The Law requiring the payment of betterment tax derives from the principle of 'distributive justice' and it is designed to ensure that the peoples of a local community will participate in the profit which a real estate owner gains with respect to the decision of the planning authority to improve the real estate in his ownership.  Nevertheless, the legislature found it appropriate to give an exemption from the payment of betterment tax to different taxpayers, and this was done in order advance various goals and objectives.    

So, for example, an exemption from paying betterment tax is given where the real estate which is improved is located in a restoration neighbourhood or when the real estate it belongs to an education, cultural, scientific, religious, charitable, welfare, health or sports institute.  The exemptions from betterment tax also include, inter alia, an exemption for personal use as a residence. This last exemption is intended, primarily, to make it easier for real estate holders to improve their conditions of living, without having the additional financial burden of having to pay betterment tax.  

Section 19(c) of the Third Schedule to the Planning and Building Law, 5725-1965 (the "Law"), grants an exemption from the obligation to pay betterment tax for the construction or extension of a residential apartment up to 140 square meters, in two stages: at the first stage, the payment of the betterment tax is deferred until the right is sold to a third party.  This deferment is given to the holder of the real estate, or his relatives, who filed an application to receive a permit to build a residential apartment the area of which will not exceed 140 square meters with respect to the real estate where he or his relative is to live.  The receipt of the building permit constitutes the exercise of a right, for the purposes of the Third Schedule to the Law, and so the obligation to pay betterment tax attaches at that stage.   

Accordingly, under the exemption, the obligation to pay the betterment tax is deferred.  At the second stage, there is a complete exemption from the payment of betterment tax, but only if the taxpayer lived in the apartment for a period of at least four years from the completion of its construction through to its sale.  

The applicants in the matter under consideration were two couples, not part of the same family, where each couple held undefined rights in a real estate parcel on which a building of ten apartments was constructed (prior to the construction, it appears that the real estate was an empty parcel).  Each of the couples received rights in one apartment and went to live there and so an exemption was requested for each one of the two apartments.  

The question which came before the Supreme Court in this case was whether according to the language of Section 19 of the Law it was possible to obtain an exemption for one than one apartment on the real estate which had been improved.  This question is particularly relevant to cases where the real estate is held by a number of parties seeking to build on the same real estate several residential units.  The issue is whether – assuming all the other requirements for an exemption are met - each one of the parties can enjoy an exemption for his own apartment or whether there is one exemption granted for the entire area of the real estate.  

The majority view, of Their Honours Justices Zilbertal and Rubinstein (as against the dissenting view of His Honour Justice Hendel), was that the principle of equality in tax laws together with the purpose of the Law indicate that the exemption from betterment tax should be given to each one of the parties for each one of the apartments (used as such party's residence).   This is especially the case since each one of the couples, who are not related, applied to improve their living conditions up to an area of 140 square meters, lived there personally and moreover the building which was constructed contributed to the real estate development and the increase of housing in the area.   Accordingly, it was decided that it is just to grant each one of the couples a full exemption from betterment tax for their apartment, on condition that they will live there for at least four years and that there is no reason and/or justification for denying the partners in the real estate the benefits given to individual owners of the real estate only because of the fact that they are partners in the real estate. In his judgement, the Vice-President of the Supreme court - His Honour Justice Rubinstein – called for an amendment to the law so that it will be clearer and will reduce legal disputes which often arise with respect to this issue.  

This rulling changes the narrow interpertation that has so far been the law in this Supreme Court, in regards to this exemption.  

Reference: Request for Leave to Appeal 8907/13 Divon Shalom Jerusalem v The Local Planning and Building Committee of Petach-Tikva