Whether the expenses disbursed for the interior construction for the apartment can be considered as the necessary expenses

Only the expenses incurred in order to increase the value of assets may be included in the necessary expenses, and the apartment owner is not allowed to include all the expenses incurred in the interior construction of the apartment in the necessary expenses.

Article 67 of the Enforcement Decree of the Income Tax Act [Legal Fiction of Immediate Depreciation]

1. The plaintiff's claim is dismissed.

2. The costs of lawsuit shall be borne by the Plaintiff.

The Defendant’s disposition of imposition of capital gains tax of KRW 12,641,020 against the Plaintiff on September 1, 2006 is revoked.

1. Details of the disposition;

A. On December 20, 2001, the Plaintiff acquired and owned ○○○○○○○○○○○○○○○ Dong (hereinafter “instant apartment”) and transferred on February 21, 2006.

B. Upon filing a report on the tax base of transfer income on April 20, 2006, the Plaintiff voluntarily reported and paid KRW 10,351,522 of the transfer income tax by deducting all of the internal construction cost of the instant apartment from the necessary expenses.

C. On September 1, 2006, the Defendant denied inclusion in necessary expenses for KRW 39,015,50 among the internal construction costs included by the Plaintiff in necessary expenses, and issued the instant disposition imposing capital gains tax on the Plaintiff additionally imposing and notifying KRW 12,641,020 on the Plaintiff.

D. On November 24, 2006, the Plaintiff filed an appeal against the Defendant on March 9, 2007 on the instant disposition, but was dismissed on April 27, 2007.

[Reasons for Recognition] Evidence Nos. 1 to 5, and the purport of the whole pleadings

2. The legality of the instant disposition

A. The plaintiff's assertion

In calculating gains from the transfer of the apartment of this case, the Defendant recognized only KRW 42,684,50 as necessary expenses, including the sum of KRW 19,50,00,00, the cost of housing construction, KRW 13,514,00, the cost of housing construction, KRW 9,670,00, and the cost of floor construction, KRW 9,670,00, among the internal construction costs incurred by the Plaintiff, as necessary expenses for the improvement of the apartment of this case or for the convenience of the use thereof. However, the instant disposition is unlawful since the Plaintiff’s remaining expenses incurred for painting construction, painting construction, and building construction, etc. are also included in necessary expenses.

B. Relevant statutes

Income Tax Act

Article 97 (Calculation of Necessary Expenses in Transfer Income)

(1) In calculating gains on transfer of a resident, necessary expenses to be deducted from the transfer value shall be as follows:

1. Acquisition value:

(a) The actual transaction price required for the acquisition of assets under subparagraphs of Article 94 (1): Provided, That in cases falling under the main sentence of Article 96 (2), the standard market price at the time of acquisition of the relevant assets;

(b) In case of the text of item (a), where it is impossible to confirm the actual transaction value at the time of acquisition, the transaction example value, appraisal value or conversion value;

2. Capital expenses, etc. prescribed by Presidential Decree;

Enforcement Decree of the Income Tax

Article 67 (Fiction of Immediate Depreciation)

(1) Where a business operator appropriates the amount disbursed to acquire depreciable assets and the amount corresponding to capital expenditures for depreciable assets as necessary expenses, the scope of depreciation shall be calculated by deeming depreciation.

(2) The term "capital expenditure" in paragraph (1) means the repair cost disbursed to extend the durable years of the depreciable asset owned by a businessman or to increase the real value of the relevant asset, and it shall be deemed that any disbursement for one of the followings is also included:

1. Remodeling to change the original use thereof;

2. Installation of erobes or air-conditioning or heating equipment;

3. Installation of refuge or shelter rooms in buildings;

4. Restoration of buildings, machinery, equipment, etc. which have no usefulness to use for their original purposes due to the destruction or damage thereof by a disaster, etc.

5. Others similar to subparagraphs 1 through 4, such as improvement, expansion, enlargement, etc.

(3) Where the repair expenses falling under any one of the following subparagraphs paid by a businessman in the taxable period, and are appropriated as the necessary expenses, such repair expenses shall not be included in capital expenditures under paragraph (2):

1. Where the amount disbursed as repair cost by individual asset is less than three million won;

2. Where the amount disbursed as repair cost by individual asset is short of 5/100 of the asset value on the balance sheet as of the expiration of immediately preceding taxable period (referring to the amount obtained by subtracting the accumulated depreciation costs from the acquisition value); and

3. Where the disbursement is made for the periodical repair of less than three years.

Article 163 (Necessary Expenses for Transferred Assets)

(3) The term "capital expenses, etc. prescribed by Presidential Decree" in Article 97 (1) 2 of the Act means those falling under any one of the following subparagraphs:

1. Capital expenses computed by applying mutatis mutandisArticle 67 (2);

3. The cost paid for the alteration, improvement or convenience of the use of the transferred asset.

C. Determination

In the calculation of the transfer income tax on the transfer of apartment, only the expenses paid for the extension of the durable years of the apartment concerned or the actual increase of the value of assets of the apartment can be included in the necessary expenses, and the owner of apartment can not include all the expenses paid for the interior construction of apartment in the necessary expenses.

Therefore, if the plaintiff is able to include the remaining internal construction cost incurred by the plaintiff in necessary expenses, it is insufficient to prove that the plaintiff has paid such cost, and it is necessary to additionally recognize that such cost has been used in realizing the value of the apartment of this case or in increasing the depreciation training of the building. The entries in the evidence No. 6 or No. 8 alone are insufficient to recognize that the remaining construction cost, etc. incurred by the plaintiff constitutes capital expenditures of the same nature as above, and there is no other evidence to acknowledge such fact.

3. Conclusion

Therefore, the plaintiff's claim of this case is dismissed as it is without merit, and it is so decided as per quasi-incompetent.