How an Australian Couple Cut Israeli Tax on Their Super Pension to Nil

Result: Israeli tax on two Australian superannuation pensions reduced from NIS 41,800 a year to nil, with NIS 27,400 recovered · Timeline: 8 months · Challenge: The ten-year oleh exemption expired and the wrong relief was claimed · Authority: Israel Tax Authority assessing officer · Financial Impact: NIS 41,800 a year, plus NIS 27,400 refunded

Background

A couple from Melbourne made aliyah in October 2014, in their early sixties, and settled near Netanya. He had spent 31 years with an Australian engineering firm and drew an account-based pension of about AUD 164,000 a year from a taxed superannuation fund. She drew about AUD 58,000 from her own fund. Together that was roughly NIS 522,000 a year, and for a decade none of it was taxed in Israel, because Section 14(a) of the Income Tax Ordinance 1961 exempts a new immigrant's foreign income for ten years.

The ten years ended in October 2024. Their Israeli accountant filed the stub period on the 2024 return and applied a 35 per cent exemption to the pensions, which produced a small bill. Then he ran the numbers for a full year and told them to expect about NIS 41,800 annually from 2025 onwards, indefinitely. They had built their retirement budget on a figure that did not include an Israeli tax bill of that size. That is when they called, and their first question was whether moving back to Australia was the only answer.

The Challenge

The accountant had not made an error so much as stopped one section too early. There are three separate provisions in play once an oleh's exemption window closes, and they are easy to run together because they sit almost adjacent in the Ordinance.

Section 9A is the domestic relief for a qualifying pension from an Israeli employer or provident fund, with rights fixed on Form 161D. It is not the provision for a pension paid from abroad, and it was not the one that mattered here. Section 9B exempts 35 per cent of a pension whose source is outside Israel, and that was the relief the accountant had applied. It is real and it is automatic, and it left 65 per cent of an AUD 164,000 pension exposed to Israeli marginal rates that reached 31 per cent on the top slice.

Section 9C is the one that changes the answer. It allows an individual who became an Israeli resident for the first time, or a veteran returning resident, to cap the Israeli tax on a foreign-source pension earned from work abroad at the amount of tax that would have been paid on that same pension in the country paying it. The relief has to be claimed, and the taxpayer carries the burden of proving the foreign rate together with the personal deductions that would have applied there.

The Australia-Israel double tax treaty, in force from 6 December 2019, was no help and was never going to be. Its pensions article assigns the taxing right over an ordinary pension to the country where the recipient lives, which after aliyah is Israel. Leading with the treaty in a case like this concedes the point. The relief was domestic, and the arithmetic under it was startling: a superannuation income stream from a taxed source, paid to a member aged 60 or over, is not assessable income in Australia. The tax that would have been paid there was nil. Under Section 9C, the ceiling on the Israeli tax was therefore also nil.

In Practice: Section 9C of the Income Tax Ordinance 1961 caps the Israeli tax on a foreign-source work pension at the tax the recipient would have paid in the paying country, for an oleh or veteran returning resident, with no time limit once the Section 14(a) ten-year window has closed. The claim is made in the annual return (Form 1301, due 30 April) to the Israel Tax Authority assessing officer, and it stands or falls on documentary proof of the foreign position. Here it displaced the Section 9B 35 per cent exemption entirely and reduced a NIS 41,800 annual liability to zero.

What We Did

The work was evidential rather than argumentative. An Israeli assessing officer will not take an assertion about Australian law from an Israeli lawyer, and should not.

We began by fixing what a claim under Section 9C actually has to prove, which is not "Australia does not tax this" but "this taxpayer, on this pension, in this year, would have paid X". We commissioned a letter from an Australian chartered accountant computing the hypothetical Australian liability for each of the two pensions, year by year, showing the taxed element paid to a member over 60, the resulting exclusion from assessable income, and the Medicare levy calculated at nil on that basis. Alongside it we assembled the fund's pension commencement statements, the annual PAYG member statements identifying the tax-free and taxed components, and the last Australian notices of assessment before departure.

We then filed the Section 9C claim for 2024 and 2025 and applied to reduce the 2026 advance payments, which had already been set on the accountant's earlier projection.

The assessing officer resisted on two grounds, both worth knowing about. The first was characterisation: he argued that an account-based pension the member can commute at will is a drawdown from a foreign investment vehicle rather than a kitzba, so Section 9C did not reach it. We answered with the fund's own documentation of a regular monthly income stream commenced on satisfying a condition of release, and with the point that the same instrument is treated as a pension by the paying jurisdiction whose treatment Section 9C expressly borrows. The second was the hypothetical itself: he suggested the computation should assume the taxpayer had left Australia and become a foreign resident there. We accepted the alternative and ran it, and the answer was the same, because a taxed-element superannuation income stream to a member over 60 stays outside assessable income either way. An argument you can lose twice and still win is worth conceding on the record.

He issued a best-judgment assessment for 2024 under Section 145 rejecting the claim. We filed a written objection under Section 150 within the 30 days that section allows, and the matter was settled at the objection hearing with an order under Section 152(b) accepting the Section 9C computation for both years. No appeal to the District Court under Section 153 was needed, which saved the client between 18 and 30 months.

In Practice: Tax already paid was recovered by a claim under Section 160 of the Income Tax Ordinance 1961, which allows a refund of overpaid tax going back six years, with CPI linkage and 4 per cent annual interest. Here it returned NIS 8,600 paid on the 2024 stub period and NIS 18,800 of 2026 advance payments, a total of NIS 27,400, credited 11 weeks after the objection was resolved.

The Outcome

The Israeli tax on both pensions came out at nil, and the Section 9C position now governs each year's return rather than being re-argued annually. The couple recovered NIS 27,400 already paid, cancelled the balance of the 2026 advances, and stopped budgeting for a NIS 41,800 annual charge. Over their joint life expectancy the difference runs well past NIS 800,000, which is a strange amount of money to turn on which of three adjacent sections a return cites.

Two things did not change, and we were careful that the clients understood both. The Section 9C ceiling caps the tax on the pension. It does not lift the pension out of the return, so it still appears, and it still forms part of the base on which the National Insurance Institute assesses health contributions on its own footing. There is no social security agreement between Australia and Israel, and no reciprocal health care agreement either, so Medicare is unusable in Israel and the couple pay Bituach Leumi and a kupat holim with nothing to offset against them. The second is that the relief attaches to a pension earned from work abroad. Had either of them continued contributing to their funds after arriving in Israel, part of the entitlement would have been open to the argument that it relates to a period after aliyah, and that argument is unsettled. They had stopped contributing on the day they left, which is the cleanest version of these facts and, for anyone still planning the move, the version worth engineering.

Key Takeaways

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

1. Three sections sit close together and only one of them fits a foreign pension. Section 9A is for Israeli qualifying pensions and Form 161D. Section 9B gives an automatic 35 per cent exemption on a foreign pension. Section 9C caps the Israeli tax at the source country's figure, and for an Australian taxed-fund pension paid after 60 that figure is often zero.
2. The treaty is not the answer here. Its pensions article gives Israel the taxing right once you live in Israel, so the relief has to come from Israeli domestic law, and leading with the treaty concedes the ground you actually want.
3. Section 9C is proved, not asserted. Budget for an accountant's letter in the source country computing the hypothetical liability, plus the fund's own statements. An Israeli assessing officer will not take foreign tax law on trust, and the burden sits on the taxpayer.
4. Run the calculation in year nine. The couple lost nothing permanent by discovering this in year eleven only because Section 160 allows six years to reclaim, and advances paid on a wrong projection are painful to fund even when they come back.
5. Stop contributing to the foreign fund before you land. Contributions made after aliyah invite an argument that part of the pension was not earned from work abroad, and that argument has not been settled.

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Facing a Similar Situation?

If your ten-year exemption is running out and nobody has yet compared the Section 9B exemption against the Section 9C ceiling for your own pension, the comparison takes an afternoon and can be worth a five-figure sum every year. Our guide to Australian superannuation and Israeli tax sets out how the three residency positions work.

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