Australia-Israel Double Tax Agreement Explained

When Was the Australia-Israel DTA Signed?

The Australia-Israel double tax agreement was signed in March 2019 in Canberra, Australia to address the double taxation issue for Australian expats and Israeli investors. The DTA came into effect from December 2019.

With growing trade and investment between Australia and Israel, the DTA was introduced to simplify tax obligations and encourage international work and investment. 

The tax treaty outlines the taxation rules for various income types, including employment income, pensions, and royalties, enhancing economic relations between the two nations.

What Are the Main Provisions of the Australia-Israel Double Tax Agreement?

The Australia-Israel DTA outlines several key provisions to prevent double taxation. Let’s break down the main ones.

Residency and Taxation Rules

Determining your tax residency is crucial under the DTA because it dictates where an individual or entity is subject to tax. Typically, your tax residency is determined by where they live and where they earn their income. Still, it can become complicated if you live or work across both countries.

The Australia-Israel double tax agreement provides tie-breaker rules to resolve dual residency situations. These rules consider factors like the individual’s permanent home, personal and economic relations, habitual abode, and nationality.

Once tax residency is determined, the country of residence gains the right to tax the individual or business on their worldwide income, while the other country may only tax income that originates within its borders.

Income Tax Relief 

Under the Australia-Israel tax treaty, income earned in one country is taxed primarily based on the source of the income and the residency status of the taxpayer.

For instance, if an Australian expat earns income in Israel, they may be required to pay taxes in Israel first. However, the DTA ensures this income won’t be taxed again in Australia. Instead, any taxes paid in Israel can be used to offset Australian tax liabilities.

Tax Credits and Exemptions

Another vital provision of the Australia-Israel DTA is the ability to claim tax credits or exemptions. If a taxpayer has already paid taxes on their income in one country, they are entitled to a foreign tax credit in the other. This prevents the duplication of tax payments.

For example, an Australian investor who earns dividends from an Israeli company will pay withholding tax in Israel. Under the tax treaty, they can claim a credit for that tax when filing their Australian tax return, effectively reducing their overall tax bill.

Special Provisions for Dividends, Interest, and Royalties

Investors often face high withholding taxes on income such as dividends, interest, and royalties. The Australia-Israel DTA seeks to alleviate this burden by capping withholding tax rates for these types of income.

• Dividends: Under the DTA, dividends paid from one country to residents of the other are subject to reduced withholding tax rates, often lower than domestic rates. For large corporate shareholders (holding at least 10% of the voting power in the company paying the dividends), the withholding tax rate can be reduced to as low as 5%.
• Interest: Interest income, such as the income earned from bonds or loans, typically faces a reduced withholding tax rate under the tax treaty. This rate is often capped at 10%.
• Royalties: Royalties, including payments for the use of intellectual property or copyrights, can also benefit from reduced withholding taxes. The DTA caps the withholding tax on royalties at 5%.

These reductions make investment between Australia and Israel more appealing and significantly lower the tax burden for international investors and companies.

Pension and Superannuation Fund Benefits

In most cases, the DTA states that pension income will be taxed only in the country where the retiree resides. Australian expats living in Israel may have their Australian superannuation taxable only in Israel, and they can claim relief from Australian taxes, and vice versa for Israelis receiving pensions in Australia. 

How Can I Claim Tax Credits Under the Australia-Israel DTA?

Claiming a tax credit under the Australia-Israel double tax agreement is essential to avoid double taxation on your income. Here’s a practical, step-by-step guide for Australian expats and investors.

• Determine Eligible Income: Identify income subject to tax in both Australia and Israel, such as employment income, dividends, or interest. The tax treaty allows you to claim tax credits for taxes already paid in one country when filing in the other.
• Gather Proof of Tax Paid: Collect documents showing the taxes you’ve paid in Israel (for Australian residents) or Australia (for Israeli residents). This includes tax receipts, statements, or withholding tax certificates from employers or investment income sources.
• Calculate Your Tax Credit: When calculating your tax credit under the DTA, the amount you can claim is the lesser of two figures: the tax paid in the foreign country (either Israel or Australia) or the tax that would be payable on the same income in your home country. For e.g., if you paid tax in Israel, compare it with what you owe to the ATO and claim the lower amount.

• File Your Tax Return: When filing your Australian tax return or Israeli tax return, include the relevant foreign tax offset section. In Australia, use the Foreign Income Tax Offset (FITO) section of your tax return. 

Tax laws can be complex, and mistakes can lead to overpayment or penalties. It’s a good idea to consult with a tax expert familiar with the Australia-Israel DTA who can help ensure you maximise your tax benefits.