Australia-Israel Tax Treaty: A Guide for Australians

An Australian shareholder in a Tel Aviv company received a dividend, saw that 30% had been withheld in Israel, and assumed that was the final tax. When he declared the dividend to the ATO, his accountant claimed a Foreign Income Tax Offset, but only for the 15% the treaty actually permitted Israel to charge. The other portion was not an offset he could use. It was Israeli tax he had overpaid and would have to reclaim separately from the Israel Tax Authority.

That gap, between what Israel withholds at source and what the treaty allows, is the single most expensive misunderstanding Australians have about their Israeli income. The Australia-Israel double tax agreement does not make income tax-free. It allocates taxing rights, caps source-country rates, and tells each country how to relieve the double tax. Used correctly it prevents you paying twice. Ignored, it leaves money sitting with the Israel Tax Authority that you have to chase.

This guide explains how the treaty works for an Australian resident with Israeli income, from the viewpoint of someone managing it from Sydney, Melbourne, or Perth rather than from inside Israel.

What the Treaty Actually Does

The Australia-Israel treaty was signed in March 2017 and came into force in December 2019. It took effect in Israel for income from 1 January 2020, and in Australia for withholding from the same date and for other income tax from the 2020-21 year.

Inside Israel, treaties are given legal force by Section 196 of the Income Tax Ordinance 1961, which allows an order adopting a tax treaty to override conflicting domestic provisions. That is why an Israeli payer can apply a reduced treaty rate rather than the full domestic rate, but only when the Australian recipient establishes treaty entitlement.

The core principle is simple. The treaty caps what Israel, as the source country, can tax. Australia, as your country of residence, still taxes your worldwide income but gives you a Foreign Income Tax Offset (FITO) for the Israeli tax properly paid. The mismatch problems arise entirely from the word "properly."

Dividends, Interest, and Royalties From Israel

These are the most common income streams, and each has its own treaty ceiling.

Dividends. The treaty limits Israeli withholding to 15% in the general case, reduced to 5% where the Australian recipient is a company holding at least 10% of the Israeli payer. Certain pension funds and government entities can be exempt. The problem is that Israeli domestic withholding on dividends to non-resident individuals runs at 25% or 30%, so unless the treaty rate is applied up front, an Australian shareholder overpays.

Interest. The treaty caps Israeli withholding on interest at 10%, dropping to 5% for interest paid to certain financial institutions and pension funds.

Royalties. Withholding on royalties is limited to 5% under the treaty.

In Practice: An Australian individual receiving an NIS 100,000 dividend from an Israeli company faces domestic withholding of NIS 25,000 to NIS 30,000, but the Australia-Israel treaty limits Israel to 15%, or NIS 15,000. To recover the NIS 10,000 to NIS 15,000 difference, the shareholder files a refund claim with the Israel Tax Authority under Section 170 of the Income Tax Ordinance 1961, supported by an ATO residence certificate. The non-resident refund track usually takes four to nine months, and the Israel Tax Authority pays only into a bank account with full identification, which is why most Australians act through a representative under power of attorney.

Selling Israeli Property: Both Countries Tax the Gain

Australians who own or inherit Israeli real estate often expect the treaty to assign the gain to one country. It does not. For real property, the treaty allows the country where the property is located to tax the gain, so Israel taxes it, and Australia taxes it again as a CGT event, with a FITO for the Israeli tax.

On the Israeli side the relevant tax is betterment tax (mas shevach), under the Real Estate Taxation Law 1963, administered by the Israel Tax Authority. The mechanics of calculating and clearing that tax are set out in our guide to capital gains tax on an Israeli property sale, and the purchase-side taxes for Australian buyers are covered in Israeli property taxes for Australian buyers.

The practical trap is timing. Israel requires the sale to be reported quickly and tax cleared before the property can transfer in the Land Registry, while Australia taxes the gain in the income year of the CGT event. If the Israeli tax is paid in a different Australian income year from the one in which you report the CGT gain, matching the FITO to the gain becomes a timing exercise your accountant has to manage deliberately.

In Practice: When an Australian resident sells an Israeli apartment, betterment tax under the Real Estate Taxation Law 1963 must be reported to the Israel Tax Authority within 30 days of signing, and the buyer cannot register title in the Land Registry (Tabu) until a tax clearance is issued. On a gain of NIS 800,000, Israeli betterment tax can exceed NIS 200,000 at the applicable rate. Australia then taxes the same gain and grants a Foreign Income Tax Offset for the Israeli tax paid, but the offset is only available in the income year you have actually paid the Israeli tax, so a clearance that slips past 30 June can push the credit into the following year.

Pensions, Salary, and the Residence Tiebreaker

The treaty gives the residence country the primary right to tax most periodic pensions. So an Australian resident drawing an Israeli pension is generally taxed in Australia, with relief for Israeli tax, and the reverse applies to an Israeli resident with an Australian pension. Lump sums and certain pension-fund payments can be taxed by the source country, which is why a one-off withdrawal is treated differently from a regular monthly pension.

Employment income is generally taxed where the work is performed, subject to the treaty's short-stay rules for temporary assignments.

When a person is treated as resident in both countries, the treaty's tiebreaker in Article 4 decides a single residence using a sequence of tests: permanent home, then centre of vital interests, then habitual abode, then nationality. This matters for Australians who spend long periods in Israel, because Israeli domestic law can treat someone as resident under its own day-count and centre-of-life tests even while Australia still considers them resident. The tiebreaker resolves the conflict, but only if you invoke it.

How You Claim Relief on the Australian Side

For an Australian resident, relief flows through the Foreign Income Tax Offset. You declare the Israeli income in your Australian return and claim a FITO for the Israeli tax you actually paid, limited to the treaty rate. Two points decide whether the claim holds up.

First, you can only offset Israeli tax that was correctly payable under the treaty. Tax withheld above the treaty cap is not creditable in Australia; it is recoverable from Israel. This is precisely the dividend trap described above.

Second, you need evidence. The ATO expects documentation of the foreign tax paid, and Israeli statements are issued in Hebrew. Keep the Israeli withholding certificates and tax assessments, and obtain certified translations if the ATO queries the FITO. Reporting of the underlying Israeli accounts that receive this income is a separate obligation, addressed in our guide to Israeli bank accounts and Australian tax reporting.

What Often Goes Wrong

The errors cluster around the FITO.

Common Mistake: Australian residents who claim a Foreign Income Tax Offset for the full amount Israel withheld, rather than the lower treaty rate. The ATO allows a FITO only for foreign tax correctly payable, so an offset claimed on Israeli dividend tax withheld at 30% instead of the 15% treaty cap will be reduced on review, leaving the excess uncredited in Australia and unrecovered in Israel. The over-withheld amount has to be reclaimed from the Israel Tax Authority under Section 170 of the Income Tax Ordinance 1961, a refund route that can take the better part of a year and is effectively closed once the Israeli statute of limitations runs.

A second recurring mistake is assuming the treaty exempts Israeli rental income from Australian tax. It does not. Israeli rental income is taxed in Israel under the applicable track and is also assessable in Australia, with a FITO for the Israeli tax. Leaving it off the Australian return is an omission the ATO can detect through CRS data exchanged from Israel.

Practical Checklist

• Confirm the income arose from 1 January 2020 onward, when the treaty took effect in Israel
• Identify the correct treaty rate for each income type before any Israeli tax is withheld
• Obtain an ATO residence certificate so Israeli payers can apply the treaty rate at source
• Claim a Foreign Income Tax Offset only for Israeli tax at the treaty rate, not the full domestic withholding
• Reclaim any over-withheld Israeli tax from the Israel Tax Authority under Section 170
• For a property sale, report betterment tax within 30 days and align the Israeli payment with the Australian income year
• Keep Israeli tax certificates and arrange certified translations if the ATO queries your FITO
• If you spend long periods in Israel, check the Article 4 tiebreaker before assuming you are taxed in only one country

Speak With an Israeli Attorney

The treaty only protects you if the Israeli tax is charged at the right rate and documented in a form the ATO will accept. We confirm the correct treaty rate on your Israeli income, recover tax withheld above the treaty cap from the Israel Tax Authority, and coordinate the Israeli paperwork your Australian accountant needs for the FITO.

Contact us for a confidential initial consultation.