How an Australian Couple Used an Old Israeli Loss to Cut a Property Tax Bill

Result: NIS 596,000 of a five-year-old capital loss set against a Herzliya betterment gain, producing a NIS 149,000 refund · Timeline: 9 months from the sale to the refund landing · Challenge: No Israeli return filed in the loss year · Authority: Israel Tax Authority (Rashut HaMisim), Netanya assessing office · Financial Impact: NIS 149,000 refunded

Background

Our clients were a semi-retired couple in Melbourne who had held Israeli assets since the 1990s without ever thinking of themselves as Israeli taxpayers. In 2021 they sold their 18 per cent holding in a small Israeli company whose only real asset was a commercial building in Petah Tikva. They sold at a loss of NIS 640,000, treated it as a bad investment, and told nobody. In February 2026 they sold a Herzliya apartment bought in 2015 for NIS 4.9 million, at a real gain of NIS 2.63 million. The buyer withheld the statutory advance and remitted it to the Israel Tax Authority, and the couple's Australian accountant asked, reasonably enough, whether the old loss could be used against the new gain. In principle it could. In practice they had done the one thing that destroys the right.

The Challenge

Section 92(a)(1) of the Income Tax Ordinance 1961 sets out the general rule and, in the same breath, the qualification that decides most non-resident files. A capital loss is set off against a real capital gain only where the loss, had it been a capital gain, would have been chargeable with tax. The subsection then says expressly that appreciation and loss within the meaning of the Real Estate Taxation Law 5723-1963 are treated as capital gain and capital loss for this purpose, which is what lets a share loss reach a betterment gain at all.

That chargeability test is where most non-residents come unstuck, and it is why we had to be careful about which of our clients' losses we were actually claiming. They had also lost money on Tel Aviv Stock Exchange holdings over the same period. Those losses were worthless to them. Under Section 97(b2) a foreign resident is exempt from Israeli tax on capital gains from securities traded on an exchange in Israel where the gain is not in a permanent enterprise in Israel, so a gain on those shares would never have been chargeable, and a loss on them therefore fails the Section 92(a)(1) test. The Petah Tikva holding was different, and deliberately so: Section 97(b3)(2) removes the foreign-resident exemption for securities of a company whose assets, on acquisition and throughout the two years before sale, were mainly real estate rights or real estate association rights. Because that gain would have been taxable, the loss was live.

The second problem was procedural and nearly fatal. Section 92(b) allows the unused balance to be carried into later years one after the other, but only on condition that a return for the year in which the loss was incurred was submitted to the Assessing Officer under Sections 131 and 132. Our clients had filed nothing for 2021. On the Tax Authority's reading, there was no loss on the record to carry anywhere.

In Practice: Section 92(b) of the Income Tax Ordinance 1961 makes the carry-forward of an unused capital loss conditional on a return having been filed for the loss year under Sections 131 and 132, which is why a NIS 640,000 loss that had sat unclaimed since 2021 required late returns before a single shekel could be set against the 2026 gain. The late filing was accepted at the Netanya assessing office of the Israel Tax Authority 14 weeks after submission, and cost NIS 11,500 in accountancy and legal fees against a NIS 149,000 refund.

What We Did

We reconstructed the 2021 transaction before approaching anyone. The share purchase agreement, the 2021 sale agreement, the company's financial statements for the relevant years and the bank records evidencing both legs were assembled and translated where needed. Two of those documents had to be obtained from the Israeli company's former accountant, which took seven weeks and two reminders. We also obtained the company's asset composition for the two years preceding the sale, because the Section 97(b3)(2) point was the foundation of the whole claim and we expected it to be tested.

We then filed late Israeli returns for the couple for 2021, opening a tax file for each of them, and reporting the capital loss. Filing late voluntarily and before any enquiry is a materially better position than filing after the Authority raises the point, and it was presented that way. The returns were accompanied by a covering memorandum setting out why the Petah Tikva loss satisfied Section 92(a)(1) and why the exchange-traded losses were not being claimed. Volunteering that second point cost nothing and bought credibility on the first.

On the property side, the mechanics ran in parallel. Betterment tax (mas shevach) for an individual is charged at 25 per cent on the real gain under the Real Estate Taxation Law 1963, and the return is due within 30 days of the sale agreement. Under Section 15(b) of that Law the buyer remits an advance against the seller's betterment tax directly to the Israel Tax Authority, at 7.5 per cent of the consideration for property acquired after 7 November 2001, which on this sale meant a substantial sum already sitting with the Authority before any assessment existed. We filed the betterment return on time, claimed the set-off in it rather than waiting to argue about it later, and cross-referenced the newly opened income tax files.

In Practice: Betterment tax runs at 25 per cent of the real gain for an individual under the Real Estate Taxation Law 5723-1963, and Section 15(b) of that Law obliges the buyer to remit an advance of 7.5 per cent of the consideration for property acquired after 7 November 2001, so on a NIS 4.9 million Herzliya sale roughly NIS 368,000 reached the Israel Tax Authority before any set-off was considered. Claiming the Section 92 offset inside the betterment return, filed within the statutory 30 days of the sale agreement, is what turned an assessment argument into a refund application.

The Australian side needed managing at the same time and in the opposite direction. The Convention between Australia and Israel for the elimination of double taxation was signed on 28 March 2019 and entered into force on 6 December 2019, applying in Israel from 1 January 2020, and Australia relieves double taxation on Israeli-source gains through the foreign income tax offset in Division 770 of the Income Tax Assessment Act 1997. The point our clients had not grasped is that the two systems pull against each other. Every shekel of Israeli tax the offset saved them was a shekel of foreign income tax offset they would no longer have in Australia. The net benefit was real but smaller than the headline, and we said so in writing before they instructed us to proceed, because a client who discovers that from their Australian accountant six months later is entitled to be annoyed.

The Outcome

The assessing officer accepted the late 2021 returns in June 2026 and the loss went onto the record at NIS 640,000. Of that, NIS 596,000 was absorbed by the Herzliya betterment gain, with the balance carried forward under Section 92(b) against any future Israeli capital gain, indefinitely and with no expiry. The reassessed betterment liability fell accordingly, and NIS 149,000 of the advance already remitted by the buyer was refunded to an Israeli account and repatriated to Melbourne on the usual withholding clearance. The refund landed in November 2026, five months after the set-off was accepted and nine months after the sale.

The couple's Australian return for the year reflected a smaller foreign income tax offset, as expected, so the true saving was not the full NIS 149,000. It was still comfortably the best return either of them had ever had on a 2021 investment they had written off entirely.

Key Takeaways

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

1. File an Israeli return in the year you make a loss, even when you owe nothing. Section 92(b) conditions the entire carry-forward on that return, and a loss nobody reported is a loss the Israel Tax Authority is entitled to ignore.
2. Not every Israeli loss is usable. Section 92(a)(1) admits only a loss that would have been chargeable had it been a gain, so a foreign resident's loss on Tel Aviv Stock Exchange holdings exempt under Section 97(b2) buys nothing at all.
3. Real-estate-heavy companies are the exception that helps you. Section 97(b3)(2) strips the foreign-resident exemption from shares in a company whose assets are mainly Israeli real estate, which is precisely what makes a loss on those shares deductible.
4. Claim the offset inside the betterment return, not afterwards. The return is due within 30 days of the sale agreement, and a set-off asserted at that stage becomes a refund application rather than an objection to an assessment already made.
5. Model the home-country effect before you file. An Israeli tax saving reduces the foreign income tax offset available under Division 770 in Australia, so the net gain is always smaller than the Israeli figure and should be quantified before anyone pays for the work.

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Facing a Similar Situation?

If you have an unreported Israeli loss and an Israeli gain coming, the sequence and the paperwork matter more than the arithmetic. Our answer on whether a non-resident can offset capital losses against Israeli gains sets out the general rule, and the guide to capital gains tax on an Israeli property sale covers the betterment side.

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