As part of its plans for managing the fiscal deficit in 2025, the Ministry of Finance is proposing to raise the surtax on passive income such as interest. The ministry proposes raising the surtax from its current rate of 3% to 5%, and expanding it to apply to those with more than one home. Such a move will mainly affect the top 10% of incomes, but it will also be a factor impeding capital investment by Israelis in general.
Currently, annual passive income of over NIS 721,560 is subject to the surtax. This includes capital gains, interest, and dividends, but not income from work or a business.
The Ministry of Finance stresses that it Is not talking about a cumulative addition to regular income tax, but about a tax on people whose passive income is higher than the set amount. "If an individual has income from capital sources amounting to NIS 500,000 and income liable to tax from work or a business of a further NIS 500,000, the proposed additional tax will not apply, since the taxable income from capital sources is lower than the set threshold," the Ministry of Finance explains.
According to the ministry, the proposed measure is a correction of a regressive aspect of the existing tax system, since much taxation of passive income in Israel is lower than the highest income tax brackets, which leads to a problematic situation. "A large portion of the income of these individuals is taxed at much lower rates than that of people whose income is lower but derives from work or a profession," the memorandum states. "For example, according to Israel Tax Authority figures, the average effective tax rate on the top 1% is about 26%, and the average effective tax rate on the top quartile is just 21%." The proposed rise in the surtax is intended to go some way towards correcting this situation, and to raise the amount of tax actually paid by the wealthiest.
The rise in the surtax is part of a broad policy of the Ministry of Finance aimed at the top income deciles that includes cancelling the scheduled rise in the amount of pension income exempt from tax, and freezing income tax brackets, despite the high rate of inflation, which amounts to an income tax hike in real terms. The Ministry of Finance thus seeks to impose most of the austerity measures on high earners, but at the same time it is liable to reduce incentives to work, save, and invest that will be required for the recovery of the Israeli economy when the war ends.
Earnings on sales of homes
Today, the surtax is paid only partially on gains on the sale of homes. Homes that do not come within the Ministry of Finance definition of a "luxury home" (that is, not worth more than NIS 5,382,285 in 2024) are exempt.
The Ministry of Finance says that this creates a tax benefit for those who invest in homes versus investment in other channels "which is contrary to government policy." The ministry therefore proposes the abolition of the luxury home category, and making the sale of any home liable to the surtax, other than a first home.
According to the Ministry of Finance’s forecast, raising the surtax rate from 3% to 5% will yield NIS 1 billion to the state in 2025, and NIS 1.5 billion each year thereafter.
In addition, expanding the applicability of the surtax on real estate investments will add NIS 420 million revenue in 2025 and another NIS 510 million when the measure fully matures in 2029. In other words, in the long term, the changes to surtax are expected to add a little over NIS 2 billion to state revenues annually.
Published by Globes, Israel business news - en.globes.co.il - on October 9, 2024.
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