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(LEAD) Gov't proposes real estate tax hike, cautious about tough taxation on financial income

All News 13:35 July 06, 2018

(ATTN: CHANGES headline; ADDS more details in last 6 paras, photo)
By Park Sang-soo

SEJONG, July 6 (Yonhap) -- South Korea's government said Friday that it plans to raise real estate taxes in a move that it claims will reduce the widening income gap, help level off housing prices and improve fair taxation.

The finance ministry said the proposed tax hike centers around raising the tax burden on owners of high value houses and multiple homes, and increasing the taxable amount of a property.

Under the proposed scheme, the so-called comprehensive real estate tax rate for properties valued at 600 million won ($535,000) or below will remain unchanged at the current 0.5 percent. But the rate for a property priced at 600 million won or more will be raised by between 0.1 percentage point and 0.5 percentage point, with the maximum rate to be raised to 2.5 percent from the current 2 percent.

The ministry also said it will seek to raise the taxable rate of a property, which is now some 80 percent of the government-set value. The rate should climb gradually to 90 percent by 2020, the ministry said. In South Korea, the government usually taxes land and homes based on its annual assessment value, instead of the actual market value.

The finance ministry said the proposed tax overhaul will affect some 350,000 people and expects an estimated 740 billion won in additional tax revenue.

The ministry added it would finalize the proposal later this month and submit it to the National Assembly for approval in September.

In this file photo taken Oct. 8, 2017, a passerby walks in front of a realtor's office displaying signs for home leases and home sales. (Yonhap)

The comprehensive real estate tax, first introduced in 2005 under the late President Roh Moo-hyun, has long been controversial here. Taxation on owners of expensive houses and owners of multiple homes during the Roh administration faced strong backlash, which in consequence led to a drop in the approval rating of the left-centered government.

The conservative Lee Myung-bak government eased the tax scheme. But the liberal Moon Jae-in government, which shares most of the economic policies sought after by the Roh administration, has vowed to impose heavy taxes on owners of high-priced homes and multiple homes, which it claims is the main cause of soaring home prices in Asia's fourth-largest economy.

Apartment prices in the affluent Gangnam district and some other neighborhoods have jumped on hopes of reconstruction projects moving forward and ample liquidity circulating in the economy.

The Bank of Korea's eight rounds of rate cuts since 2012 helped send home prices and household debt to record levels as more people took out loans to buy homes.

Last year, the government unveiled a set of measures to tighten lending rules on homes to try to cool the overheated property sector.

It adopted stricter rules requiring multiple-home owners to pay a higher capital gains tax when they sell their houses. The government, moreover, toughened the loan-to-value and debt-to-income ratios for new loans, which effectively limits homebuyers' ability to get home-backed loans based on the value of property they own and their income.

This undated file photo shows apartment buildings in Seoul. (Yonhap)

Kim Dong-yeon, South Korea's chief economic policymaker, said the government will have to further review whether to strengthen taxation on financial income as it could cause funds to shift into the real estate market.

"We need to be cautious (about expanding taxations on financial income) because we need to take many things into consideration," the minister said in a press briefing in Seoul.

Earlier, a presidential panel proposed that the threshold for comprehensive financial income taxation be lowered to 10 million won from the current 20 million won as part of efforts to collect more tax from the country's rich.

Under the so-called global taxation on financial income, people with an annual financial income (interest income plus dividend income) of 20 million won and lower pay taxes separately from their other income. The amount exceeding the threshold should be added to other income, which will then be subject to a higher tax rate.

According to data from the National Tax Service, slightly over 94,100 South Koreans were subject to the comprehensive financial income tax in 2016, with their interest and dividend income standing at 131 million won on average.

A total of 3,603 South Koreans recorded an annual financial income of 500 million won or more per year, with their total income averaging 2.41 billion won.

Finance Minister Kim Dong-yeon speaks during a press conference on a tax code revision in Seoul on July 6, 2018. (Yonhap)


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