Abolition of the tax benefits on advanced training funds is a measure that the Ministry of Finance keeps in a drawer and produces from time to time when it might be tactically useful as a bargaining chip. There follows a ritual arm-wrestle with the Histadrut (General Federation of Labor in Israel) that results in the ministry backing down.
Minister of Finance Bezalel Smotrich recently considered abolishing the tax benefits on advanced training funds, but the measure did not in the end appear in the update to the 2024 state budget approved by the government last week.
Nevertheless, it is not certain that the last word has been said on the matter. The reason for that is the hole in the budget caused by the war that broke out in October, which the Bank of Israel estimates will cost the economy about NIS 200 billion. Such expenditure obliges the Ministry of Finance to look for new sources of revenue in order to keep the expected jump in the fiscal benefit within bounds. The updated projection for the deficit in 2024 is 6.6% of GDP.
Remarks made by Itay Temkin, deputy head of budgets at the Ministry of Finance, at a discussion in the Reichman University Fair Value Forum last week on taxation of advanced training funds reveal the thinking behind the current confrontation over the matter.
"The war in the Gaza Strip will cost a great deal of money," Temkin said. "We are facing a fiscal shock that will be with us for many years. To say that government ministries should be shut down is easy, but such a step can bring in NIS 1 billion. In the advanced training funds we are talking about a benefit worth over NIS 10 billion annually. The alternative to that is that every Israeli pays another 2.5% income tax, or to raise the rate of VAT by 1.5%."
Temkin also criticized the arbitrariness of deposits in advanced training funds, sometimes within the same company. "A person get up in the morning and goes to work and has an advanced training fund, while someone else doesn’t, both of them at the same salary level," he said, adding that if income tax or VAT is raised, that will hit every worker in the country, and those who do not have advanced training funds will be hurt more.
Advanced training funds are theoretically meant to provide for professional training, but in practice they are simply a tax-free savings scheme. Employees do not pay income tax on deposits into the funds (run by the insurance companies and investment houses) on their behalf, and also do not pay capital gains tax (currently 25%) on withdrawals, as long as the money has been left in the fund for six years. Self-employed people can also deposit money in advanced training funds and enjoy the same tax benefits.
Withdrawals are often made to meet some large one-time expense, such as buying a car, home renovations, or a wedding in the family, but there is no limit on how long money can be left in the fund. Nor is there any obligation on an employer to offer advanced savings funds, which are a much sought-after perk. The tax benefits on these funds make them better than almost any other long-term saving program.
The savers in advanced training funds are mainly salaried employees, who can deposit an amount equivalent to 10% of their monthly salaries, up to a salary of NIS 15,712. Generally, the employer pays 7.5% and the employee 2.5%. In effect, this is a tax-free payment of up to NIS 1,178 monthly (NIS 15,712 x 10% x 75%) on top of the regular salary, and, as mentioned, withdrawals are also tax free after six years. People can choose which fund the money will be paid into, and switch between funds without penalty.
The result of all this is that the advanced training funds now manage about NIS 330 billion, more than any other track in the Israel provident funds market.
According to the figures presented at the Fair Value Forum, the benefits on advanced training funds have become the third largest among the tax benefits that the state allows, after the tax benefit on pension savings and the tax credit points for children that reduce parents’ income tax payments.
Analysis by the Ministry of Finance chief economist’s department projects a total loss of tax revenue on account of advanced training funds in 2024 of NIS 10.7 billion, comprising NIS 8.5 billion from the tax benefit on deposits into the funds, and another NIS 2.2 billion from the exemption from capital gains tax on withdrawals from them.
Fear of upsetting wage agreements
CPA Shlomi Shuv, who moderated the Fair Value Forum discussion, mentioned two distortions in the existing situation. "If there are tax benefits, they should be open and not disguised. After all, no-one really uses the money deposited in the advanced training funds these days for professional training, even if that was the original rationale. We’re talking about a substitute for salary, and the question is whether it should be liable to tax or exempt," he said.
The other problem he mentioned was a social one. The Ministry of Finance analysis shows that 82% of the tax benefit on deposits into advanced training funds goes to the top 20% of salary earners.
On the other hand, Prof. Amir Barnea, who participated in the discussion, warned that abolishing the tax benefits on advanced training funds would be liable to upset wage agreements and in the end lead to higher wage costs. He proposed transferring the tax benefit on advanced training funds to pension savings, so that workers’ net pay would not change, or alternatively to abolish the tax benefit as part of a general taxation program.
Up to now, the Histadrut has maintained a militant stance that has thwarted the Ministry of Finance’s proposals to remove the tax benefits on advanced training funds. Amit Ben-Tzur, director of the Histadrut’s research institute, stressed that hundreds of thousands of unionized workers pay into advanced training funds, from contract workers in the cleaning and security industries, to construction workers, workers in the hotel industry, and 100,000 teachers and a similar number of local authority employees, people who, he said, do not earn high salaries.
"This saving enables people in a country like Israel, where wages are too low and prices are too high, to cope with the cost of living. For example, when they suddenly need dental treatment that Is not in the state health basket and they have to find NIS 5,000 all at once, where will they take it from?" Ben-Tzur said that the figures he had showed that 85% of the money eligible for withdrawal from the advanced training funds was not withdrawn, which he said indicated that people use this money only at times of crisis when they are short of cash.
Yaniv Pagot, head of trading, indexes and derivatives at the Tel Aviv Stock Exchange, also warned that hitting the advanced training funds could have severe consequences, but in a different direction. "No-one asks where the money is invested, and everyone only looks at who enjoys the tax benefit," he said. "I would remind you that half the amount saved in advanced training funds is invested in the Israeli capital market, about NIS 170 billion of it in bonds and shares of Israeli companies.
"If this instrument disappears - and without the tax benefit the funds will disappear - the local capital market will dry up even more. And then, where will the money to finance the companies come from? At what price will money be raised, and what will happen to concentration in the economy? Instead of channeling a good slice of the advanced training funds’ assets to investment in local infrastructure funds and local venture capital, things that would have an impact here within the country, and making the taxation benefits conditional on that, they come along to eliminate them."
Pagot said that eliminating the funds would lead people who saved through them to buy more apartments and again inflate real estate prices, and to invest more overseas, such as in the S&P 500 Index. "Companies in Israel will develop even greater dependence on bank finance instead of finance on the capital market," he said.
Inbal Pollack, who heads the Israel Tax Authority securities investment department, pointed out the problem that the investment alternatives that do not carry tax benefits are the ones available to the less well off. "People who have the lowest savings invest their money mainly in bank deposits and mutual funds, products without tax benefits," she said. Pollack called for the formulation of transparent and clear conditions for the taxation of the various savings instruments.
Published by Globes, Israel business news - en.globes.co.il - on January 21, 2024.
© Copyright of Globes Publisher Itonut (1983) Ltd., 2024.