What to expect from Trajtenberg’s tax bill

Your taxes: The bill proposes to raise our taxes; we think this is to pay for social-justice measures, but they aren’t spelled out.

Prof. Manuel Trajtenberg (photo credit: Mark Neiman / GPO)
Prof. Manuel Trajtenberg
(photo credit: Mark Neiman / GPO)
Not so long ago, in the summer, we saw demonstrators in tents around Israel demanding social justice.
There are now similar demonstrations in New York and London.
In Israel, the Trajtenberg Commission toiled long and hard looking into the situation and making recommendations. And now a bill has just been published for deliberation by the Knesset. The bill proposes to raise our taxes. We think this is to pay for social-justice measures, but they aren’t spelled out in the bill.
What is proposed in the bill? Here is an overview of what the bill proposes starting in 2012.
• For individuals, a new higher tax bracket of 48 percent is proposed, for all income above NIS 40,000 per month, or approximately NIS 480,000 per year. Currently personal income-tax rates range up to 45%.
• For personal income above NIS 1 million per year, an additional 2% special surcharge is proposed, making the proposed top rate 50% for individuals.
• Fathers would receive extra “credit points” (personal tax allowance) for each child aged under four: one point in the year of birth; two points in each of the next two years; one point in the year the child reaches three years old.
• For companies, it is proposed to increase the regular rate of company tax from the current 24% to 25%.
• The tax on dividends, capital gains and land appreciation will go up 5% under the proposals.
The regular rate will increase from 20% to 25%. The rate for major shareholders (holding 10% or more) will increase from 25% to 30%.
• As a transitional measure, the new rates will apply to the pro rata portion of capital gains arising after the rate increase, on a time-apportionment basis. However, investors in publicly traded securities and “exempt” mutual funds (the investor pays tax, not the fund) may elect in December 2011 to sell and repurchase them at market value; this is sometimes known as “bed and breakfast.”
The result must be a gain, not a loss, and it seems you must sell all of a particular kind of security, not necessarily the whole portfolio.
• The advance payment due on account of land-appreciation tax for most taxable Israeli real-estate deals will increase from 7.5% or 15% to 9.5% or 18.5% under the proposals. The lower rate applies if the seller bought the real estate after November 6, 2001. The advance payment is due once 40% of the consideration is paid.
• A decrease is proposed in National Insurance Institute upper-income limits for employees and the self-employed from nine times the national average wage to five times (about NIS 40,000). This is to discourage people from setting up companies and paying less taxes. Nevertheless, a company is often a good idea.
• Future legislated tax reductions for companies and individuals have been eliminated.
Tips to keep in mind First, watch the progress of the proposals. They have yet to be reviewed and enacted into law.
The tips below assume the proposals become effective in 2012.
• Accelerate bonuses, dividends, interest payments and capital gains where possible – before tax rates rise.
• There are apparently no provisions relating to stock-option taxation, contrary to earlier fears of a tax rise.
• Operating as a company may still be preferable to operating as a self-employed freelancer. Tax rates on distributed profits of both will approach 50%, but there may still be NII savings on dividends, albeit up to a lower-income limit. And companies confer limited liability.
• Consult your securities adviser about the possibility of a “bed and breakfast” for publicly traded securities.
As always, consult experienced tax advisers in each country at an early stage in specific cases.
Leon Harris is a certified public accountant and tax specialist Harris Consulting & Tax Ltd.