Tax Authority to return millions of shekels deducted from pensions

The Israel Tax Authority (ITA) has admitted that it unlawfully collected tax from tax-exempt pension payments received by pensioners between 2012 and 2019, and it is now obliged to return the money to them. The illegally collected sums amount to tens of millions of shekels annually.

The ITA’s unlawful conduct was exposed in a lawsuit, and a request that the suit should be recognized as a class action, filed by Shabtai Shabtai, a retired person who receives a pension, through Adv. Adi Leibowitz.

The claim stated that the ITA unlawfully instructed entities making pension payments – employers, provident funds, and others – not to award the tax exemption for a qualifying pension to anyone who had not presented approval in advance from the tax inspector. This was despite there being no real justification for this requirement, and despite the law stating that tax should not be deducted at source from an exempt pension.

In a ruling giving court approval to a settlement in which the ITA admitted having collected tax unlawfully, Central District Court Judge Avi Gorman said, “Income determined by the legislator to be exempt from tax must not be taxed. The recognition of property rights makes it obligatory to treat exempt income carefully, and not set up obstacles to the exemption that are unnecessary and unjustified. Even a paternalistic concern to ensure that the taxpayer is aware of all his rights cannot justify taxation of exempt income.”

The court made an NIS 100,000 award to the bringer of the class action, and awarded costs of NIS 1 million plus VAT to his counsel.

The claim concerned amendment 190 to the Income Tax Ordinance, which is mainly to do with expanding tax benefits given under section 9a of the ordinance when pension savings are withdrawn by taxpayers who have reached retirement age. In amendment 190, the legislator considerably enlarged the exemption given to a qualifying pension, with the aim of securing pensioners’ rights in a reality in which life expectancy is rising and pension savings accumulated during a person’s working life need to finance a longer period of retirement.

As a result of the unjustified requirements imposed by the ITA, however, a substantial portion of tax-exempt pensions, amounting to tens of millions of shekels, did not end up in the hands of the pensioners, but was instead paid to the ITA as income tax.

Following the lawsuit, the ITA changed its instructions and told all pension payers to give the exemption without the need for approval from the tax inspector, but on the basis of the pensioner’s signature on a short declaration only. The ITA thus accepted Shabtai’s claim.

According to the findings presented by the two sides, there are about 10,000 pensioners who, as a result of the ITA’s original instructions, had the tax-exempt element of their pensions taxed at source.

In the request for approval of the settlement presented by the ITA and Shabtai, the amount of the tax rebate due to pensioners for the two years preceding the filing of the lawsuit, 2016-2017, is NIS 45.9m. The amount unlawfully collected in 20182019 is estimated at a further NIS 80m. (Globes/TNS)