Tax Authority demanded NIS 4.6 million from Rafi Agiv. What did the court decide?
Did the three real estate sale transactions carried out by businessman Rafi Agiv take place as part of his activities as a “dealer in the course of his business,” making them subject to output VAT, or were they sales by a private individual? The Central District Court recently ruled on this question, deciding “both and”: in two of the transactions, Agiv acted as a real estate dealer, while in another he acted as a private individual. ● The district court closed a dramatic tax loophole for businesspeople. The drama and the consequences ● Real estate investors have abandoned the market and do not believe the purchase tax will fall
Judge Shmuel Bornstein ruled that the sale of a building Agiv held on Yehuda HaMaccabi Street in Tel Aviv was a sale of an asset held privately, and therefore is not subject to business tax. By contrast, two other transactions, in Pardes Hanna and Hadera, had a clear business character as commercial real estate activity, and therefore are subject to business tax.
The question of whether a person will be considered a “real estate dealer,” or whether the asset sales they carried out were private, has dramatic significance, among other reasons because the tax liability in a business case is tens of percentage points higher than in a private transaction. Among other things, the capital gains tax rate in a private transaction stands at 25%, while the marginal income tax rate, when it is a business, is 47%. To this, in many cases, an excess tax of 5% must be added, and in addition VAT is imposed on a sale carried out as part of a business.
Agiv is a businessman and accountant who also operates in real estate and investments. He has academic training in property appraisal and asset management, and he was also one of the owners of Hapoel Tel Aviv football club. In the past, Agiv served as a controlling shareholder in Tel Aviv HaHadasha Yizum Vei’utz Ltd. and as an indirect controlling shareholder in Ramdash Capital Ltd., which was registered for VAT as a dealer and was in practice engaged in the purchase and marketing of land.
At the end of an audit conducted by the Petah Tikva VAT Manager regarding Agiv for the years 2014 to 2018, it was determined that Agiv is a real estate “dealer” who carried out three real estate transactions during the audit period “in the course of his business,” for which he was charged output VAT: a transaction to purchase a building on Yehuda HaMaccabi Street, a transaction to purchase agricultural land in Hadera, and a transaction to purchase agricultural land in Pardes Hanna. The original output VAT demanded was NIS 4.66 million, but during the appeal proceedings the parties reached agreements, and the scope of the dispute was reduced to about NIS 1.6 million.
At the heart of the dispute were the three transactions mentioned above. The first, the “Yehuda HaMaccabi transaction,” in which Agiv bought in July 2007 a two-story building at 83 Yehuda HaMaccabi Street in Tel Aviv, including a residential apartment, three shops and a storage room, for $925,000. After several months, Agiv sold 25% of the rights in the building, and later the two owners sold all of their rights in the building, each according to his share, for NIS 15,903,000. Agiv’s share was NIS 11,927,250, or 75%.
In the second transaction, the “Hadera transaction,” Agiv purchased in 2014 an option to buy agricultural land in Hadera covering 4,542 square meters, for NIS 100,000 plus VAT. He later signed 31 option assignment agreements for the property with 44 different buyers, some of them couples, and kept part of the option for himself and his wife, Shirley Agiv. Shortly afterward, he exercised the option and signed an agreement to purchase the land himself and in trust for all the other 44 buyers for about NIS 7.4 million.
The third transaction was the “Pardes Hanna transaction,” in which Agiv signed a trust agreement in August 2014 with Tel Aviv HaHadasha, under which he would purchase for it an option to buy rights in agricultural land covering 22,003 square meters in Pardes Hanna-Karkur. Agiv later signed 39 option assignment agreements for total consideration of about NIS 12 million.
In addition to these transactions, Agiv was involved over the years in numerous other real estate deals, personally and through companies under his control, amounting to tens of millions of shekels in total, including a deal to buy a quarter of a property, an old building, on Hahas Street in Tel Aviv, build a new building and sell apartments in it; the purchase and sale of real estate in the Neot Golf project in Caesarea, a vacation apartment; the purchase and sale of parts of land on HaLahav Street in Ramat HaSharon, and the construction of a residential house on HaEtzel Street in Ramat HaSharon and its sale. He also bought and sold a property on HaYarkon Street in Tel Aviv, a residential apartment on HaAlonim 12 in Ramat Gan, land on Sha'ar HaYam 23 in Herzliya and the sale of a residential house built on it, and the purchase of a residential apartment, a former private house, on Kehilat Yaasi-Pinchas Rosen Street in Tel Aviv.
Despite the many transactions he carried out over the years, Agiv argued that the three transactions at the center of the dispute were not carried out as part of a “business,” and therefore he should not be charged VAT.
“Clear shades of business activity”
In order to reduce the difficulty of classifying a gain as business income or private income, case law established tests that tilt the balance one way or the other, including the nature and character of the asset, the frequency of the transactions or actions performed in the assets, the manner in which the transactions were financed, the existence of a business mechanism, the performance of improvement actions in the assets, the length of time the assets were held, the owner’s knowledge and expertise in the field in which the transactions took place, the financial scope of the transactions, and the circumstances surrounding the transaction. An overarching test has also been set above all the others, the circumstances test.
Even so, disputes over the classification of real estate transactions repeatedly reach the courts. In Agiv’s case, the court held that application of the business tests, and above all the tests of the nature of the asset and the length of its holding in relation to the Yehuda HaMaccabi property, lead to the conclusion that the Yehuda HaMaccabi transaction should not be regarded as taxable.
“On its face, it is clear that there was no ‘business’ of renting properties in the asset, but rather a passive rental business,” Judge Bornstein ruled, noting that “the totality of the circumstances, prolonged holding of the asset, lack of substantial turnover of tenants, lack of a management mechanism, lack of ongoing investment or improvement actions, and lack of commercial risk, lead to the clear conclusion that this is a clearly passive rental activity, which does not amount to a ‘business.’”
By contrast, regarding the Hadera transaction and the Pardes Hanna transaction, it was determined that the tests tipped the balance toward a business, in terms of the nature of the asset and the length of holding, as well as the frequency and scope of the transactions and the fact that these were agricultural lands and multiple option assignment transactions.
Bornstein noted, among other things, that “the purchase and sale of options in agricultural land, especially when it involves assets requiring future subdivision or a change in designation, is regarded as an activity with a speculative character. Such activity, whose purpose is to generate profit from future appreciation arising from a change in designation or development processes, is generally appropriate to be classified as an ‘occasional transaction of a commercial nature’ (in the case of a single transaction) or as business activity when it involves several transactions. In this regard, the significant number of option recipients, the financial scope of the transactions and the relatively short holding period during which the appellant held the rights before selling or assigning the options must be taken into account.”
The judge added that other transactions carried out by the seller, including by companies under his control, should also be taken into account, even if they are not part of the relevant assessment. “This other activity, insofar as it is carried out in assets such as those that are the subject of the assessment, and in this case, real estate assets, and insofar as it is extensive, of significant financial scope, carried out frequently and over a long period, and especially if it is carried out by someone who is an expert in the real estate field, ‘colors’ the speculative transaction with clearer shades of business activity.”
It was also noted that a review of Agiv’s activity in the real estate market, and the varied and substantial scope of the properties purchased, held and sold by him over the years, indicates the business nature of the speculative transaction he carried out, as does the financial scope and frequency of those other transactions he carried out.
“These are many transactions carried out by the appellant, with high frequency and substantial scope, amounting to tens of millions of shekels, and not infrequently involving the sale of an asset relatively soon after its purchase. Clearly, these are transactions of significant scope, exceeding those carried out by an ordinary person, and they too indicate systematic and organized activity of a business nature,” the court ruled.
Agiv’s lawyer: We will consider an appeal
Attorney Amit Glick, a partner at the Ziv Sharon firm, and Attorney Shlomi Moalem, who represented Rafi Agiv, said in response: “This is a significant ruling, which determined that the specific area of activity of the taxpayer must be examined on its merits, and not settled by a sweeping determination that this is the activity of a dealer.
“The ruling also has implications for income tax and land taxation regarding the fundamental question of how a taxpayer’s business activity should be examined.
“The Tax Authority did well in accepting a large part of our arguments during the appeal and significantly reducing the amount of the assessment. With regard to the Hadera and Pardes Hanna transactions, Mr. Agiv is considering whether to file an appeal to the Supreme Court.”
