Family Members Are Not Necessarily One Economic Unit for the Purposes of Betterment Tax Payments

The Appeals Committee for Planning and Building, Compensations and Betterment Tax in the District of Jerusalem held that family members who are not one economic unit are not a single family unit for the purposes of exemption from betterment tax in the expansion of an apartment of no more than 140 square meters.

The appeal involves a set of parents, the owners of a lot upon which stands a home in the Bayit V’Gan neighborhood in Jerusalem, who gifted their daughter and her husband a small, independent apartment close by. After transferring the small apartment to the couple, a plan for the expansion of the land’s construction area was registered in the Gazette for effect. The plan sets forth a construction addition and expansion for the existing residential units on all stories of the building according to the building addendum.

According to the plan’s publication, the daughter and the husband sought to expand their apartment and relied on the exemption established by section 19(c)(1) of the Third Annexure to the Planning and Building Law: “Construction or expansion of a residential apartment shall not be viewed as an exercise of rights where the holder of the real estate or his relative applied for a building permit upon the same estate used for this dwelling or the dwelling of his relative, provided that the total size of such residential apartment after its construction or expansion does not exceed 140 square meters.”

Following approval of the application for the building permit, the young couple was sent a notice charging them a sum of about NIS 600,000. The notice considered the total building rights and did not take into account any entitlement for (conditional) exemption from betterment tax under section 19(c)(1) of the Third Annexure.

The Local Committee refused to allow the young couple to benefit from the exemption, claiming that ownership of the lot is held jointly with the parents, and thus all family members together are entitled to only one exemption. The Local Committee relied on the Supreme Court judgment in the matter of Tsari.

The Appeals Committee for Planning and Building, Compensations and Betterment Tax found in favor of the couple’s appeal. It held that the Local Committee’s argument that the couple is not entitled to an exemption under the Annexure is based upon two mistaken assumptions: (1) that the couple constitutes joint holders of the property with the parents and is therefore seen as holders of the rights in an entire property whose building size exceeds 140 square meters; and (2) that the couple and the parents constitute a single family unit and/or relatives as defined in section 19(c)(1) of the Annexure.

Regarding the first assumption, the Appeals Committee held that the couple received a small residential unit as a gift. This is not a joint ownership as set out in section 27 of the Real Estate Law. The Appeals Committee rejected the position of the Local Committee and explained that the case at hand involves the expansion of a residential unit owned by the couple alone.

As to the other assumption, the Appeals Committee clarified that the question of whether the rights holders constitute a single family unit, and as such are entitled to only one exemption (as decided in the Tsari matter), cannot be examined narrowly, on the basis of “blood relations.” Rather, the exemption is limited to one family unit where the family unit constitutes a single economic unit. The Appeals Committee explained that the case before it “concerns a couple who supports its children as an economic unit distinct from the parents,” and that the fact that the apartment was given as a gift from the parents could not lead to the couple receiving different treatment than those who purchased an apartment without assistance from parents or from those who received assistance from parents to purchase an apartment not attached to the parents’ apartment.

In light of the above, the Appeals Committee concluded that the exemption in section 19(c)(1) of the Annexure should apply to the couple and that the betterment tax should stand at about NIS 243,000.