Inland Revenue - Tax policy Tax Policy

News and information about the Government's tax policy work programme, including:
- proposed changes to the laws that Inland Revenue is responsible for
- updates on the progress of bills through Parliament
- policy announcements

Student loans

Matters raised by submitters

Matters raised by officials


MATTERS RAISED BY SUBMITTERS


Issue: Limiting the ability to reopen repayment obligations prior to 1 April 2013

(Clause 57)

Submission

(Chartered Accountants Australia and New Zealand)

The submitter does not support the proposed changes and considers that despite the complexity introduced by significant numbers of changes since 1992, there is no principled reason to enact this change.

Comment

In general, officials note that by the time the changes take effect, 1 April 2013 will be seven years in the past. This is more than the median repayment time for New Zealand-based borrowers. Given this, there are unlikely to be many borrowers affected by this change. If a borrower is adversely affected by this change, the proposed legislation enables the Commissioner to reinstate the borrower back to the position they would have been in prior to this change.

Retaining the rules going back to 1992 imposes compliance costs for borrowers who have their repayment obligations changed before 2013, as the majority of the changes to rules prior to 2013 do not feature in the current scheme. The low likely impact on borrowers significantly outweighs the cost imposed by building and testing systems to manage the old and complex rules that are unlikely to affect many borrowers.

Recommendation

That the submission be declined.


Issue: Allowing Inland Revenue to notify employers when an employee’s loan balance is close to zero

(Clause 45)

Submission

(Martin Etherington, Corporate Taxpayers Group, EY)

Two submitters expressed support for the proposal to allow Inland Revenue to notify employers of a borrower’s remaining loan balance. Both also noted that it would be important that when Inland Revenue notifies an employer, that this is done allowing enough time for the employer to make the necessary adjustments. (Martin Etherington, Corporate Taxpayers Group)

Implementing the change within payroll software should not be difficult. “Close” could be defined as where the loan is likely to be paid off within the next month. (Martin Etherington)

The proposal would impose significant compliance costs on employers for little benefit. The proposal should be made optional for employers. Alternatively, Inland Revenue could provide a faster refund process for overpaid loan deductions in the interim period between annual returns. (EY)

Comment

Officials welcome the support for the proposal and agree that providing sufficient notice to employers is important. Officials would prefer that the timeframe is not defined in legislation to allow greater flexibility to cater for different borrower situations. Generally, Inland Revenue is looking to issue letters to employers and borrowers when the borrower’s loan is expected to be repaid in the next three months.

Officials consider that the compliance costs imposed by this change should not be significant, and that as a result, this change is appropriate. Qualitative research undertaken by Inland Revenue with groups of employers concluded that employers supported the proposal. Officials consider that making compliance with these requirements voluntary is not appropriate.

Inland Revenue agrees that the refund process should be as efficient as possible and is making significant efficiency changes as part of its transformation process. It still considers that it is preferable for no over deductions to occur for student loan borrowers. Independent testing on Inland Revenue’s behalf has shown a positive response from employers and customers to this change.

Recommendation

That the submission to make the proposal optional for employers be declined and the other submissions be noted.


Issue: Loan put on hold for those with life-shortening congenital conditions

(Clause 42)

Submission

(Sarah Peters)

That those with life-shortening congenital conditions should have their loan put on hold to prevent further debt.

Comment

Officials consider that the current loan scheme strikes the correct balance between providing relief to those with life-shortening congenital conditions and ensuring equity among borrowers. Where the borrower is based in New Zealand, loan repayments are income contingent with repayments only required where the borrower’s income is above the repayment threshold of $19,760 and no loan interest is imposed. If the borrower’s income is above the repayment threshold and loan repayments are required, the borrower may be able to qualify for hardship relief if the repayments are causing difficulties for the borrower. The Bill would extend this treatment to overseas-based borrowers with serious illnesses or disabilities.

Officials therefore recommend that the submission be declined.

Recommendation

That the submission be declined.


MATTERS RAISED BY OFFICIALS


Issue: Repeal the requirement for loan repayments to be deducted from schedular, election-day, and casual agricultural income

Submission

(Matter raised by officials)

The changes requiring student loan repayments be deducted from schedular, election-day, and casual agricultural income should be repealed. This is because consultation with employers has identified significant compliance costs for them to implement the changes.

Comment

From 1 April 2020, changes included in the Taxation (Annual Rates for 2019–20, GST Offshore Supplier Registration, and Remedial Matters) Act 2019 require student loan repayments to be deducted from schedular, election-day, and casual agricultural income each payday. These changes apply from 1 April 2020.

These changes would be beneficial to borrowers in reducing the compliance costs of making loan repayments during the year. However, consultation undertaken by Inland Revenue with employers has identified significant costs for implementing these proposals. Therefore, officials recommend that this legislative requirement be repealed.

Recommendation

That the submission be accepted.


Issue: Underestimation penalty

Submission

(Matter raised by officials)

That the student loan underestimation penalty be replaced with a shortfall penalty to align it with the penalty imposed for underestimation of provisional tax for tax purposes.

Comment

Borrowers who earn income other than salary and wages and whose end-of-year repayment obligation on this income is more than $1,000, are required to make interim repayments in the following year. A borrower can base these interim repayments on either the previous year’s assessed amount plus an uplift percentage or an estimate of the expected end-of-year repayment obligation.

To ensure borrowers who choose the estimate option make an accurate estimate of their interim repayment obligations, a penalty is imposed on those who significantly underestimate their interim repayments.

To provide consistency of penalties between underestimations of loan repayments and the underestimations of provisional tax, it is proposed that the current underestimation penalty be replaced with a tax shortfall penalty.

The Government tried to make this legislative change in 2011, but it had to be reversed because of Inland Revenue’s system limitations at the time. With Inland Revenue’s Business Transformation changes, this system limitation has been removed.

This change is required before Inland Revenue moves administration of student loans repayment rules to its new computer system from 1 April 2020.

Recommendation

That the submission be accepted.


Issue: Repayment obligations limited to loan balance

Submission

(Matter raised by officials)

Remove the requirement for pay-period repayment obligations to be limited to the loan balance. Instead, enable repayment obligations to continue until the consolidated loan balance (including unpaid amounts and interest) is repaid.

Comment

The Student Loan Scheme Act 2011 limits a borrower’s repayment obligation to their loan balance, rather than their consolidated loan balance. The consolidated loan balance includes amounts in default, whereas the loan balance excludes these amounts. These terms are defined in the Act. Occasionally, borrowers working in New Zealand may have no remaining loan balance, but because of amounts being in default, may have a consolidated loan balance remaining. In these cases, the current provisions prevent salary and wage deductions from being made to repay these outstanding amounts.

Officials recommend an amendment to allow salary and wage deductions to continue until the consolidated loan balance is fully repaid.

This change is required before Inland Revenue moves administration of student loans repayment rules to its new computer system from 1 April 2020.

Recommendation

That the submission be accepted.


Issue: Lowering the adjusted net income threshold from $1,500 to $500

Submission

(Matter raised by officials)

That the $1,500 adjusted net income threshold, below which a borrower is not required to make repayments on their adjusted net income, be reduced to $500.

Comment

The Act contains a concessionary $1,500 threshold. If a borrower has less than $1,500 of non-salary and wage income, they are not required to make any student loan repayments on this income. This threshold reflects the compliance costs associated with the requirements to file a return and/or notify Inland Revenue of any adjustments to income for student loan purposes.

From the 2018–19 tax year, most salary and wage earners will have their tax automatically assessed. Therefore, as the compliance costs associated with complying with the filing requirements have been reduced, officials recommend lowering the threshold to $500 of income, which would require $60 of repayments. This is very close to the $50 threshold for income tax owed from an automated assessment, where amounts owed of less than $50 are written off.

This would mean that a larger number of borrowers would be required to make repayments and if payments are made, would reduce the term of the loan. Where the borrower does not pay, provisions in the student loan scheme currently allow unpaid amounts of less than $334 to be capitalised back onto the loan balance. No borrowers will be subject to penalties as a result of this change if they do not make repayments when required to do so.

This change is required before Inland Revenue moves administration of student loans repayment rules to its new computer system from 1 April 2020.

Recommendation

That the submission be accepted.


Issue: Date repayment deductions are deemed to be made

Submission

(Matter raised by officials)

The date that student loan repayment deductions are deemed to be made should be changed from the 15th of the month to the employee’s payday.

Comment

Currently deductions are deemed to be made on one fixed date, the 15th of the month. This is because until 1 April 2019 Inland Revenue did not receive pay day information for all employees, and determining employees’ pay days would impose compliance costs on employers. The introduction of payday filing now enables Inland Revenue to deem deductions to be made on the employee’s payday. This should not have adverse implications for borrowers.

Officials recommend that an amendment be made to deem student loan repayment deductions be made on the employee’s payday. 

This change is required before Inland Revenue moves administration of student loans repayment rules to its new computer system from 1 April 2020.

Recommendation

That the submission be accepted.


Issue: Aligning the write-off rules

Submission

(Matter raised by officials)

Amend the Student Loan Scheme Act 2011 to enable the Commissioner to write off amounts of $20 or less.

Comment

Currently, the Tax Administration Act 1994 allows the Commissioner to refrain from collecting tax of amounts not more than $20. In the Student Loan Scheme Act 2011 the Commissioner may write off amounts less than $20. Officials recommend aligning these by changing the wording in the Student Loan Scheme Act 2011 to align with the Tax Administration Act 1994. This would provide consistency of treatment between small amounts of income tax and student loan obligation. This should not have a significant impact as it will adjust the threshold for a small balance write-off by one cent.

This change is required before Inland Revenue moves administration of student loans repayment rules to its new computer system from 1 April 2020.

Recommendation

That the submission be accepted.


Issue: Interest for New Zealand-based borrowers

Submission

(Matter raised by officials)

Remove the requirement to impose interest and then write it off for New Zealand-based borrowers, for reassessments prior to 1 April 2020.

Comment

Systems limitations have meant that New Zealand-based borrowers had interest applied to their loans and the interest was immediately written off. This has caused confusion and concern. Inland Revenue’s business transformation programme means that those systems limitations no longer exist. However, when changes are made to borrower’s loan balance after 1 April 2020 that apply to periods before 1 April 2020, the legislation technically requires interest to be imposed and written off for New Zealand-based borrowers. From a systems perspective and to improve clarity for borrowers, it is simpler to confirm that this treatment should also apply to any recalculations or reassessments on a New Zealand-based borrower’s loan before 1 April 2020. Officials propose including a savings provision to confirm this treatment.

No borrower’s repayment obligations will be affected by this change.

This change is required before Inland Revenue moves administration of student loans repayment rules to its new computer system from 1 April 2020.

Recommendation

That the recommendation be accepted.


Issue: Payment ordering rules

Submission

(Matter raised by officials)

Payments should be generally allocated against the oldest unpaid period, and within each period against interest first, then the principal.

Comment

Currently, the Student Loan Scheme Act 2011 requires that payments be offset first against interest on the loan, then against the principal. Inland Revenue’s new system has been configured so that payments are generally allocated against the oldest unpaid assessment, and then against interest before principal within each period. This treatment is generally advantageous to borrowers as it will minimise any interest they are charged.

Officials recommend that the legislation be amended to reflect the period-based allocation of payments within the new system.

This change is required before Inland Revenue moves administration of student loans repayment rules to its new computer system from 1 April 2020.

Recommendation

That the submission be accepted.


Issue: Early assessment of student loan adjusted net income

Submission

(Matter raised by officials)

Where a borrower files a valid return before the end of the tax year, a borrower’s end of year repayment obligation should be finalised before the end of the tax year.

Comment

Currently, the Student Loan Scheme Act 2011 requires that a borrower’s end-of-year repayment obligation on their adjusted net income cannot exceed their loan balance on the last day of the tax year. In some cases, a borrower may file a return before the end of the tax year (for example, if they go overseas) and this requirement would delay Inland Revenue being able to complete this assessment. Where a return is filed earlier than the last day of the tax year, officials propose that the assessment could be completed, and the borrower’s repayment obligation should not exceed their loan balance on that day.

This change is required to enable Inland Revenue to configure the student loan rules in its new computer systems and processes which apply from 1 April 2020.

Recommendation

That the submission be accepted.


Issue: Notification of income by overseas-based borrowers applying to be treated as New Zealand-based

Submission

(Matter raised by officials)

An amendment is required to clarify that borrowers are able to notify the Commissioner of their adjusted net income at the time they apply for treatment as being physically in New Zealand or a later date.

Comment

Borrowers can apply to be treated as being physically in New Zealand if the principal reason for not being in New Zealand is included within a list of categories in the Student Loan Scheme Act 2011, for example, as part of their New Zealand employment the borrower is posted overseas. If granted, borrowers’ repayment obligations are income contingent and the loan is interest free for the relevant period. Borrowers can apply for this treatment before, during or after being absent from New Zealand.

As a condition of some of the listed reasons, borrowers must notify the Commissioner of their adjusted net income. However currently, it is unclear whether those borrowers who apply for this treatment after their absence must make a separate extension of time application, or whether they may notify the Commissioner of their income information at the time of application.

Officials recommend that the Act be amended to make it clear that a borrower can notify the Commissioner of their adjusted net income at the time they apply or at a later date if the Commissioner agrees. This change would apply from 1 April 2020.

Recommendation

That the submission be accepted.