How an Australian Couple Fixed Their Israeli Residency Exit Date

Result: Israeli tax residency formally ended as of 31 August 2021 by ruling, with NIS 214,000 of over-withheld tax refunded · Timeline: 20 months · Challenge: Leaving Israel without ever closing the residency file · Authority: Institution for Tax Decisions, Israel Tax Authority · Financial Impact: NIS 214,000 recovered, NIS 24,000 exit tax paid

Background

A couple in their fifties left Ra'anana for Melbourne at the end of August 2021, when one of them took a hospital research appointment. They did what most people do. They packed, they flew, and they assumed that living in Australia made them Australian for tax purposes and nothing more needed doing. Behind them in Israel they left a rented two-bedroom apartment, a securities portfolio at an Israeli bank worth about NIS 3.1 million, a provident fund, an unclosed National Insurance file and two adult children.

Four years later their Melbourne accountant asked a question that unravelled the whole arrangement. Why, he wanted to know, was the Israeli bank still deducting tax at 25% on portfolio gains and at 30% on dividends, when the Australia-Israel treaty caps Israeli withholding on dividends at 15%? The answer was uncomfortable. As far as every Israeli institution was concerned, they had never left.

The Challenge

Israeli tax residency does not end because you board a plane. It ends when your centre of life moves, which is the test in Section 1 of the Income Tax Ordinance [New Version] 5721-1961, and the Israel Tax Authority does not accept that it has moved simply because you say so. The couple had never filed Form 1348, the residency declaration used to tell the Authority that the day-count tests may point one way while the centre of life points another. Their day counts were modest, 78 days in 2023 and 96 in 2024, nowhere near the aggregate that raises a presumption of residency. The difficulty lay elsewhere.

It lay in everything they had left switched on. The Ra'anana apartment was still theirs. Their kupat holim membership was still active and their National Insurance file had never been reported as severed. One of them was still invoicing an Israeli company for occasional consulting work. Individually each of these is explainable. Together they are precisely the picture the Authority points to when it argues that a family's centre of life never really left Israel, and a taxpayer who raises the argument for the first time in an assessment four years after departure is arguing from the weaker side of the table.

There was also money moving in the wrong direction, in two ways at once. The bank was over-withholding on Israeli-source income the treaty had already limited. And the exit tax was sitting unaddressed. Section 100A of the Ordinance treats an individual who ceases to be an Israeli resident as having sold their assets on the day before residency ends. Leave that unresolved and the Authority is free to argue, years later, for a departure date that suits it rather than one that suits you.

In Practice: Advance rulings are governed by Sections 158B to 158F of the Income Tax Ordinance [New Version] 5721-1961, introduced by Amendment 147 with effect from 1 January 2006, and are decided by the Institution for Tax Decisions at the Israel Tax Authority. There is no statutory filing fee, but the recommended service standard of 90 to 120 days was never implemented and this file took 14 months from submission to signed ruling. Israeli professional fees on a general-track application run NIS 20,000 to NIS 60,000; this one cost NIS 41,000, against a recovery of NIS 214,000.

What We Did

The first decision was strategic rather than technical: whether to ask at all. A ruling given in agreement binds both sides as a contract on the facts presented, and an applicant who will not accept the Authority's conditions is usually better off saying nothing, because a refusal sitting in the file is an unpleasant thing to argue against later. We modelled the likely conditions before drafting a word, and only then advised them to proceed. The mechanics of that choice are set out in our guide to Israel Tax Authority advance rulings for non-residents.

We built the factual submission around the benchmarks the Authority itself publishes for relocating Israelis, which look for at least three years of residence abroad, a family settled abroad for at least two and a half years, and visits held to roughly 75 days a year for the worker and 85 for the family. The couple cleared all three comfortably, and saying so in the Authority's own vocabulary mattered more than any legal argument we could have made. Alongside that went the ordinary proof: Australian lease and then purchase documents, Medicare and private health cover, Australian employment contracts, ATO notices of assessment for four years, Australian school and medical records for the younger child, and a day-by-day travel schedule reconciled to passport stamps.

Then we closed the open files, because the Authority reads them as evidence. The consulting invoices to the Israeli company were stopped and re-papered as services supplied from Australia. The National Insurance residency position was reported and settled separately. The Ra'anana apartment was kept, which was fine: Israel taxes Israeli rental income whether the landlord is resident or not, and owning a let apartment abroad is a normal thing for an emigrant to do rather than evidence of a life left behind. Form 1348 went in with the covering submission so the file was complete on the day it landed.

The application was filed anonymously at first, which let us test the reception of the proposed date before putting their names to it. We identified the file once the response was constructive. The ruling issued in agreement fourteen months later and fixed 31 August 2021 as the date Israeli residency ended, subject to conditions on future presence in Israel.

In Practice: Under Section 100A of the Income Tax Ordinance, an individual who ceases to be an Israeli resident is deemed to have sold their assets on the day before residency ends, with an election to defer payment until the asset is actually sold and to apportion the gain over the holding period. The ruling fixed the Israeli-attributable share of the portfolio gain at NIS 96,000, producing exit tax of NIS 24,000 at the 25% rate. The over-withheld tax was then reclaimed from the Israel Tax Authority under Section 170 of the Ordinance, supported by an ATO certificate of residence, on a non-resident refund track that runs four to nine months.

The Outcome

The signed ruling did three things at once. It fixed the departure date, which meant the Authority could not later reopen the question and assert Israeli residency through 2022 or 2023. It settled the exit tax at NIS 24,000 on an apportioned gain of NIS 96,000, a figure the couple could pay without selling anything. And it gave the bank a document it could act on, which produced a withholding exemption certificate and stopped the over-deduction at source.

The refund followed six months later. Across four tax years the Israeli bank had withheld NIS 214,000 more than Israel was entitled to take once the couple were non-residents and the treaty caps applied, and that money came back under Section 170 with the ATO residence certificate attached. On the Australian side the position was cleaner than they had feared. Because Division 855 of the Income Tax Assessment Act 1997 treats an individual who becomes an Australian resident as having acquired their non-Australian assets at market value on that day, Australia was only ever taxing the growth after August 2021, and the Foreign Income Tax Offset they had been claiming was recalculated to the tax Israel was properly owed rather than the tax it had actually deducted.

Twenty months from first instruction to money in the account. The exposure if they had waited for the Authority to raise the question first, on its own timing and its own choice of departure date, was materially larger, and the negotiating position would have been reversed.

Key Takeaways

What this case illustrates for non-residents in similar situations:

1. Departure is an event you have to document, not a fact the Israel Tax Authority infers. Form 1348 and a contemporaneous evidence file cost very little in the year you leave and are expensive to reconstruct four years later.
2. An advance ruling is a negotiation with a binding result, so decide whether you can live with the likely conditions before you apply. A refusal in the file is worse than never having asked.
3. Fix the exit date and the Section 100A position together. Once the date is agreed in writing, the apportionment of every later disposal follows from it and stops being arguable.
4. Treaty rate caps do not apply themselves. An Israeli bank withholds at domestic rates until someone hands it a document, and the excess has to be reclaimed under Section 170 rather than credited at home.
5. Leave nothing switched on that contradicts your story. Active consulting invoices, an unsevered National Insurance file and a live kupat holim membership are the three items that most often decide a residency argument against an emigrant.

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Facing a Similar Situation?

If you left Israel without formally closing your residency position, or an Israeli bank is still treating you as a resident years after you moved, the question is not whether to deal with it but whether to deal with it before the Tax Authority does. Our guide to the Israeli exit tax on leaving Israel sets out what a departure actually triggers.

Contact us for a confidential consultation about your Israeli legal matter.