A new legislative amendment slated for inclusion in the Economic Arrangements bill, obtained by "Globes," establishes new taxation arrangements for the kibbutzim (collective communities). Among other things, the amendment states that under certain circumstances, kibbutz members will be taxed individually, just like everyone else in Israel.
The amendment includes a method for classifying kibbutzim into two categories for tax purposes. The first is a "collective kibbutz" adhering to the traditional kibbutz rules, in which the members share everything in common and own no private property. This type of kibbutz will be taxed as a unit, with the kibbutz paying the tax for all of its members. The second type is the "renewed kibbutz," which is not completely collective. Under the proposed amendment, under certain circumstances, members of this type of kibbutz will each have to pay his own personal tax.
The biggest revolution in the amendment, however, probably lies in the order eliminating the possibility of calculating a collective kibbutz's tax on the basis of the aggregate income of all of its members if there is a gap of 25% or more between the highest and lowest salaries paid on the kibbutz. In order to benefit from paying tax on aggregate income, a kibbutz must make sure that the gap is less than the 25% threshold.
The amendment is being promoted by Minister of Finance Moshe Kahlon and his ministry, in cooperation with the Israel Tax Authority, which is seeking to alter the unique arrangements anchored in the Income Tax Ordinance concerning taxation for kibbutzim, in which the tax assessment of the kibbutz is calculated according to the tax liability of all of its members, had the kibbutz's income been divided equally among them. This method enables a kibbutz to use progressive income tax brackets and tax credits, sometimes resulting in no tax liability at all.
This method is based on two stages. First, the kibbutz's income is calculated, including the income from the various sectors on the kibbutz and the income of members working outside the kibbutz. The amount granted by the kibbutz to its members for living expenses is counted as an expense in the profit and loss statement. In the second stage, the taxable income is notionally divided equally among the members, and theoretical tax is calculated according to the personal tax rates, and credits and deductions reducing the amount of tax applying to each member. In this way, the kibbutz enjoys a tax benefit granted through tax credits on its income and the income of its members. The kibbutz is liable for the tax owed by all of its members.
According to Adv. Guy Chen, CPA, an expert in kibbutz taxation at the Sagi & Co. law firm, "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 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."
Full income into the pockets
Chen added, "Under the Income Tax Ordinance, all the kibbutzim are to be taxed the same way, but there are kibbutzim that have decided to apply a personal tax to their members, even though they could apply to themselves the tax liability of the kibbutzim. They decided that each of their members would be an individual taxpayer. The Tax Authority encourages this situation. For years, the Tax Authority's position has been that if a kibbutz is not fully collective, then each member should be taxed personally.
This stance is now being expressed in the proposed amendment in the framework of the Economic Arrangements bill. According to the explanation given for the change, the special character of the collective kibbutzim justified the existence of a general tax system appropriate for them only, and the National Insurance Institute also established different rules and arrangements for the kibbutz's status in both National Insurance fees and eligibility for old age pension. It is also written, however, that the crises that affected the kibbutzim and cooperative moshavim in the 1980s and 1990s diverted most of them from the egalitarian model to a model of inequality in the remuneration given to their members.
"Today, it is possible to find substantial number of kibbutzim in which a kibbutz member receives from the kibbutz the full income (minus the tax on it) produced by him from various sources. This creates a marked inequality between different kibbutz members," the explanation attached to the amendment stated.
It is therefore noted that in 2004, among other things following the recommendation by the Ben Rafael Committee, a public committee that reconsidered the definition of the essence of a kibbutz, it was decided to revise the cooperative society regulations and the definition of a "kibbutz" appearing in them. Three types of kibbutzim were included in the regulations: a "cooperative kibbutz" - a traditional kibbutz fulfilling all the principals of collective ownership, including property, equality, and shared consumption in education and production; a "renewed kibbutz" - a kibbutz fulfilling the principal of collective ownership and shared consumption in education and production, with mutual responsibility for the members , but which decided to change its rules on one or more of the following subjects: ownership of housing units, differential wages, and members' ownership of assets; and an "urban kibbutz."
Although under the regulations each of the three types was considered a "kibbutz" for tax purposes, the Tax Authority's position (in contrast to the position of the kibbutzim and cooperative moshavim) is that there is no reason to apply the special tax rules applying to the kibbutzim to either renewed or urban kibbutzim.
In addition, the method of charging National Insurance fees, based on dividing living expenses and equality in the other benefits given the kibbutz and its members by the number of kibbutz members, created a lack of uniformity in tax assessment, with the Tax Authority charging tax according to income, while the National Insurance Institute charged according to expenses.
"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."
Tax Authority: Dialogue taking place
As for its ruling that a renewed kibbutz (a kibbutz that has privatized some of its services, and is no longer completely collective) should be taxed differently than a collective kibbutz, Chen says, "A renewed kibbutz can be a kibbutz with a completely collective way of life, other than one specific subject, such as ownership of housing units, and will continue to be taxed as a collective kibbutz. However, members of a kibbutz that has decided on a differential distribution of income, with a gap of 25% or more between the lowest income and the highest, will be taxed individually.
"Collective kibbutzim, all of whose members continue to receive the same budget from the kibbutz, with no gap of more than 25%, will remain collective for all intents and purposes, and will continue to pay tax according to the currently prevailing method."
The Tax Authority said in response, "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."
Published by Globes [online], Israel business news - www.globes-online.com - on July 31, 2016
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