Tax Authority Catches Up With Kibbutz Realities

The Israeli government may finally be catching up with changing conditions on the kibbutzim as a new law to restructure taxation of the collective communities has been in preparation for inclusion in the next budget, Globes said on Sunday.

The proposal would do away with the current uniform taxation of all kibbutzim regardless of wide differences in income. Instead, it would recognize two types of kibbutzim: the traditional collective kibbutz where all property is held in common by the members, which will continue to be taxed as a single unit; and the “renewed kibbutz,” where such collectivization no longer obtains, and individual members will be required to pay a personal income tax under certain circumstances.

In addition, if there exists an income inequality of 25 percent or more between the highest and lowest salaries paid on the kibbutz, it will not be eligible for the collective tax, which presumes that income is divided equally among the members.

The amendment to the Economic Arrangements bill is being advanced by Minister of Finance Moshe Kahlon and his ministry, in cooperation with the Israel Tax Authority.

According to Guy Chen, CPA, an expert in kibbutz taxation at the Sagi & Co. law firm, the new law would correct a gross legal anomaly.

“This legal situation has caused distortion. For example, a kibbutz with many people who do not work still uses their tax credits in order to reduce its tax liability. On many kibbutzim we have handled, this situation generates excess credits if the quantity of the kibbutz members’ tax credits exceeds the kibbutz’s income, in which case the kibbutz pays no tax. This is a distortion created by the law,” Chen explained.

Taxation of the kibbutzim has been under review for years. In 2004, the Ben Rafael Committee suggested different tax categories for different types of kibbutzim to reflect changing realities.

Another distortion was noted in the method of charging National Insurance fees, which was based on expenses; whereas the Tax Authority made its assessment based on income.

“In view of the lack of clarity concerning the law applying to the renewed kibbutz and its members, the above-mentioned taxation method led to reduced tax on the renewed kibbutz members’ income, and to prolonged arguments with the Tax Authority and the National Insurance Institute concerning the correct method of taxing the income of the kibbutz and its members, which also affects senior citizens’ allowances given by the National Insurance Institute,” the explanation for the new amendment states.

For this reason, “It is proposed to revise the method of taxing the kibbutz, so that a distinction is made between the collective kibbutz and the renewed kibbutz.

“Where a gap exists between the members’ income, the tax shall be calculated like the tax for ordinary taxpayers. It is accordingly ruled that the income of members in a renewed kibbutz shall be calculated according to a member’s income for all intents and purposes.”

The Tax Authority confirmed that a revision of the law is under way. “The Tax Authority is indeed promoting as part of the Economic Arrangements bill a revision that will arrange taxation of kibbutzim and adapt legislation to the existing situation. At the same time, a dialogue is taking place on the matter between Tax Authority representatives and representatives of the kibbutz movements.”