Relevant Period:This article introduces the FY2013 Tax Reform Outline as published in January 2013. Please distinguish the outline's proposals from subsequent enactment and implementation.

What was decided, when, and by whom

The Outline of the FY2013 Tax Reform was approved by the Cabinet on January 29, 2013. The document opens with that date and “Cabinet Decision.” Annual tax reform outlines are usually approved in December, making the January 29 decision an exception. For the adjacent years, see FY2012 and FY2014, and for how to read recent outlines, see Key points of the FY2026 tax system revision outline for further details.

The opening states the year's aims, which directly correspond to the structure of the text.

In light of current economic conditions, tax measures will stimulate private investment, expand employment and income, and support SMEs, agriculture, forestry, and fisheries to achieve a virtuous cycle of growth and wealth creation. Measures concerning income, inheritance, and gift taxes and housing acquisition will implement the integrated social security and tax reform. Additional tax measures will support reconstruction following the earthquake disaster.

Main pillars of the outline

The text has seven chapters.

Adding a 45% Top Income Tax Bracket

The individual income taxation chapter begins with the top rate revision.

In addition to the existing income tax rate structure, a 45% rate shall be introduced for taxable income exceeding JPY40 million.

Existing brackets remain, with one added at the top. The amendment applies to income tax for 2015 onward.

The higher rate applies where taxable income subject to aggregate taxation exceeds JPY40 million. A large bonus or business income could produce such a year. Ordinary gains from selling land, buildings, or shares are generally taxed separately from salary and similar income, so they are not examples of income subject to this 45% rate.

Lower Inheritance Tax Basic Deduction and a 55% Top Rate

The asset taxation chapter begins with inheritance and gift tax revisions, which I consider the measures likely to affect the most people. First, the basic deduction falls.

The rate structure also changes. The existing maximum is 50% on amounts exceeding JPY300 million. The proposal sets rates of 40% for amounts up to JPY200 million, 45% up to JPY300 million, 50% up to JPY600 million, and 55% above JPY600 million, adding two upper brackets.

Expanding the Special Provisions for Small Residential and Business Land

Not all changes increase the burden. The outline expands the eligible area for specified residential land from 240 to 330 square meters. It also addresses structurally divided two-generation homes and land beneath homes no longer occupied because the deceased entered a nursing home.

Changes to Gift Tax and Settlement-at-Inheritance Taxation

Gift tax brackets will differ between gifts from lineal ascendants to recipients aged at least 20 and other gifts, with a 55% top rate for both. Settlement-at-inheritance taxation will extend eligibility to grandchildren aged at least 20, previously limited to presumptive heirs, and reduce the donor age requirement from 65 to 60. These changes generally apply to property acquired on or after January 1, 2015.

Introducing a JPY15 Million Exemption for Lump-Sum Education Gifts

A new measure exempts up to a specified amount when grandparents or parents provide education funds in a lump sum for grandchildren or children.

For contributions made between April 1, 2013 and December 31, 2015, the value of trust beneficial interests or contributed money and similar assets is exempt from gift tax up to JPY15 million per recipient, with a JPY5 million limit for payments to persons other than schools and similar institutions.

Recipients must be under age 30, and funds must be placed in a trust or similar arrangement with a trust company, bank, or financial instruments business operator. The arrangement operates through financial institutions rather than direct handover. The recipient submits a provisional Education Funds Exemption Return to the tax office through the institution and provides documents showing that withdrawals were used for education.

Termination rules are also prescribed. When the recipient reaches age 30, any balance remaining after education withdrawals is treated as a gift on that date and subject to gift tax. Unused funds are therefore taxable. A balance remaining upon the recipient's death is not taxed.

Two Changes to Individual Financial Income: Tax-Exempt Accounts and Bonds

Financial and securities taxation contains two major revisions. The first concerns tax-exempt accounts: the opening period is extended to January 1, 2014 through December 31, 2023, from the previous end date of December 31, 2016. Listed shares and similar assets accepted into each year's tax-exempt subaccount must have total acquisition consideration of no more than JPY1 million. Exemption runs from the account's establishment until five years have elapsed from January 1 of that year.

The second restructures bond taxation. Interest on specified bonds and similar instruments is removed from final withholding taxation at 20%. Payments due from January 1, 2016 become subject to separate taxation by self-assessment at 20%, comprising 15% income tax and 5% inhabitant tax. Disposal gains also lose their exemption and become subject to the same separate taxation. They are added to the rules allowing offsetting against listed-share disposal losses and dividend income, with losses carried forward for three years. For government and corporate bond holders, interest, sales, and loss treatment all change together.

Tax Credits for Capital Investment and Wage Increases

The first corporate taxation priority is stimulating private investment and expanding employment and income. Three new systems are introduced.

The first promotes domestic capital investment. Blue-return corporations acquiring domestic production equipment in fiscal years beginning between April 1, 2013 and March 31, 2015, where aggregate acquisition costs exceed specified amounts, may choose 30% special depreciation or a 3% tax credit for machinery used in domestic business. The credit is capped at 20% of current-year corporation tax. Headquarters, dormitories, office furniture and fixtures, passenger cars, welfare facilities, and similar assets do not qualify as production equipment.

The second concerns wage increases. Where domestic employee payroll increases by at least 5% over the base year's amount, a credit of 10% of the increase is available. The credit is capped at 10% of current-year corporation tax, or 20% for SMEs and similar entities.

The third allows SMEs in commerce, services, agriculture, forestry, and fisheries to choose 30% special depreciation or a 7% credit for furniture, fixtures, and building attachments acquired through store renovations and similar work undertaken with guidance and advice.

SME measures also change entertainment expenses. The fixed deduction limit rises from JPY6 million to JPY8 million, and the existing 10% disallowance within that limit is abolished. The cap therefore rises and the previously nondeductible one-tenth within it disappears.

Extending the Housing Loan Tax Credit by Four Years and Raising Limits

The housing loan tax credit is extended by four years from December 31, 2013 to December 31, 2017, with higher limits.

For certified long-term quality and certified low-carbon housing, the eligible loan limit from April 2014 is JPY50 million and the maximum total credit is JPY5 million.

An easily overlooked condition applies. The amounts from April 2014 assume consumption tax at 8% or 10% is included in the price or cost. Otherwise, eligible loan limits are JPY20 million for ordinary housing and JPY30 million for certified housing. The ceiling depends on the transaction's consumption tax rate as well as the purchase date.

To determine if it relates to you

• If taxable income subject to aggregate taxation exceeds JPY40 million in any year, see the top income tax rate revision. It applies from 2015.
• If you have previously estimated inheritance tax or expect to inherit residential land, see the inheritance and gift tax revisions and special provisions for small residential and business land.
• If you plan to help with children's or grandchildren's education costs, see the gift tax exemption for lump-sum education funds.
• If you hold government or corporate bonds or invest through securities accounts, see financial and securities taxation.
• Companies considering capital investment or wage increases, and small and medium corporations with substantial entertainment expenses, should see private investment and employment/income measures and SME, agriculture, forestry, and fisheries measures.
• If you plan to acquire a home from 2014 onward, see housing taxation. Limits differ according to the consumption tax rate.
• If you pay national taxes in installments or have payment deferral, the delinquency tax and related revisions are relevant.

Source

• Outline of the FY2013 Tax Reform (Cabinet decision of January 29, 2013)

Materials Consulted for the Correction

• National Tax Agency: Overview of 2013 Income Tax Amendments (Page 6)
• National Tax Agency: Capital Gains on Land and Buildings
• National Tax Agency: Taxation of Share Transfers