Neglected All-Purpose Account ISA... What Does It Take to Fulfill Its 'All-Purpose' Function?

"Tax Credit Benefits for Investor Contributions Should Also Be Established"

[Asia Economy Reporter Park Jihwan] In March 2016, office worker Park, who was recommended by an acquaintance working at a bank, signed up for an Individual Savings Account (ISA). Although he heard a rough outline of the product structure and benefits, he joined without much consideration, trusting only that the government was actively promoting it. Park subscribed to an ISA product that invests 100,000 KRW monthly in a fixed deposit with an annual interest rate of 2.5%. The interest on the principal of about 5 million KRW he has contributed until recently amounts to 125,000 KRW. The tax-exempt benefit applies to only about 20,000 KRW, which is 15.4% of the interest income. He said, "Although the investment amount was not large from the start, I don't know if it was a good decision to put 5 million KRW away for five years to earn less than 20,000 KRW," adding, "I am considering canceling the contract."

ISA, which was launched with the glamorous nickname of the national financial technology account, has recently faced criticism for becoming a meaningless product due to a continuous decline in subscribers, primarily because of the 'meager' tax benefits. Among experts, there is a growing voice that drastic measures such as tax credits are necessary to fulfill its original role as a national wealth-building tool.

According to the financial investment industry on the 8th, currently, under the general type, ISA allows contributions of up to 100 million KRW over five years within an annual limit of 20 million KRW. Tax-exempt benefits apply to profits up to 2 million KRW (4 million KRW for the low-income type). Assuming a profit of 2 million KRW, the tax benefit, applying the interest and dividend income tax rate of 15.4%, is about 308,000 KRW. Considering the mandatory five-year subscription period (except for low-income earners with earned income below 50 million KRW) during which funds are locked, the subscription benefits are not very attractive. When factoring in the opportunity cost of locking up to 100 million KRW, the benefits appear even lower. Countries like the UK and Japan, which have introduced similar tax-saving accounts, do not have separate tax-exempt limits.

As criticism about the insufficient subscription benefits continued, the government announced in March plans to include stocks as ISA investment targets and expand the eligible subscribers. The government’s plan is to grow the market size by expanding eligibility from only those with existing income to all residents.

They are also promoting a method to increase tax-saving effects by offsetting losses from stock investments with gains from other financial products. At maturity, profits and losses from stocks, funds, and other products will be aggregated, and the tax-exempt limit will be based on net profits, with only the amount exceeding that limit subject to separate taxation at 9.9%. Dividend income received from stock investments within the ISA account can also enjoy tax exemption within the limit.

A Financial Investment Association official said, "If you buy Samsung Electronics stock through general stock trading and receive dividends, you have to pay a 15.4% tax, but with an ISA account, you can offset losses from other products against dividend income," adding, "If there is no profit after offsetting, no tax is paid, so demand is expected to increase slightly." The official also said, "It is necessary to consider making the ISA system permanent, like in the UK, instead of operating it under a sunset clause," adding, "This would allow investors to approach ISA investment with a long-term plan."

Experts unanimously agree that for ISA to succeed, tax credit benefits on contributions must be added. They explain that a two-way tax benefit system, combining tax credits on contributions with tax exemption within the operating profit limit and relatively low tax rates on additional amounts, would create a definite incentive to attract investors.

There is also an opinion that, in the long term, various tax-advantaged financial products, currently numbering about ten, should be unified under ISA. Hwang Sewoon, a research fellow at the Capital Market Research Institute, said, "We should consider concentrating various tax benefits on ISA, the most representative product for national retirement asset accumulation," explaining, "Rather than dispersing tax benefits across multiple products, having ISA as the sole option for tax benefits would ensure equal benefits for all citizens."

A Ministry of Economy and Finance official said, "Internally, we have formed a task force (TF) with stakeholders such as the Korea Federation of Banks and the Financial Investment Association to exchange opinions on ISA reform plans," adding, "We are working on tax law amendments based on measures such as expanding subscription eligibility and including stocks in managed assets to stabilize the stock market, but we are not considering introducing tax credits on contributions."

This content was produced with the assistance of AI translation services.