Clearing up taxes in Korea

Taxes are a pretty complicated thing, and Korea is no exception, in this post, I hope to explain in a bit more detail how taxation works in Korea and cover some frequently discussed yet often unsatisfactorily covered ground.

First off, if you work in a public school in Korea, you are able to receive a 2 year tax exemption (This applies to all nationalities except for Canadians). It’s important to note, that the clock on your 2 year exemption starts ticking from when you start working in Korea, so if you’ve already worked for 2 years in Korea outside of a public school, you will have lost out on your 2 year tax exemption.

For people working outside of the public system, or those whose exemption has expired, you will have to pay taxes, and this is where much of the confusion starts.

One of the biggest causes for confusion is the 3.3% tax rate which is mentioned in many contracts. Let me clear this one up, the tax rate is NOT 3.3%, ever. 3.3% is the withholding rate for independent contractors (how it’s supposed to work: your employer withholds 3.3% of your salary each month, and at the end of the year you depending on whether you paid too much or too little tax, you either have to pay in more, or you receive a rebate) Though shadier hagwons (the ones most likely to enroll you as an independent contractor) aren’t know for returning tax rebates to employees.

Legally someone on an E2 cannot actually be an independent contractor, but in reality this happens.

Another major cause for confusion is the option for foreigners to be taxed at a flat rate of 15%. While this is in fact true, using this method will forfeit most tax deductions and credits, so this only starts becoming a realistic choice once your salary is around 100 million won per year.

So what is the tax rate in Korea?
Well, like most countries, Korea uses a progressive taxation method. This means, the higher your salary, the higher your tax rate will be.

These are the current tax brackets based on an annual salary:

0-12mill  – 6%
12 – 46 mill – 15%
46 – 88mill – 24%
88 mill – 300mill 35%
300mill or more – 38%

So, the first 12mill is taxed at 6%, the next 34mill is taxed at 15% and so on.

This is rather simple, however, there are many deductions and credits which make calculating your tax a little bit more complicated.
The ones that apply to most people are:
Deduction for “wage and salary earners” which is calculated according to a formula based on your salary.
The basic deduction which is a flat 1,500,000, however this deduction will be higher if you have dependents.
The standard deduction. This takes into account health insurance, pension contributions, medical expenses and educational expenses. If the total of your deduction is less than 1,000,000, then you are given a base deduction of 1,000,000.
Lastly is a tax credit of 500,000 for “wage and salary” income.

So let’s do an example.

Say you’re earning a salary of 2.5m a month. That’s 30m per year.

The first major deduction is the deduction for “wage and salary earners” which on the 30mill salary is a deduction of 11,250,000.

This means that your “taxable” income is actually 18,750,000.
Then there is the basic deduction of 1,500,000.
Next is the standard deduction of 1,000,00
So your tax taxable salary is now 16,250,000.

12,000,000 @ 6% = 720,000
4,250,000 @ 15% = 637,500

Total 1,357,000.

Now we subtract tax credit of 500,000 for “wage and salary” income.

So your total tax due is 857,000.
But, there’s is also a local resident tax of 10% of your total tax (85,700 in this case)

Final amount: W943,250. This translates into an effective tax rate of  3.14%

Using the same information as above, here are the taxable amounts on some different salaries:
2,000,000 per month: 377,630 = 1.57%
3,000,000 per month: 1,834,250 = 5.09%

A few things to remember.
1. Your monthly tax deduction won’t necessarily match up with these numbers. Usually a “ball-park” figure is deducted each month, with a final amount being assessed after your tax return in Jan/Feb. Depending on your deductions, you may have to pay in more, or you may receive a rebate.
2. Based on how your salary is calculated, your tax rate may vary. Things like transport and meal allowances aren’t taxed (up to a limit) which may greatly reduce your tax liability.
3. There are a long list of other deductions. Some of the most common ones include medical expenses and credit card usage. These have pretty high minimum thresholds, and unless you’ve spent a significant sum on these things, you most likely won’t receive any sort of deduction.

Note: The above post is meant to serve just to educate readers about their taxes. Each individual situation will be different.

For more detailed information on taxation please refer to the National Tax Service website. The link to “Automatic Calculation service for year-end settlement” on the left, if you click “progressive tax rate method” will output your tax liability according to the calculations I demonstrated above, no Math required. (Works best in Internet Explorer)

Posted in Banking in Korea, Tax | 1 Comment

Banking in Korea – Opening a bank account.

Opening a bank account in Korea is very easy. All you need to bring is your passport or your ARC (it’s recommended to bring both, especially if you are setting up accounts for international transactions). Some banks/branches also require a letter of proof of employment. While this isn’t a legal requirement, I’d recommend bringing it anyways as it may save you an extra trip.

Go into the bank, approach the information desk and ask to open a bank account. They’ll guide you through the process. When opening an account, make sure you ask for (and get!) an international ATM/Cheque card, this will allow you to draw money from your account while overseas (many Korean banks don’t freely give these cards to foreign customers, so you need to ask). It will have a Visa/Cirrus/Maestro logo on it. Once your account is open, you will have a cheque/ATM card and a bank book. The bank book is very important, not only does it serve as a record of your transactions it can also be used to make transactions, so keep it in a save place.

If you’ve opened an account with KEB, now you want to create an Easy One Account.
How it works: When you create the account, you give them the details of a bank account where you want to send your money (i.e. your home bank account) and the currency you want to send.
When you transfer money from your regular Korean account to the Easy One account, that money is automatically wired to your bank back in SA. Easy as that.

Lastly, you will want to set up Internet banking. They will activate your account for Internet transactions, and give a plastic card with lots of numbers on it. This is your “key card” and is required to make any transactions.

Setting up Internet banking is a little different from most other countries. Korean banks use certificates and lots of activeX controls to provide security. As such, it’s recommended that for Korean Internet banking, you use Internet Explorer (some people have reported varying degrees of success with other browsers, unless you want to have an experience similar to giving a cat a bath, go with IE).

When you visit the bank’s website it will prompt you to download lots of software, and activeX controls, unfortunately, you’ll need to say yes. Next you’ll need to issue a certificate. At the homepage, click on the digital certificate link, and follow the instructions.
NB. You can only have 1 certificate, so if you wish to bank on multiple computers, issue the certificate to a flash drive. (If you lose the certificate, you can re-issue a new one).

For more information on KEB’s offering for expats, click here.

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Banking in Korea – Which Bank should I use?

Taking a break from investing, this post is for newbies to Korea, those who’ve just arrived or perhaps those who haven’t even arrived yet.

One of the most common questions asked by newbies to Korea is, “Which bank should I use?” The answer is quite simple. Korea Exchange Bank (KEB).
For the most part, KEB is the best bank for foreigners to use in Korea.

Firstly, they are geared to foreign exchange and foreign customers and their staff is used to dealing with foreign customers, as such, you can expect a decent level of English in their branches (be warned, the phrase “it depends on the branch and who you talk to” has never been more true than in Korea).

Secondly, they offer the best remittance rates. The “Easy One” account is a very good product which once set up, makes sending money home very simple. More on this later.

Thirdly, and this is important for South Africans, they are the only bank which offers remittances in Rands. This is important, because usually you have to send dollars home, which means that you will have to pay to exchange your money twice (Once changing Won to Dollars, and again changing Dollars to Rands in SA).

It’s important to note, that KEB isn’t the biggest bank in Korea. While they have a pretty good branch network in Seoul, in smaller cities they’ll usually only have a handful of branches which may be quite inconvenient. In rural areas, they may not even have any branches at all, meaning you may have to travel to a nearby city.

The good news is, that with the exception of getting set up, one doesn’t need to visit the bank often. Once your accounts are set up, it’s very easy to use online banking for all your transactional needs. As for ATMs, using your own bank’s ATM is free, while using an ATM from another bank usually incurs a charge of W1000-1200. With regards to KEB, they were recently bought by Hana bank (which has a much larger branch network), so I believe you can use their ATMs for cash withdrawals without paying a fee.

So it’s my opinion that unless you have a reason to use another bank, you should use KEB. ( I suppose I should come clean and admit that I don’t actually use KEB, but if I had to start over again, I definitely would).

For some additional Korean banking info have a look at this link

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How to pick a Unit Trust part 2

So now you know the differences between the different types of unit trusts, and you wish to invest. Here comes the tricky part, where you have to do some research.

First, choose which category of UT you wish to invest in. As a young investor, with a very long-term investment horizon (over 10 years) I can afford to take on more risk, so I’ll choose a General Equity Unit trust. I particularly like General Equity Funds as they invest primarily in the Top40 stocks. These are the 40 biggest listed companies in SA, companies you know and whose products you use, SAB, MTN, Anglo American, Standard Bank, and so on.

For me, consistent, long-term performance is my most important factor.
So go to a site like http://www.fundsdata.co.za/ and generate a ranking of the best performing General Equity UTs over the past 5 years. You’ll get something which looks like this:

fundsdata1

Now as you can see, there are different fund classes. Basically, class R means those funds are closed to new investors, and as a new investor you can only invest in A class funds.

So our universe now looks like this:
fundsdata2

Next, I like to look at the different fact sheets on offer for each fund. This will give you the overall goal of the fund, some commentary from the fund manager, a detailed breakdown of performance over various periods and most importantly it will explain the fees.

The top ranked fund here is actually an ETF (as explained before) and it works slightly differently from a regular UT, so I will exclude it from the example. Next is the Coronation Top 20 fund, with the monthly fact sheet located here : http://www.coronation.com/assets/factsheet/2013/June/CORONATION%20TOP%2020%20FUND.pdf

If you look at the top right of the fact sheet it will show the fund size R15.81billion (one of the biggest in SA). While size is not the most important factor and there is a debate whether or not bigger is actually better, for the novice investor it’s advised to stick to more established funds, as such, all things being equal go for the bigger one. The rest of the information is pretty self-explanatory, lets look at the “fees” in more detail:

coronation fees

Underlined is the initial fee. This is 0%. Zero is good, that means you pay absolutely nothing upfront. Some funds have an upfront fee of as high as 5%, that means, for every R100 you invest, only R95 makes it into the fund. This is especially important as these initial fees aren’t deducted from the fund price which can often make the performance look better than it actually is.
Circled is the TER (Total Expense Ratio). This is the number you have to look at. The TER is the total amount in fees that you will be paying. A lot of funds have a performance component to their fees (like this one), so the TER varies slightly from month to month. In most cases the published TER is the rolling average of the TER for a 12 month period.
However, you don’t actually “pay” the fees. These fees are usually calculated and deducted daily from the fund price. This means, that the price and performance you see, and the price/performance you get are one and the same.

For those interested in doing their own homework, and looking at the different funds, here their factsheets:
Satrix Divi: http://www.satrix.co.za/products/satrix%20divi.aspx
I
MARA MET Equity: http://www.imara.co/uploads/imara-funds/ief/ImEF_Report_Jun_13.pdf
Aylett Equity Prescient Fund: Unavailable
Coronation Equity Fund: http://www.coronation.com/assets/factsheet/2013/June/CORONATION%20EQUITY%20FUND.pdf
Prudential Equity Fund: http://www.prudential.co.za/uploads/funds/55/7-11-factsheet.pdf

Now after narrowing the selection down, and examining a few top performers, you’re well on your way to picking a winner.

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How to pick a Unit Trust part 1

Last post I mentioned that there are over 800 unit trusts in South Africa. Don’t believe me? Well here’s a list of 650 http://www.sharenet.co.za/free/ut.phtml (I actually don’t know where the other 150 are…I read the 800 figure somewhere, and never bothered to check!) Anyways, as more than half of those will underperform, the big question is, how do you pick a winner?

Firstly, you need to know, there are many different types of Unit trusts each with different mandates and objectives:
1. Speciality or Sector specific funds. These funds invest stocks in a specific market sector, such as Property, Resources, Small caps etc. These funds are extremely volatile, and their performance is relative to the sector they invest in. If property is having a great year then your fund will do very well relative to the overall market (regardless of whether or not your fund is doing well in it’s sector), on the other hand if resources is having a terrible year, regardless of whether your fund is doing well it’s sector or not, it will underperform vs the overall market. These funds are quite high risk, and should be avoided as a singular investment (if you include one or more of these funds as part of a greater portfolio that’s fine). It’s important to note, when looking at lists of the best funds over a period of time, the short term list (i.e. 1-3 years) is usually populated with these types of funds.

2. General Equity Funds. These funds invest across all sectors with the aim to outperform the major index (either the All-Share index or Top40 in the case of South Africa). These funds are pretty volatile, as they have very high exposure to the stock market, and will generally track the trends of the stock market.  While these funds have quite a high degree of risk in the short-term, a good fund from this category will generate a very good long-term return for its investor.

3. Balanced/Stable Funds. These are similar to General Equity Funds, however, the major difference is that they have lower exposure to stocks than General Equity funds. In their mandate they will state their maximum equity exposure, which usually ranges from 40% for conservative funds, up to 75% for more adventurous. In addition to investing in stocks, they will also invest in bonds, cash, and other more stable investments. While these funds tend to underperform General Equity Funds during strong bull markets, they are a lot less volatile and do far better during times of poor market performance. These types of funds are appropriate for investors with a lower risk threshold.

4. Offshore Funds. These funds include funds in all the above mentioned categories, the major difference is that they invest offshore (i.e. Outside South Africa). There are sector/specific offshore funds, General Equity Offshore Funds, Balanced Offshore Funds and so on. These provide excellent diversification, and with South Africa being a relatively small and volatile economy, having some offshore exposure is essential for investors. Karl Leinberger from Coronation says that the average South African should have 20-30% of their assets offshore, and this is a sentiment echoed by many other commentators. Investing in an offshore Unit Trust is one of the best ways to achieve that.

5. Multi-Asset Funds. These funds invest in a combination of everything. They may have local and offshore exposure (Offshore exposure is usually limited to 25% due to South African Law), equity, bond and cash exposure. Additionally, these funds may actually invest in other funds to balance out their portfolios. Within this broad category, there are high equity, medium equity and low equity funds, each offering different exposure to the stock market.

For a detailed chart of the different fund types please click here.

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How to invest in the stock market

So, you’ve bitten the bullet and decided that you want to look into investing in the stock market, but don’t know where to start? Well, start right here of course!

There are 3 major ways of investing in the stock market.

1. You can buy shares directly on the market. With the advent of online share trading, it’s never been easier or cheaper for the retail investor to buy and sell shares. All of the Big 4 banks offer online trading platforms as well as a few others. For those looking to get into online share trading, your first port of call should be to look at your current bank’s platform offering. This may be far easier due to FICA Requirements. If your current bank doesn’t have a good platform, or none at all (e.g. Capitec) then I’d recommend Standard Bank’s online share platform (https://securities.standardbank.co.za). Having tried both FNB’s and Std Bank’s platforms and listening to my father complain incessantly about Nedbank’s I can say without a doubt it’s the best of the three (I have no experience with ABSA’s or some of the other platforms, eg. PSG or Sharenet). Something to note, however, is that share trading isn’t for beginners. Individual shares can be extremely volatile, and in most cases the minimum realistic investment in a single stock is R10,000 meaning it’s not easy for a small investor to build a balanced portfolio. The only exception to this is if you use your trading platform to buy ETFs (read below for more information).

2. The most common way for individuals to invest is through a Unit Trust. A unit trust is a collective investment, where many people invest in a fund with a specific objective which is managed by a professional manager.
The benefits include:

a. Hiring a professional investment manager, which theoretically offers the prospects of better returns and/or risk management.

b. Benefitting from economies of scale – cost sharing among others.

c Diversify more than would be feasible for most individual investors which, theoretically, reduces risk.

However, the negatives of investing in a Unit Trust include:

a. High fees, most SA-based Unit Trusts charge annual fees of 2-3% (which is already reflected in the prices shown). When the fund is performing well, these fees are a fair price to pay for a market beating return, however, when the fund’s performance is just average, or even poor, then these fees can really eat into your return.

b. Not all fund managers are created equal. Depending on which report you read and in which country it was written somewhere between 25-50% of fund managers beat the market (beat the market : generate performance in excess of the benchmark, in most cases the general stock index). This means if you choose to invest in a Unit Trust, you need to research your provider and the specific fund to make sure you are investing in a winner.

There are currently over 800 Unit trusts in South Africa which makes choosing the right one a very daunting task, and the subject of a future post.

For more general information on Unit Trusts: http://en.wikipedia.org/wiki/Collective_investment_scheme

3. Lastly, there is the option to invest in ETFs. An ETF is an exchange traded fund, (which trades on the stock market, like a stock), and for the most part tracks a certain stock index (like the Top40) or commodity (e.g. Gold). If one were to buy the Satrix40 ETF, one would effectively own shares in all companies in the TOP 40 index (weighted according to their size). This means the performance of your investment will very closely correlate with the performance of the market or underlying index.

The benefits of investing in ETFs include:
a. Low costs. ETFs have no active management. As such, ETFs charge annual fees of around 0.5% (some are even lower). This compares very favourably to the 2-3% charged by Unit Trusts.
b. Performance. ETFs will track the underlying index and give closely matching performance. As mentioned earlier, less than half of fund managers actually beat the index, so an ETF give you that market matching performance.

Negatives include:

a. Performance: ETFs aren’t actively managed, that means that while you’ll get performance which closely matches the index, you’ll never outperform the index.

While the most common type of ETF is an index tracker (the biggest and most popular in SA is the Satrix 40). There are actually many different types of ETFs which track many different indexes (some of which aren’t very well known).
Here is a list of ETFs available in South Africa:  http://www.etfsa.co.za/ETF_profiles.htm

There are two ways to invest in ETFs. The first is through your stockbroking account (see #1). This allows you to buy and sell your ETFs on the market like a stock. However you will have to pay brokerage and a monthly admin fee (If you already have a trading account, the monthly fee is moot). This method is preferable for large amounts as the brokerage is a one-off cost (when you buy or sell the share/etf) and the monthly account fee is a fixed amount. The other method to invest in ETFs is through an ETF platform provider.
The two most well-known in SA are http://www.etfsa.co.za/ (which provides access to all ETFs) and http://www.satrix.co.za (which provides access to only Satrix funds – which are the largest group of ETFs in SA). When investing through one these providers they also charge a (much lower) brokerage fee, but there’s also an annual fee of about 0.5% to manage your account (in addition to the 0.5% charged by the fund itself).

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How to generate a real return on your money

In my last post, I explained why simply saving is not enough. In order to create real wealth, one needs to invest their money. There are many avenues for investing, the most common being property and the stock market (through various channels). Without discounting the relative merits of property investing, it’s outside of the scope of this blog, so I’ll be focusing primarily on the stock market.

Why the stock market? History has shown that the stock market is one of the easiest and most profitable ways to grow your wealth over the long term. Remember that graph in my previous post which showed how your savings will be eaten by inflation. Here is that same graph with the performance of the JSE Top 40 index included:

chart2As you can see, the performance is quite amazing. While you needed to have R1774 in 10 years to have the same purchasing power as R1000 today, R1000 invested in the TOP40 index would have been worth R5988. At the current rate of inflation, that would be worth R3375 in today’s money.

It’s important to note a few things:

1. Previous returns are no guarantee of future gains. While the stock markets have performed excellently over the past 100 years, there is no guarantee that such performance will be repeated. There may be periods of lower than expected performance, and there may even be periods where investments on the stock market lose money.

2. Stock Market investments are volatile investments. They can make big moves both up and down. The 2008 Financial crisis is a good example of a big downward move, where most stock investments lost a lot of value.  While the graph above shows a straight line in market gains, the real picture looks like this:
chart3As you can see, it’s a pretty bumpy road. Which leads me to the last point.

3. Stock Market investments are long-term investments. The longer you are invested, the more the volatility is ironed out and the greater the chance of you reaping a good return.
The above graph shows how the Top40 index lost about half it’s value between Mid 2008 and early 2009 due to the financial crisis. If you had invested in 2008 and sold in 2009, you would have lost an absolute fortune. However, if you had been invested for a 10 year period (even throughout the Financial Crisis) you would have reaped a handsome return. As such, stock investments should be considered as long-term investments with a 5-10 year horizon as a minimum.

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Why saving and investing is important

Most people know that saving is very important. Not only should we save for big purchases, a deposit on a house, or an overseas trip, we should also save for the future and unforeseen events.

While putting money aside each month to fund that amazing round-the-world trip is a very effective strategy, when it comes to saving for the long-term (be it, retirement, a down payment on a house, or our children’s education) simply leaving money in a bank account is not enough.

Why is it not enough? Simply put, leaving money in a savings account for the long-term is a very effective way to “save yourself into poverty”.

Here’s a brief explanation: The current inflation rate in South Africa is 5.9%.
This means, you need to be earning 5.9% on your money each year JUST TO BREAK EVEN.

But…
The interest on a regular savings account ranges from 1-3.4% (FNB – July 2013).
The average interest of the 20 biggest money market funds in SA is 5.19%(http://www.moneymarket.co.za/Top-20-Money-Market-Funds.aspx)

While these differences seem rather small, over a longer period of time they can grow quite large. As the following graph shows, after a period of 10 years, R1000 in today’s money needs to be worth R1774 to keep up with inflation.  However, if you put that money in a regular savings account, it would only be R1397 which is worth only R787 in today’s money. The money market account fares quite a bit better being valued at R1659. However that is still only R935 in today’s money which is less than you started with. That’s quite a slap in the face for being a disciplined saver for 10 years don’t you think?

chart1

So, in order to not only keep up with inflation, but actually create wealth, one needs to find different vehicles for their long term savings. This will be the topic for my next post.

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