What you should know about new tax regime
Two women check out brochures about savings products from various banks. / Korea Times photo by Hong In-ki
By Kim Da-ye
The chances of making a lot of money from the cash you have are decreasing, and investors are facing a further squeeze under a revised tax regime.
In December, The National Assembly passed a revision to tax laws that will make more investors pay taxes on gains from financial assets.
Under previous laws, only those who made more than 40 million won of gains from financial assets such as interests and dividend payments had to report them as income. Increases in taxable income can move them onto higher tax brackets. The income tax rates are between 6 percent and 38 percent.
The revision now requires those who make more than 20 million won from financial assets to report the gains from this year. The ruling Saenuri Party suggested lowering the limit to 30 million won this year and 20 million won by 2015, so the change came earlier than expected.
The number of people to be taxed on their financial income is expected to quadruple to some 200,000 from 50,000 and the government may end up collecting 300 billion won of additional taxes, local dailies reported.
The revision will affect taxpayers differently depending on their salaries and financial incomes.
Those who have no job but make under 77 million won will hardly see any differences. Twenty million won out of 77 million won will be taxed at a flat rate of 14 percent while the income tax rate for the remaining 57 million won is 14 percent.
Those who will see the biggest changes will be working people with high salaries and financial incomes that exceed 20 million won. For instance, the income tax rate for people who earn 100 million won is 35 percent. Those who make extra 30 million won from financial assets would have paid a 14-percent flat rate on the amount under the previous tax regime. In line with the revised laws, they will have to pay 14 percent of 20 million won and 35 percent of the remaining 10 million won, which is now counted in their “composite income.”
Tax havens
As the revised law will be enforced this year without any grace period, depositors and investors are hurriedly seeking tax-free destinations for their money.
One type of asset is a bond linked to inflation. The government guarantees the payment of the face value at maturity, and for the bonds bought until the end of 2014, people do not need to pay taxes on returns.
Another frequently recommended group of assets are Brazilian bonds. Under a taxation agreement between the Korean and Brazilian governments, investors do not need to pay tax on returns from the real-denominated bonds that tend to yield a lot more interests than domestic bonds. However, investors have to pay a 6 percent “Tobin” tax one time when they buy the securities.
Some other tax-free financial products include long-term saving insurances and immediate payment annuity, a contract which pensioners buy with a lump sum and which pays out income regularly.
However, the number of different tax-free assets is shrinking quickly — take the example of inflation-linked bonds — on which investors are recommended to act fast.
Spread expiration dates
Many savings accounts and financial products mature in two or three years, likely with relatively large amounts of returns. Terminating multiple accounts that expire in a year results in huge taxable income, so experts recommend investors to spread expiration dates.
One type of financial product investors should pay particular attention to is equity-linked securities (ELS) that became highly popular for high returns and relative safety in the last couple of years amid the sluggish stock market and the low deposit interest rates. However, the securities have become the subject of concern under the new tax scheme.
The returns of ELS depend on the performances of underlying equities. When the targets of the performances are met, the returns are paid. When they aren’t, the expiry of the securities will be extended usually by half a year. In some cases, the terms have been extended to two or three years, and a large amount of returns can balloon up the investors’ taxable incomes. Investors in ELSs are advised to choose those that pay out returns monthly.
The same principle applies to holders of long-term bonds and fixed deposit accounts that pay all the interests when they mature.
Health insurance scarier than taxes
People who have no jobs but rely on their financial assets tend to not pay national health insurance but still get all the benefits because they are registered as dependents of their working family members.
When their financial earnings exceed 20 million won and get reported as composite income, they cannot be dependents anymore and will have to subscribe to national health insurance on their own.
Married couples
A large portion of elderly Koreans live on interest from their deposits, and the revision could deal a blow to them. For example, those with over 700 million won in deposit accounts that pay 3 percent interest are now affected. At a 4 percent interest rate, those with 50 million won in deposits will be required to report their income.
In the case of married couples, if one spouse has managed all the financial assets under his or her name, the couple is encouraged to split assets between themselves. Spouses can give each other up to 600 million in 10 years without having to pay gift taxes.
However, splitting assets among all family members should be done with caution. Up to 15 million won of assets can be given to an underage child without incurring gift taxes, and up to 30 million won to an adult child. The gift tax rate is 10 percent, and the additional punitive tax on unreported transfer of assets varies between 20 to 40 percent.
Other changes
The revision to the tax laws covers a wide range of assets.
Major shareholders are required to pay tax when they sell or transfer their shares. Under the existing laws, investors with a 3-percent stake or more in a KOSPI-listed company or shares of a KOSPI-listed firm worth 10 billion won or more were considered major shareholders. Now those with a 2 percent stake or more or shares worth 5 billion won will be regarded as major shareholders.
Shareholders of KOSDAQ market-listed firms will have to pay sales tax when they have a 4-percent stake or larger or shares worth 4 billion won or more. The figures are down from 5 percent and 5 billion won.
Changes were also made to the income tax deduction system. Taxpayers can have their taxable income reduced by deducting various tax-free expenditures from the total income.
In 2013, 15 percent of spending made with credit cards — down from 20 percent in 2012 — will be deducted from the taxable composite income. Up to 30 percent of cash spent with “cash receipts” issued will be deducted from the total income, and that’s a significant increase from 20 percent last year. Furthermore, 30 percent of expenditures on public transportation worth up to 1 million won will be deducted.
From Jan. 1, 2014, when consumers buy luxury bags priced at 2 million won or over will have to pay 20 percent of the amount exceeding 2 million won as tax.