ISAs can offer an attractive option

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ISAs can offer an attractive option


In a bid to boost competitiveness in the local finance industry, the Financial Services Commission (FSC) and Ministry of Strategy and Finance have been moving to establish Internet banks, introduce regulations to make switching bank accounts easier and introduce Individual Savings Accounts (ISA).

An ISA combines various financial products in one basket and offers tax breaks for account holders.

One of the key features of the ISA is that taxes are levied only on net profits - total profits minus losses from all financial products within the account - above 2 million won ($1,712). Currently, taxes are levied on all profits made from individual financial products.

The tax rate for an ISA account is also lower at 9.9 percent, inclusive of local taxes, while the current tax rates on income from bank interests, equity funds and derivatives securities is 15.4 percent.

ISAs are expected to become available early next year after new tax proposals are approved by the National Assembly in September.

Below is information about ISAs, provided by the FSC.

Q. What is an ISA?

A. It is an account with which the account holder can allocate their money in various financial products, including bank deposit accounts and equity funds. It acts as a comprehensive investment package that can be managed personally.

After three to five years, the account holder is entitled to tax benefits. The account holder however cannot make direct investments into securities. ISA is for investment products only.

Why is the government and financial regulator introducing and backing ISAs?

The Finance Ministry and Financial Services Commission have decided to introduce ISAs in an effort to further aid comprehensive asset management by average Koreans in times of low-interest environments and aging demographics.

Compared to other developed nations, financial assets in Korea account for less of an average household’s total assets. For an average Korean household, financial assets accounted for 26.8 percent of the total.

This compares with 70.7 percent in the United States, 60.1 percent in Japan, 49.6 percent in the United Kingdom and 39.6 percent in Australia.

An ISA is also a replacement product for a range of existing financial products whose benefits are set to expire this year. An ISA gives the account holder the freedom and convenience to invest in new products or replace ones within their account.

What is the profits-loss combined calculations for ISAs?

It means taxes will be levied based on total calculations of profits and losses made from all products within the ISA account. Previously, taxes were levied on individual financial products and on their profits.

But ISAs allow the account holders to count in losses and calculate net profits over a time period. Taxes will be levied on net profits of the products within an ISA.

What are the details of the tax benefits?

Up to 2 million-won return on investments or capital incomes from financial products managed within the ISA account will be non-taxable. For capital incomes above the 2 million-won ceiling, a 9 percent tax rate (9.9 percent inclusive of local taxes) will be applied.

This is less than the 15.4 percent tax rate that has been applied on a range of financial products, including bank deposit and equity funds. Tax benefits are expected to be maximized for ISA holders who allocate smaller sums into their ISA.

Who is eligible for ISAs?

Anyone with a stated earned income or income from businesses is eligible. Property owners who can prove income from property rentals are also eligible.

Is there a limit on how much money one can put into an ISA?

The maximum amount allowed per year is 20 million won. The amount allowed per year cannot be carried over to the following year.

An ISA account has to be held for at least five years to enjoy tax benefits. But account holders age 15 to 29, people with annual earned income below 25 million won and business owners with less than 16 million won in annual income can redeem their ISA accounts after three years and enjoy the same tax benefits.

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