Does Australia Have a Tax Treaty with Israel?

Australia has concluded double taxation agreements with over 45 countries, including the United States, the United Kingdom, Germany, France, Japan, and most OECD economies. Israel is not among them. The absence of an Australia-Israel tax treaty is not a recent development or a temporary gap — it has been the position for decades, and there is no public indication that a treaty is under active negotiation. For an Australian resident with Israeli-source income, the consequence is that Israeli taxes cannot be reduced to treaty rates, and the relief mechanism for avoiding full double taxation is less efficient than it would be under a treaty: Australia's domestic Foreign Income Tax Offset, which credits foreign taxes paid against Australian liability on the same income but with limitations that a well-drafted treaty would handle more cleanly. The practical effect on an Australian resident selling Israeli property, receiving Israeli dividends, or managing Israeli rental income is a higher combined tax burden than an equivalent American or British taxpayer with the same Israeli position would face.

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Detailed Answer

When Australia has a tax treaty with a country, that treaty determines which country has primary taxing rights over specific categories of income — property income typically goes to the country of location, dividends and interest typically go to the country of residence with a capped withholding rate in the source country. Without a treaty, Israel taxes Israeli-source income at its domestic rates, and Australia taxes Australian residents on their worldwide income at Australian rates, with relief available only through the FITO mechanism under Division 770 of the Income Tax Assessment Act 1997 (ITAA 1997).

The Foreign Income Tax Offset allows an Australian resident to claim a credit against their Australian tax liability for foreign income taxes paid on the same income. The critical limitation: the FITO cannot exceed the Australian tax that would otherwise be payable on that foreign income. If the Israeli tax rate on a particular item of income is lower than the Australian rate on the same income, the FITO fully offsets the Israeli tax but the Australian taxpayer still owes the difference to the ATO. If the Israeli rate is higher than the Australian rate — which can occur for non-resident withholding on Israeli dividends — the excess Israeli tax is not refundable or creditable; it is simply lost. The FITO is calculated and claimed on the Australian individual tax return using the Foreign Income Tax Offset worksheet.

In Practice: Under Division 770 of the Income Tax Assessment Act 1997, an Australian resident who pays Israeli betterment levy (mas shevach) of 25% on the gain from selling Israeli property and then reports that same gain to the ATO as a capital gain can claim a FITO for the Israeli tax paid — but the FITO is limited to the Australian CGT applicable to that gain. If the property was held for more than 12 months, the Australian CGT 50% discount (Section 115-10 ITAA 1997) applies, and the Australian tax is calculated on only half the gain; the FITO is correspondingly limited to 50% of the Israeli tax paid. On an Israeli property gain of NIS 2,000,000 (approximately AUD 800,000), with Israeli betterment levy of NIS 500,000 (AUD 200,000) and an Australian tax rate of 45% on 50% of the gain (AUD 180,000 Australian CGT), the FITO claim of AUD 180,000 absorbs only a portion of the AUD 200,000 Israeli tax paid — AUD 20,000 in Israeli tax is unrecoverable. The ATO requires evidence of the Israeli tax paid, typically the ITA clearance certificate (ishur mas) or the betterment levy self-declaration receipt.

Israeli withholding rates without treaty protection are the full domestic rates:

• Dividends from Israeli companies paid to non-resident individuals: 25% withholding under Section 125B of the Income Tax Ordinance 1961 (or 15% for certain company types). Treaty-beneficiary investors — US residents under the US-Israel treaty — can often claim a reduced 12.5% or 15% rate; Australian residents cannot.
• Interest on Israeli bank deposits paid to non-residents: exempt from Israeli tax under Section 97(b) of the Income Tax Ordinance in certain circumstances; taxable at up to 25% in others depending on the account type.
• Rent from Israeli residential property: taxable under Section 122 of the Income Tax Ordinance at a 10% flat rate or at progressive rates by election, with a monthly exemption threshold of approximately NIS 5,900.

Each of these items must also be included in the Australian resident's assessable income and reported to the ATO, with FITO claimed for the Israeli taxes withheld or paid.

The Australian CGT cost base interaction creates a specific complexity for property sales. An Australian resident calculates their Australian CGT based on the AUD cost of acquiring the Israeli property (converted at the exchange rate on the purchase date) and the AUD proceeds (converted at the exchange rate on the sale date). Israeli betterment levy paid is deductible from the Australian CGT cost base as a cost of sale — reducing the Australian gain — rather than being claimed solely as a FITO. The election between deducting Israeli tax as a cost base reduction and claiming it as a FITO is made on the Australian return for the income year of the sale, and the better approach depends on the Australian taxpayer's marginal rate and the relative sizes of the Israeli and Australian tax liabilities. This is not an obvious calculation and is where a coordinated approach between an Israeli attorney and an Australian tax adviser produces a measurably better outcome than handling each side independently.

For Australian residents considering aliyah, the treaty gap has one compensating factor: Israeli new olim (olim hadashim) receive a 10-year exemption on foreign-source income under Section 14(a) of the Income Tax Ordinance 1961. An Australian resident who makes aliyah and becomes an Israeli tax resident would, during the 10-year exemption period, pay Israeli tax only on Israeli-source income — Australian-source income (superannuation distributions, Australian property income, Australian dividends) would be exempt from Israeli tax. The interaction between the ATO's treatment of a former Australian resident and the Israeli 10-year exemption is complex and requires planning before the aliyah date, but it partially compensates for the absence of a formal treaty. For Israeli property tax obligations specifically relevant to Australian buyers, see our guide on Israeli property taxes for Australian buyers.

When to Consult a Lawyer

• You are selling Israeli property and need to determine the optimal approach between deducting Israeli betterment levy as an Australian CGT cost of sale (reducing the Australian gain directly) versus claiming it as a FITO (crediting the Australian tax on that income) — the better approach in your specific circumstances depends on your Australian marginal rate, the amount of the Israeli tax, and whether the CGT 50% discount applies, and the difference can be AUD 20,000–50,000 on a significant Israeli property sale
• You receive dividends from an Israeli-listed company or from an Israeli company in which you hold shares, and the 25% Israeli withholding was deducted before you received payment — documenting the Israeli withholding for the FITO claim requires specific paperwork from the Israeli company or its registrar, which Israeli companies may not proactively provide to Australian shareholders and which may need to be formally requested
• You are considering making aliyah from Australia and want to understand the Australian exit tax implications — under Section 104-135 of the ITAA 1997, ceasing Australian tax residency triggers a deemed disposal of most capital assets at market value, which can crystallise a large Australian CGT liability in the year of departure; mapping the Australian and Israeli tax positions before the aliyah date is essential planning that neither country's tax authority will prompt you to do

A qualified Israeli tax attorney working in coordination with an Australian tax adviser can structure the timing and documentation of both the Israeli and Australian tax positions to minimize the total combined burden that the absence of a formal treaty would otherwise leave unaddressed.

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Speak With an Israeli Attorney

The absence of an Australia-Israel tax treaty is a fixed constraint, not something legal advice can change. What it can address is how Israeli taxes are calculated, documented, and timed — and how that documentation is structured to support the Australian FITO claim in the form that produces the most efficient combined tax position. The two sides of this calculation need to be built together, not separately.

Contact us for a confidential initial consultation.