIS 89 per month. If the degree is from an Israeli higher education institution, the credit is given for the same number of years studied starting with the tax year after completion of the studies, but no more than three years for a first degree or two years for a second degree. In the case of a medical or dentistry third degree, the credit is given for five years. If a new professional degree is obtained and a completion certificate is submitted to the Tax Authority, the credit is given for the same number of degrees the taxpayer studied, but no more than three years. Other detailed rules are also prescribed (ITO Sections 40C & D).
What does this all mean? Recently, the Israeli Supreme Court reviewed these issues in the case of Jerusalem 1 Assessing Officer v. Bank Yahav (Civil Appeal 3501/05, November 28, 2007).
In 1997, the bank experienced a dramatic upturn in its activities and needed to "upgrade" its employees. Therefore, it encouraged them to study for a degree in the banking field - business administration, economics, accounting and computers. The bank's top management approved the financing of 75% of the tuition fees since the bank felt the employees gained some personal benefit. To receive this financing, employees had to stay with the bank three months per NIS 1,000 financed. Most of the 44 bank employees concerned studied for a first or second degree in business management. The issue was whether the tuition financing was a taxable benefit for the employees or should the benefit to the employer prevail?
The Supreme Court stated it is necessary to consider the employer's "convenience," namely whether the nature of the employee's function necessitates him receiving the tuition.
This should not be checked from the employer's viewpoint, but "objectively" from the employee's viewpoint and the function he performs. There are two parts to this. Are the studies closely connected to the function performed? And what is the extent of the benefit derived by the taxpayer (the employee) from the studies? In particular, are the studies intended to preserve existing knowledge or improve it?
The Supreme Court concluded that a business administration degree and a second (masters) degree give the student the possibility of working in an alternative profession in a management capacity. This represents the acquisition of a new (knowledge) asset.
Consequently, the bank's financing of its employees' degree studies deviated from the principle of employer convenience. The employer undoubtedly gained an advantage but the studies were not essential to the performance of the employees' functions. The employees were given a substantial benefit as the degrees improved their situation and status outside their job and specific place of employment.
Therefore, the Supreme Court was "afraid" it had to accept the Tax Authority's claim that financing a degree course constitutes a taxable benefit to the employees. Even if the aim of granting an exemption is desirable, in practice that is up to the legislature (the Knesset) and not the interpretation of the Court.
As always, consult experienced tax advisors in each country at an early stage in specific cases.
Leon Harris is an International Tax Partner at Ernst & Young Israel.
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