Offsetting Israeli Capital Losses: A Guide for Australians

A semi-retired couple in Melbourne sold their small holding in an Israeli company in 2021 at a loss of several hundred thousand shekels, wrote it off as a bad investment, and told nobody. Five years later they sold a Herzliya apartment at a large gain, watched the buyer remit a hefty advance of Israeli tax, and asked, reasonably enough, whether the old loss could shelter the new gain. In principle it could. In practice they had done the one thing that nearly destroys the right: they had never filed an Israeli return for the loss year.

The right to offset Israeli capital losses is real and generous. It is also full of traps that catch non-residents specifically, because the Israeli system assumes you are inside it, filing and claiming, and an Australian resident who deals with Israel only when an asset is sold is usually outside it. This guide sets out how Section 92 works, which losses are worth claiming, and how the Israeli set-off collides with your Australian tax.

The General Rule Under Section 92

The governing provision is Section 92 of the Income Tax Ordinance 1961. A capital loss realised in a tax year can be set off against capital gains realised in that year, and, importantly, that includes a real-estate betterment gain (mas shevach) under the Real Estate Taxation Law 1963 as well as gains on Israeli securities. A loss that cannot be fully used in the year it arises is carried forward without any time limit and set against capital gains in later years.

So the architecture is favourable. A securities loss can shelter a property gain. A loss on one Israeli property can shelter a gain on another. And an unused loss does not expire, which is why a five-year-old loss can still be live against a current sale. The betterment side of that equation is explained in the guide to the betterment levy and land appreciation tax, and the general rule for non-residents is summarised in the answer on offsetting capital losses against Israeli gains.

The catch, for a non-resident, is that nobody applies the offset for you. The Israel Tax Authority collects capital gains tax asset by asset, effectively transaction by transaction. Sell one Israeli apartment at a loss and another at a gain in the same year and the Authority will not net them in the background. The loss just sits there unless you go and claim it.

Not Every Loss Is Worth Anything

This is where Australian residents most often go wrong, because the intuition from home does not carry over. Section 92(a)(1) contains a chargeability test: a loss is set off against a gain only where the loss, had it been a capital gain, would have been chargeable with tax in Israel. The subsection expressly treats appreciation and loss within the meaning of the Real Estate Taxation Law 1963 as capital gain and capital loss for this purpose, which is what lets a share loss reach a betterment gain at all.

The test bites hardest on listed shares. Under Section 97(b2) a foreign resident is exempt from Israeli tax on gains from securities traded on an exchange in Israel, provided the gain is not made in a permanent enterprise in Israel. That exemption is usually a benefit. For loss purposes it is a trap. Because a gain on Tel Aviv Stock Exchange holdings would never have been chargeable to a foreign resident, a loss on those same holdings fails the Section 92(a)(1) test and is worth nothing at all.

The mirror image is what makes some losses valuable. Section 97(b3)(2) removes the foreign-resident exemption for securities of a company whose assets, on acquisition and throughout the two years before the sale, were mainly real estate rights or real estate association rights. A gain on shares in a real-estate-heavy Israeli company would have been taxable, so a loss on those shares is live and deductible. The character of the underlying company, not just the fact that you lost money, decides whether the loss is usable.

In Practice: Under Section 92 of the Income Tax Ordinance 1961 a capital loss offsets same-year capital gains, including a mas shevach gain under the Real Estate Taxation Law 1963, with any unused balance carried forward indefinitely. A NIS 300,000 loss on shares in a real-estate-heavy Israeli company, set against a NIS 300,000 betterment gain, saves roughly NIS 75,000 at the 25% individual rate, but the Israel Tax Authority applies it only when you file to claim it, and a refund of tax already withheld typically takes a few months to process at the assessing office after the return is submitted.

The Filing Condition That Decides Most Files

Section 92(b) is the provision that quietly determines the outcome of most non-resident cases, and it is the one the Melbourne couple fell foul of. The carry-forward of an unused capital loss is allowed 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 of the Ordinance. Put plainly, a loss you never reported is a loss the Israel Tax Authority is entitled to ignore.

For an Australian resident who thinks of themselves as an Australian taxpayer who happens to own something in Israel, this is counterintuitive. You made a loss, you owed nothing, so why would you file? The answer is that the filing is not about the tax due that year. It is about putting the loss on the Israeli record so it survives to be used later. Skip it, and the carry-forward has no foundation.

Late returns can often rescue the position, and filing voluntarily before any enquiry from the Authority is a materially stronger stance than filing after the point is raised against you. But it is slower, it costs professional fees, and it depends on reconstructing transaction records that may be years old and held by a former Israeli accountant. The clean course is to file in the loss year itself.

Common Mistake: Not filing an Israeli return in the year the loss is made, because no tax is owed. Section 92(b) conditions the entire carry-forward on that return, so a NIS 640,000 loss that was never reported cannot be set against a later gain until late returns for the loss year are filed and accepted by the assessing office of the Israel Tax Authority, which in a straightforward case takes around 14 weeks and adds several thousand shekels in professional fees. The loss is not lost forever, but it is frozen until the paperwork the reader thought was unnecessary is finally done.

How the Offset Runs on a Property Sale

For real estate the mechanics are procedural and unforgiving of delay. Betterment tax (mas shevach) is charged at 25% of the real gain for an individual under the Real Estate Taxation Law 1963, and the return is due within 30 days of the sale agreement. Crucially, the tax is effectively collected up front: 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% of the consideration for property acquired after 7 November 2001, or 15% for property acquired before that date.

That advance often reaches the Authority before any assessment exists. If you want a loss, whether from securities or another property, to reduce the betterment gain, you have to claim it inside the betterment return rather than waiting to argue about it afterwards. A set-off asserted in the return becomes a refund application. A set-off raised later becomes an objection to an assessment already made, which is a slower and weaker road. The starting point for what reduces a property gain in the first place is the note on deductible expenses for Israeli capital gains, and the full mechanics of the sale-side tax are in the guide to capital gains tax on an Israeli property sale.

In Practice: Section 15(b) of the Real Estate Taxation Law 1963 obliges the buyer to remit an advance of 7.5% of the consideration for property acquired after 7 November 2001 directly to the Israel Tax Authority, so on a NIS 4.9 million Herzliya sale roughly NIS 368,000 reaches the Authority before any set-off is even considered. Because betterment tax runs at 25% of the real gain and the return is due within 30 days of the sale agreement, claiming the Section 92 offset inside that return is what converts an over-withheld advance into a refund, which then takes several months to be assessed and repaid.

The Australian Side Pulls the Other Way

An Australian resident is taxed by the Australian Taxation Office on worldwide capital gains, so the Herzliya gain is assessable in Australia as well as in Israel. Australia relieves the double taxation through the foreign income tax offset under Division 770 of the Income Tax Assessment Act 1997, which credits the Israeli tax you actually paid against your Australian liability on the same gain. The Convention between Australia and Israel for the elimination of double taxation, signed on 28 March 2019 and in force from 6 December 2019, applying in Israel from 1 January 2020, sits over the top of that arrangement.

The consequence is one many people miss until their Australian accountant points it out. The two systems pull against each other. Every shekel of Israeli tax that the Section 92 offset saves you is a shekel of foreign income tax offset you no longer have available in Australia. Reduce the Israeli tax, and you increase the Australian tax on the same gain, because there is less foreign tax to credit. The net benefit of the offset is real, but it is smaller than the headline Israeli saving, and it should be quantified before anyone pays for the work. Discovering it six months later, from your Australian return, is an avoidable annoyance.

There is a further wrinkle worth naming. Israeli gains and losses are computed in shekels, so currency movement between the loss year and the gain year widens or narrows the figure the offset actually applies to, independently of anything that happens in Australian dollars. The Australian and Israeli computations are done in different currencies on different rules, and they will not tie out to the cent.

Practical Checklist

• File an Israeli return in the year you make a capital loss, even when no tax is due, to satisfy the Section 92(b) carry-forward condition
• Check whether the loss would have been chargeable had it been a gain, since a loss on Israeli-exchange-traded shares is usually worthless to a foreign resident
• Identify real-estate-heavy Israeli company shares, where a loss is live under Section 97(b3)(2)
• Claim the offset inside the betterment return, filed within 30 days of the sale agreement, not afterwards
• Reconstruct and translate the loss-year transaction records early, because former Israeli accountants are slow to produce them
• Model the Division 770 interaction with your Australian accountant before filing, so you know the true net saving
• Keep unused losses documented, since they carry forward indefinitely against future Israeli gains

Speak With an Israeli Attorney

The sequence and the paperwork on a capital-loss offset matter more than the arithmetic, and the single most expensive mistake, a missing loss-year return, is also the most common. We help Australian residents file late returns to preserve a carry-forward, claim the offset inside the betterment return, and reclaim advance tax withheld on a sale, while keeping the Australian foreign income tax offset in view so the net result is the one you actually planned for.

Contact us for a confidential initial consultation.