According to a different approach - In calculating the betterment levy, the value of the land "in its previous state" must be taken into account as it is, in accordance with its value in a free market, which takes into account the contribution of TAMA 38 to the market value (in our example: NIS 2 million). For convenience, this approach will be called The Inclusion Approach (Although in my opinion it is more appropriate to call it Market Cap Approach).
- In my view, the correct approach – which meets the requirements of the law and is consistent with the tax laws – is the generalization approach; I will elaborate.
The Limits of the Tax Event in the Wake of the "Other Plan"
- The issue before us is rooted entirely in tax law (and not in planning and building law, as one might argue). When we are dealing with tax law, the center of gravity is always in the tax event – which we must locate and delineate its boundaries.
- As has already been ruled in the past, and as explained by me above, the mere approval of TAMA 38 does not constitute any tax event. The relevant – and only – tax event in our case is the tax event that takes shape with the approval of the other plan. The approval of the other plan satisfies the two cumulative conditions for the formation of a tax event, which I discussed above: (1) with the approval of the other plan, there is an increase in the value of the real estate; and (2) the increase was caused by the approval of the plan. However, this is not the case. The tax event of "betterment" is limited by the provisions of section 1(a) of the addendum only to the increase in the value of the land, which has a direct or indirect causal connection between it and the betterment plan (see: Civil Appeal Authority 10879/02 Kfar Saba Bowling v. Local Planning and Building Committee, para. 13 [Nevo] (December 6, 2006); Civil Appeal Authority 4217/04 Femini v. Jerusalem Local Planning and Building Committee, IsrSC 66(3) 386, para. 7 (2006) (hereinafter: the Femini case)).
- These words were well explained by the scholar Henryk Rostowitz:
"In order to create a tax event in betterment tax, two events and one condition are required: the first event – an increase in the value of the real estate; The second event – approval of a plan, granting relief or permitting an exceptional use; The condition is that the first event is the result of the second event. If a plan is approved, a relief is granted or an irregular use is permitted, and the value of the real estate has not increased, then no tax event has occurred at all, and this case should not be treated as a case in which the betterment levy rate is zero. The same is true if the value of the real estate increased and the second event did not take place. If both events occurred, but the value of the land increased not as a result of the second event, the condition linking the two was not met, and there was no tax event" (see: Henryk Rostowicz Betterment Levy 201 (1996); Emphasis added - A.S.).
- The importance of the direct causal connection was discussed by the late Justice M. Cheshin, z"l, inanother hearing of the citizens of Beit HaKerem in the following words:
"The betterment levy is imposed on betterment of planning, but only on betterment of planning. The value of real estate may increase for reasons that are not for planning reasons, but this betterment tax is not imposed [...] Needless to say, the assessment of all betterment and specific betterment will be made in accordance with the provisions of the law, i.e., in calculating the betterment of real estate, only betterment that is directly related to the betterment plan will be included" (ibid., at p. 79; Emphasis added - A.S.).
- The strict requirement for a direct causal connection is also understood against the background of the idea underlying the levy, which is, as stated, participation in the expenses of the local authority and the public's participation in the enrichment of the landowner, which stems from the planning action of the authority. In this way, betterment levy differs from betterment tax, in which no causal connection of any kind is required, andany increase in the value of the property, as such, is taxable betterment (see: section 6 of the Real Estate Taxation Law; Civil Appeal 1458/99 Rosenberg v. Land Appreciation Tax Administration, IsrSC 56(2) 174, 184 (2001)).
- The real estate market is affected by a wide range of variables, from the characteristics of the properties, through the interest rates (the "cost of capital"), to the fact that one celebrity or another lives in the neighborhood. The problem is that an increase in value that is not a direct result of the approval of the betterment plan is not caught in the tax net and does not generate a tax event of the type in question. The tax laws therefore dictate that for the purpose of making the betterment assessment, the increase in the value of the land that was caused as a result of the betterment plan must be extracted and isolated from the overall increase in the value of the land, which is also affected by other factors. This "betterment" – and only on it – will be subject to the betterment levy.
- In terms of the appraiser's practice, the said betterment is determined by calculating the difference between the value of the real estate "in the previous state" and the value of the real estate "in the new state". This difference is supposed to represent the betterment that arose as a result of the betterment planning action, and from this the amount of the levy that the taxpayer must pay is derived. In terms of the tax burden, the lower the aforementioned difference (the smaller the betterment), the smaller the levy. For the purpose of the matter, assuming that the value of the real estate "in the new state" is a fixed figure, then the lower the value of the real estate "in the previous state", the greater the difference, and as a result, the higher the rate of the levy. What this means is this: when a certain component is "neutralized" (reduced) from the value of the land "in the previous state", the rate of the betterment levy increases; and therefore, in practice, the levy is also collected for the neutralized component.
- It is clear that the reason for which the value of the land climbed and reached a "previous state" is irrelevant, and this increase in value is not subject to betterment levy, as long as there was no tax event defined in the law as betterment levy up the road. If a tax event is found up the road that is defined in the law as betterment levy, then it is possible to understand why the increase in value involved in the assessment of the "previous situation" should be "neutralized", since, as stated, the neutralization allows the tax to be collected in respect of this increase in value. Hence the opposite: in the absence of a tax event defined in the law as betterment levy, nothing or half of the value of the "previous situation" should not be neutralized. This, as stated, is because the previous situation is the result of market forces (which, in certain cases, attribute value to the planning potential inherent in the very approval of TAMA 38) and is not a direct result of a planning-governmental action that is defined in the law as one that establishes liability for betterment levy.
- Against the background of the above, I will examine the two proposed approaches.
- The proponents of the neutralization approach seek to reduce from the value of the land "in the previous state" the increase in value derived from TAMA 38, and thereby increase the betterment from which the levy rate will be derived. Such a reduction will lead, in practice, to the collection of betterment levy not only for the betterment that originated in the other plan, but also for the increase in the value of the land that originated from the approval of TAMA 38.
- At this point, we have room to ask: Does the increase in value that originated in TAMA 38 (without the issuance of a building permit) entail a tax event of betterment that justifies neutralizing this component in the assessment of the "previous situation" in such a way as to enable the collection of a levy in respect of it? In addition, does the increase in value that arose following the approval of TAMA 38 satisfy the necessary condition of a direct causal connection to the planning action for which the levy was collected – namely the approval of the other plan? It seems to me that there can be no dispute that the answer to these two questions It's not an absolute no.
- First, as has already been ruled in the Ron case, the approval of TAMA 38, insofar as a building permit was not issued by virtue of it, does not constitute a tax event defined in the law as betterment levy, and it is not possible to collect betterment levy for it at the time of the sale of the land (see: the Ron case, at paragraph 57). Since the increase in value due to the approval of TAMA 38 does not constitute a tax event, it is no different from any other market factor that affects the value of the real estate, which, of course, should not be neutralized (and for which a betterment levy should not be collected). Second, the increase in value that arose following the approval of TAMA 38 certainly does not have a direct causal connection, or any connection, to the other plan that came into existence after the betterment arose by virtue of the NOP. It follows from this that the neutralization approach violates the basic principle that requires the collection of betterment levy and the collection of taxes in general: "There is no tax without a law" (see: Application for Administrative Appeal Leave 2090/16 Herzliya Local Planning and Building Committee v. Acro Ltd., para. 42 [Nevo] (March 15, 2018)). The neutralization approach therefore cannot stand.
- The fact that the approval of TAMA 38 creates a kind of "planning improvement" does not raise or lower the issue at hand. Not every planning action of a public authority, even if it is capable of enriching the citizen, establishes a tax event and entails a tax charge such as betterment levy. For example, the central government sometimes strives to develop planning in the form of national outline plans for various purposes, without externalizing its investment on the citizens who benefit from it through taxation (see: Aharon Namdar, Betterment Levy 319 (2011); Appeal Petition/Administrative Claim 7381/15 Dorfberger in Tax Appeal v. Oded, paragraphs 19-22 [Nevo] (October 30, 2016)).
- In contrast to the neutralization approach, the inclusion approach advocates an assessment of the value of the land "in the previous state" according to free market values as they are, without attributing special importance to the fact that the value of the land increased due to the approval of TAMA 38 and without demanding that the levy be collected for this increase in value. The generalization approach is therefore appropriate to the principles of tax law and is what should guide us.
- Moreover, Section 4(7) of the Moreno addendum stipulates that the increase in the value of the land will be calculated "as if it had been sold on a free market". Thus, the legislature expressed its opinion that among the proposed approaches, we should adopt the generalization approach. If the market attributes economic value to the very applicability of TAMA 38 to the real estate, this effect should be included in the assessment of the value of the land (and I will note, in parentheses, that TAMA 38 will not always add value to real estate – this will be documented in the litigation surrounding the failures of TAMA 38-related projects, which are brought to our attention from time to time). This approach correctly implements one of the main goals of tax law: the aspiration to achieve the collection of a "true tax". Collecting "real tax" means collecting tax in accordance with the real economic profit at the base of the tax (see and compare: Civil Appeal 9308/20 Acre Assessor v. Beit Hosen Ltd., paragraph 12 of my judgment and the references there [Nevo] (February 13, 2023)). In the framework of the collection of betterment levy, the attempt to attribute to the taxpayer enrichment, which he must share with the public, is therefore inappropriate when his enrichment did not arise from the plan that is the basis for the levy charge. As stated, the taxpayer's obligation to pay betterment tax depends on the existence of a causal connection between his enrichment and the betterment plan. Regardless of such causal connection, a betterment levy charge cannot arise.
- Thus, despite the detailed details of the issue before us, the law provides a clear and explicit answer to it, as stated above.
- At that point, I could have ended my judgment. However, the litigants raised additional arguments before us, each of which argued with good taste and knowledge. For this reason, I will respect these arguments in providing a response.
"Exemption" de facto from the increase in value by virtue of TAMA 38 in the sale of the property
- The appellants and the counsel – as aforesaid, wish to apply the neutralization approach in our case – claim that the inclusion of the increase in value that arose from the very approval of TAMA 38 in the "previous situation" assessment leads, in practice, to the granting of an exemption from betterment levy on this increase in value in the sale of the land. According to them, such an exemption is not enshrined in the law and has no place.
- This argument must be rejected. According to the existing law, which I presented above, such an "exemption" is in any case recognized and implemented in practice in the tax policy. To be more precise: the alleged "exemption" is nothing but an illusion. As we have learned, the approval of TAMA 38 from the outset does not constitute a tax event of betterment in the sale of the land.
- Given the fact that within the framework of the existing law, a betterment levy was not collected on the increase in value by virtue of the approval of TAMA 38 at the time of sale, it is difficult in my view to take the approach that a different law should be applied – the collection of the levy for the increase in value deriving from TAMA 38 – solely due to the approval of another plan that applies to the same land. The application of such an approach leads to arbitrary and manifestly unequal results. Illustration: A building on which TAMA 38 applies, with two identical apartments, A and B. Following the approval of TAMA 38, without a building permit being issued by virtue of it, the parity of the apartments increased from NIS 1 million to NIS 2 million. Apartment A was sold, and in accordance with the law, the owner of Apartment A was not charged a betterment levy on the betterment that arose following the approval of TAMA 38 (NIS million). Subsequently, another plan was approved, which improved the land and increased the value of the apartments from NIS 2 million to NIS 3 million. Now Apartment B has been sold. If the neutralization approach is implemented, the owner of Apartment B will be charged a levy for betterment of NIS 2 million (the difference between the "previous situation" of NIS 1 million, under the neutralization assumption, and the "new situation" of NIS 3 million). This betterment, for which the owner of Apartment B will be charged a levy of 50%, includes both the increase in the value of NIS 1 million that arose following the approval of the TAMA – for which the owner of Apartment A was not charged – and an additional NIS 1 million increase in value for the betterment following the other plan (lawfully). This is without a significant change in the legal situation and without a causal connection between the first increase in value and the approval of the other plan. It is clear, in my opinion, that this result is unacceptable and should be rejected with both hands.
The Effect of the Ruling in the Ron Case on Our Matter
- As may be recalled, in the Ron case it was held that betterment levy should not be collected by virtue of TAMA 38 when exercising rights by way of sale, but only upon the issuance of a building permit. This is because the rights under the NOP are "vague" (non-vested) rights that do not constitute a tax event of betterment immediately upon approval of the NOP (inter alia, because the realization of the rights is subject to the discretion of the local planning institution).
- The appellants and the counsel found in the ruling of Justice Y. Amit in the Ron case an anchor for their arguments in favor of the neutralization approach. According to them, once it has been determined that at the time of approval of TAMA 38 there is no tax event of betterment, then it can no longer be said that when calculating the "previous situation" for the purpose of conducting a betterment assessment due to another plan, these rights suddenly became "vested" in a way that increases the value of the land.
- In order to respond to this argument, a distinction must first be made between betterment as a tax event (or "legal betterment") and betterment as an economic-appraisal fact (or "factual betterment"). What is this supposed to mean? Betterment as a tax event (betterment levy) is formulated only when the conditions set forth in the Betterment Levy are fulfilled, which I discussed above. Betterment as an economic-appraisal fact is in fact any actual increase in the value of the land, whatever it may be.
- Justice Amit's comments in the Ron case in relation to TAMA 38 did not deal with the determination of the value of the land "in the previous state", nor with the question of whether TAMA 38 generates factual improvement. His remarks dealt with the question of whether the approval of TAMA 38 at the time of the sale creates legal betterment. In other words, in the Ron case, it was not determined that TAMA 38 did not actually increase the value of the land to which it applies. All that was determined there is that the approval of TAMA 38 does not constitute a tax event that requires the collection of betterment tax on the sale of the property. The fact that TAMA 38 created a factual improvement – i.e., it increased the actual value of the land – does not result in the formation of a tax event; on the contrary: the fact that TAMA 38 does not produce a tax event does not indicate that it did not result in an increase in the value of the land. These are two different meanings of "betterment".
- Economic consideration of contingent rights by virtue of TAMA 38 in the assessment of the "previous situation" does not turn these rights, as the consultant claims, into "vested rights". The value of real estate in the free market embodies various variables, including rights that are not granted and the expectations that accompany them. This is when within the framework of laws dealing with betterment levy, the landowner is not supposed to share with the public what the market has given him (just as the public is not supposed to compensate him for what the market has taken from him).
noted this, in a similar context, the judge A. Fogelman In the matter Delia Bucket: