Donation Tax Levied According to the Sales Price of Neighbor’s Home

K, Seoul resident in his 20’s, inherited an apartment from his father last year. Like everyone else, he paid 99 million won as donation tax according to the standard market price set by the National Tax Service (NTS) – 600 million won.

Completely oblivious of it, K was recently hit by a “tax bomb.”

He was notified by the district taxation office to pay a penalty tax of 78 million won and an additional tax, 10.95 percent, for dishonesty.

The tax office’s logic was that K should pay as above because an apartment with equal space was sold at 800 million won two months after his donation.

K’s tax agent said, “The tax office’s explanation is absurd in that it requires tax payers to be clairvoyant of future sales prices for an apartment complex comprising thousands of households.”

Ms. Park is a 62-year-old lady who owns three apartments, including Tower Palace, a residential, and commercial building located in Dogok-dong, Gangnam-gu, Seoul. She decided to donate the Tower Palace apartment to her children because she was worried about an increased property tax burden as transfer income tax will be heavily levied on those who own more than three houses starting from this year.

Ms. Park, however, is not making her donation yet.

If she makes a voluntary report according to the standard market price, her donation tax would be 234 million won. Yet, considering the case of a near-by apartment’s sale for 1.6 billion won, the sum would surge to 421 million won.

She would regret paying a geometrically increasing tax, but there is another reason for Ms. Park’s procrastination.

Ms. Park sullenly remarked, “I can deal with the increasing donation tax, but if another apartment is later sold at a price higher than the 1.6 billion won, I might have to endure tax investigations.”

The confusion of tax payers concerning donation tax has reached a serious state as a result of the change in the tax law: the tax office can levy donation taxes by setting a neighbor’s sales price as the standard and not the owner’s property.

What Was Changed in Tax Law-

The Ministry of Finance and Economy revised the inheritance and donation taxes at the end of 2003 and implemented it from the following year.

Before the revision, market price was only recognized when the property concerned with inheritance or donation was either appraised or sold, and the owner had to pay a high tax in those cases. Starting in 2004, however, an owner has to pay tax according to an appraisal or by the sale of a similar property.

In other words, the tax office will set a real transaction price of another apartment with similar space, location, and usage as the standard for levying inheritance and donation taxes.

Previously, the principle was to calculate the donation taxes according to the market price of a donated property – appraised, transaction, auction, public sale, or compensation prices – three months before and after the donation date. Nonetheless, since there was no data on the market price at the time when a donation was made, the standard market price of the NTS was usually employed.

Inasmuch as transaction prices, which are higher than those of the NTS standard market prices, were used as standard prices, tax payers not only had to manage increased donation tax burdens but fell into confusion because the standard was also vague.

A tax accountant of H bank’s private banking (PB) sector said, “Starting from this year, I have received about one phone call every two hours asking about donation tax, and I give face-to-face consulting almost everyday. But even if I explain about the sales case price, the clients cannot be convinced.”

“It’s Not Somebody Else’s Story”-

The problem is that the standard of using the transaction price is vague. Since prices of apartments vary greatly depending on the floor, direction, and repair status, the tax burden also differs significantly depending on which case is applied.

The tax authority is applying penalty to donation taxes by using the highest transaction price as the standard for taxing. Yet since this principle is not maintained in some localities, some criticize that it is a “rubber band standard.”

Moreover, the transaction price system is not only applied to donation taxes but also to inheritance taxes. As this principle will be applied to those who own one house as well as those who own a fortune, confusion is expected to grow even greater.

For example, if you own a 700 million worth apartment together with your wife, you must pay a donation tax for what is left after deducting the exemption of 300 million won according to the transaction price of a similar apartment.

In addition, when an owner of one house who has no spouse inherits wealth, the tax exemption limit including houses and other properties is 500 million won, so the sales case price would be applied if he inherited a house that costs more than 500 million won.

Professor Hyun Jin-kwon (economy major) at Ajou University stated, “There is a possibility of increased side-effects because the tax authority has the discretionary power to decide which transaction cases to apply. Until a real transaction system is established so that sales prices can be objective, it is necessary to protect tax payers by making the standard uniform with standard market price.”

Ji-WanCha Kyung-JoonChung cha@donga.com news91@donga.com