Starting January,1 2017, a new annual tax could be imposed on owners of three or more apartments, according to a Ministry of Finance bill attached to the Economic Arrangements Law. The bill will be submitted for cabinet approval together with Israel's budget for 2017-8. According to Ministry of Finance estimates, there are about 50,000 people who, with their spouses, own about 180,000 apartments. The tax will not be imposed on the two first apartments, but each additional apartment will have a tax amounting to 1% of the apartment's value imposed on it, up to a ceiling of NIS 1,500 per month (18,000 per year). The apartment's value per square meter will be determined by the Ministry of Justice Land Appraisal Department, based on Central Bureau of Statistics data regarding the location of the apartment, multiplied by the apartment's size in square meters.
The apartments' owners will be able to choose which properties will be subject to this tax and, if they refrain from choosing, the government will impose the tax on the cheaper apartments, according to Tax Authority data. A person controlling one third (33%) of the ownership right to an apartment will be considered an apartment owner, with spouses regarded as one owner unless they live separately.
The bill still has a long way to go until its final Knesset approval in second and third readings, and is expected to elicit substantial political opposition. The decision to include the new tax on apartment holders in the Economic Arrangements Law, attached to the state budget, followed exhaustive discussions with the participation of senior officials in the Ministry of Finance, the Tax Authority and Ministry of Justice. This idea was first raised during the term of the previous government by the then Chairman of the National Economic Council, Prof. Eugene Kandel, but was rejected by the then Minister of Finance Yair Lapid.
The bill still continues to arouse opposition due to two key issues: inequality between small, cheaper, apartments and concerns that apartment owners will add the tax paid to the rent fees charged. Following these concerns and due to demands made by Ministry of Justice senior officials, the tax would be determined according to the size of the apartment and the price of land in its vicinity, based on a government land appraisal. As for concerns that tenants will pay the price of this tax, economists believe that it is exaggerated, in a free market where it is possible to choose non-taxed apartments.
The Ministry of Finance refers to the taxing of apartment owners as having a clear social objective: reducing gaps and decreasing inequality in the Israeli society. "The rising apartment prices led to inequality between various social strata," the explanation to the law says. According to Ministry of Finance data, the overall wealth of landlords is 15 times greater than that of tenants, although the average income level of apartment owners is only twice as large.
In justifying this law, Ministry of Finances economists cite 19 th century economist Henry George, who claimed that it is unjust for apartment owners alone to enjoy the increased value of their property, since the increase in land value did not follow from their own efforts, but was exactly the result of government and public investments in infrastructure development. "Taxing multiple properties according to the value of the property properly reflects George's idea," the Ministry of Finance writes.
In addition to a better division of income and gap reduction, the Ministry of Finance believes that the new tax will present an incentive for apartment owners to sell their properties, therefore increasing apartment supply in the second hand market and exerting pressure to lower real estate prices.
Moreover, according to Ministry of Finance estimates, this law is expected to increase state tax revenues by NIS 800 million per annum.
Adv. Liat Keisary, Barnea & Co. law firm partner, says, "The Ministry of Finance should find more plausible and comprehensive solutions to increase apartment supply and lower prices on the market, for example, releasing further land for apartment construction for young couples and setting an upper limit on rent prices, as customary in other countries. Eventually, apartment owners will find legitimate tax structures, as well as new and creative ways of reducing tax payments. The ones who do not succeed, will simply impose these expenses on tenants.
"The Ministry of Finance does not take into account that the owners of three apartments and up would transfer ownership of these apartments to limited companies owned by them, which would make it difficult for tax authorities to enforce the proposal. As a result, owners could keep family property under one ownership, use the funds for further company investments and save on social security payments. Other options of avoiding tax payments would be to register the apartments as gifts for their children, or buy it under their name in the first place."
Published by Globes [online], Israel business news - www.globes-online.com - on August 3, 2016
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