Delay in payment of capital gains tax – when it is considered a fundamental violation

Written by Alon Chen, Advocate

In a sale contract of an apartment, between Dan the seller and Gill the buyer, it was determined that Dan will pay all the taxes that apply to the seller, including capital gains tax of real estate (from now on: “capital gains tax”). The amount that was set in the contract as value was paid fully by Gill and Dan gave Gill the right of possession over the apartment.

But only 4 years later Dan paid the capital gains tax. During this period, Dan charged objection and appeal procedures on assessment of capital gains tax that was fixed for him. Gill claims that paying the capital gains tax at this time is considered a fundamental violation of the contract that gives him the right to cancel the contract. Is Gill right? The answer is no!

1.                  In a decision given in civil appeal 1168/99 Chaled Nasser Vs Fatchia Nasser & others P”D 54 (4) 185, two reasons were given. The first reason was based on the fact that in the contract, there was no specific instruction for the payment of capital gains tax. Therefore there is a need to apply clause 41 of the Contracts Law (general part) 5733-1973. This clause determines that: “a commitment, that the date of fulfillment was not decided upon, should be fulfilled in a reasonable time after signing the contract…”. Therefore the question that should be answered is what is considered as a reasonable time for paying capital gains tax ? In this matter it was ruled more than once that the reasonable time would be examined according to the circumstances of every case. In this case the parties to the contract gave thought to the payment for the apartment and the handing over of the rights to the buyer.  The parties indeed applied specifically to capital gains tax but did not even attach the payment to the date set in the Real Estate Tax Law (capital gains tax, sales tax and purchase tax), 5723-1963 (from now on: “the law”) that is 50 days from the day of the sale, when payment is by self assessment (clause 90 A of the law).  Therefore it is not clear that this is the reasonable time in the circumstances of this matter. Moreover the seller did not remain unconcerned all that time. He edited an assessment that was rejected and he pressed objection, while he paid the part of the tax that was not on dispute. Doing that the seller proved that he fulfills the demands according to law, since in determining the reasonable time, one should take into consideration the efforts made by the party that is charged with the violation. Generally speaking the buyer got the right of possession of the apartment and it was not proved that the fact that the capital gains tax was not paid on time, which delayed the registration of the rights of the buyer, caused him damage. In this argument the judge Strasberg – Cohen, was in a minority.
 

2.                  The second argument rises from the fact that even if we assume for a moment that there was a violation of the contract, it is still not a fundamental violation. Due to the fact that in a case of a non-fundamental violation the cancellation of the contract is subjugated to justice considerations. In the circumstances that were described above there is no justice in canceling the contract. The second reason was of the majority opinion, shared with judge Strasberg – Cohen, also by judge Barak and judge Frukachia.

 

3.                  On the basis of the second reason judge R. Shapira of Haifa District Court decided in civil appeal No 1066/00 Galeb Vs Ben Chalil and the Registrator of land property Haifa (not yet published), that not paying capital gains tax by the defendant from the day the contract was signed until six years from that date, does not lead to cancellation of the contract. In the worst case, it is a reason to pay the agreed compensation, where such were agreed in the contract.   

Courtesy of Adv. Alon Chen

02-566-7733