Minor technical issues
The following matters are proposed by officials to deal with minor drafting issues.
Issue: Definition of “other income”
Clause 4
Submission
Two problems have been identified with the definition of “other income” in clause 4 of the bill. They are:
- The definition of “other income” applies only to borrowers who file returns or notify the Commissioner of their worldwide income. However, the intent was that the definition of “other income” would also apply to borrowers who are required to file returns or required to notify the Commissioner of their worldwide income under the bill but fail to do so.
- A further change is required to the definition of “other income” in clause 4 to remove the reference to the term “annual gross income” and replace it with the term “net income”. Not all references in the bill to the term “annual gross income” were correct and were previously changed to refer to net income. However, this change was omitted.
Recommendation
That the definition of “other income” be amended accordingly.
Issue: Definition of “pre-taxed income”
Clause 4
Submission
The definition of “pre-taxed income” in clause 4 should be changed to remove paragraph (d) which refers to personal services rehabilitation payments. These payments are made by ACC to attendant carers of disabled persons. These payments do not need to be included in the definition of “pre-taxed income” as attendant carers are required to file a return, and are treated as other income earners once their income goes over $14,000 a year.
Recommendation
The definition of “pre-taxed income” be amended accordingly.
Issue: Commissioner cancelling a special deduction rate
Clause 42
Submission
When a borrower has two jobs and their income from their main job is under the repayment threshold, the Commissioner can issue a special deduction rate to the borrower for their second job to take account of the unused repayment threshold on their main job.
Clause 42 of the bill requires the employer to continue to apply the special deduction rate until the Commissioner notifies the employer otherwise. There is no requirement for the Commissioner to notify the employer in writing.
A special deduction rate can also be issued if the borrower is in hardship or if they derive other income or has a loss for the tax year. In these instances, if the Commissioner cancels the special deduction rate, he must notify the employer in writing. To correct this legislative oversight, officials propose that clause 42 be amended to require the Commissioner to provide notification to the employer in writing.
Recommendation
That the submission be accepted.
Issue: Application date of clause 57
Clause 57
Submission
Clause 57 requires the Commissioner to inform borrowers of the significant over-deduction threshold before the commencement of the income year. However, as a result of a legislative oversight, this clause does not come into force until 1 April 2012 and therefore borrowers will not be able to be informed of the threshold in the first year.
Officials propose the bill be amended so that clause 57 applies from the date of assent to enable Inland Revenue to advise borrowers before 1 April 2012.
Recommendation
That the submission be accepted.
Issue: Definition of “annual gross income” in clauses 4 and 106
Clauses 4 and 106
Submission
As currently drafted, the references to “annual gross income” in clause 106 would impose a greater liability on non-tax resident New Zealand-based borrowers than they would face as a tax-resident New Zealand-based borrower by imposing repayment obligations on their gross income instead of their net income (after expenses). To address this, officials propose that a number of minor changes be made to clauses 4 and 106 to ensure that non-tax resident New Zealand-based borrowers’ repayment obligations are based on their net income (after expenses) as occurs for tax-resident New Zealand-based borrowers.
Recommendation
That the submission be accepted.
Issue: Assessing overseas-based borrowers
Clause 101(1)
Submission
The bill provides that Inland Revenue assesses the borrower’s overseas-based repayment obligation as soon as practical after being notified by the borrower that they intend to be overseas-based or as soon as Inland Revenue becomes aware that the borrower is overseas-based.
Officials now consider that changing a borrower’s status at the point they go overseas and prior to meeting the overseas-based criteria of being absent for a continuous period of 184 or more days, is problematic. The borrower will be liable for repayment obligations when they could in fact return to New Zealand within the 184-day period and these obligations would need to be reversed. Additionally, these borrowers would have an overseas-based repayment obligation assessed, but would not be subject to interest until they met the 184-day period.
Instead officials propose that clause 101(1) be amended so that Inland Revenue will only assess the borrower’s overseas-based repayment obligations when it is aware that the person has fulfilled the overseas-based criteria. This will reduce compliance costs for borrowers.
A further change is required to remove the requirement to include overseas-based interest on repayment obligations payable by overseas-based borrowers in their final year. Currently, borrowers’ repayment obligations for the year are limited to the loan balance on 31 March of the previous year. As a result, they pay off what they have been advised to pay for the year but due to the interest charged for the year this leaves a small amount owing, which leads to a repayment obligation in the following year. Previously, officials recommended that interest be included in the repayment obligations payable during the year. However, this method is not accurate in all cases and can lead to overpayments if the loan is paid off part-way through the year. To reduce the extent to which over- or underpayments occur, officials now consider that including interest in the calculation for the repayment obligation adds increased complexity and instead recommend that the overseas-based interest not be included in the calculation of repayment obligations for the final year as currently occurs under the Student Loan Scheme Act.
Recommendation
That the submission be accepted.
Issue: Ability to change the repayment obligations and thresholds of overseas-based borrowers by Order in Council
Clause 102
Submission
There is inconsistent treatment between the method used to set the repayment amounts and thresholds for overseas-based borrowers and New Zealand-based borrowers. The legislation should be consistent for both groups of borrowers.
Comment
New Zealand-based borrowers’ repayment threshold (currently $19,084) and the repayment percentage (currently 10 percent) can be changed by regulation. However, the repayment amounts and repayment thresholds for overseas-based borrowers can only be changed by legislation.
To ensure the legislation is consistent between the process for setting repayment amounts and thresholds between New Zealand-based and overseas-based borrowers, officials propose an amendment to enable the repayment amounts and repayment thresholds that apply to overseas-based borrowers to be changed by way of regulation.
Recommendation
That the submission be accepted.
Issue: Reflecting the excess repayment bonus and administration fee in overseas-based borrower’s repayment obligations
Clauses 102(5) and 203(2)(a)
Submission
An overseas-based borrower’s repayment obligation for a year is based on the loan balance at the previous 31st of March. However the legislation is unclear on whether the loan balance at 31 March is adjusted for any excess repayment bonus credited or any administration fee charged.
To ensure the loan balance reflects the imposition of any administration fee charged or the crediting of any excess repayment bonus, officials recommend that the provisions in the bill that deal with an overseas-based borrower repayment obligation be amended to take account of these two transactions.
Recommendation
That the submission be accepted.
Issue: Commissioner refraining from collecting small amounts of remaining repayments
Clause 136
Submission
The Student Loan Scheme Act 1992 enables Inland Revenue to refrain from collecting small amounts of repayment obligations, including terminal repayments (now referred to as “remaining repayments” in the bill). This provision has been retained in the bill but an oversight has resulted in the reference to remaining repayments being omitted from the list of repayment obligations which Inland Revenue can refrain from collecting.
Officials propose that clause 136 be amended so Inland Revenue does not have to collect total remaining repayments for a tax year that are less than $20.
Clause 136 also provides a threshold below which small amounts are not collected. This threshold is meant to refer to amounts less than $20, which is consistent with other provisions in the bill. However, the current wording incorrectly refers to small amounts of $20 or less to be written off. Officials propose that clause 136(1) be amended to correctly refer to amounts of less than $20.
Recommendation
That the submission be accepted.
Issue: Commissioner may grant relief
Clause 138(3)
Submission
If a borrower is unable to pay any late payment interest charged, they can apply to have the interest cancelled. When the interest is cancelled, any action that occurred as a result of imposing the interest is reversed.
However, as a result of cancelling the interest charged, if the borrower has excess repayments over and above their liability, the bill incorrectly provides for the amount to be refunded. This is not in keeping with the rest of the bill, which requires the excess to be first offset against late payment interest and then any unpaid amount. Any remaining amount is either credited to overseas-based interest and the loan balance, or refunded.
Officials therefore propose that clause 138(3) should be amended to provide for any relief from late payment interest granted to be used to reduce late payment interest, then against any unpaid amount. Any excess should be either applied to overseas-based interest, then the loan balance or be refunded.
Recommendation
That the submission be accepted.
Issue: 30-day grace period to pay outstanding amounts
Clause 190
Submission
Under the Student Loan Scheme Act 1992, interest is calculated and charged daily on the amount outstanding. To provide some certainty to borrowers when making a payment, borrowers have 30 days from when a notice is issued to pay the amount outstanding in full, and any daily interest that has accrued between the date of notification and the date of final payment will be written-off.
The bill changes the way that interest is charged. In future, interest will be calculated daily, charged monthly (at the end of the month) and compounded annually. This change provides certainty to borrowers of the amount owed and how long they have to pay the outstanding amount before interest is charged. For example, if interest is charged on the 30th of the month, on the 20th the borrower will have 10 days to pay before the next interest is charged. Once interest is charged on the 30th, the borrower will have another month before the next interest is charged.
A legislative oversight has meant that the 30-day grace period provided in the Student Loan Scheme Act 1992 has been retained in the bill. If the provision is retained in addition to the changes made to charge interest monthly, the grace period would be up to 60 days from the date of the notice being issued. This was not the intended outcome.
Officials therefore propose that clause 190, which provides the 30-day grace period, should be removed.
Recommendation
That the submission be accepted.
Issue: Provisions of the Tax Administration Act and Income Tax Act that apply to this bill
Clause 196
Submission
Four amendments should be made to clause 196, which deals with provisions in the Tax Acts that apply to the Student Loan Scheme Bill. The first is to remove the reference to “Returns and assessments” from the title of the clause. This clause refers to a number of provisions in the Income Tax Act and the Tax Administration Act, not just to returns and assessment provisions, so these words should be removed from the clause title.
The second amendment proposed by officials is to insert a new paragraph to ensure that the return provisions of the Income Tax Act and Tax Administration Acts apply to a declaration of pre-taxed income or a notification of worldwide income under the bill. This link was overlooked in drafting the bill.
The third proposed change relates to paragraph (a) of clause 196. The Income Tax Act provisions that apply to the bill refer to both “taxpayer” and a “person”. However, this clause only refers to a “taxpayer” when cross-referencing the Income Tax Act. Officials propose this clause be amended to refer to both “taxpayers” and “persons”.
Finally, three cross-references to the Income Tax Act should be included in the bill. The Student Loan Scheme Act 1992 Act limits the period when a borrower can apply for a refund. Currently, borrowers have up to eight years to have a repayment obligation reassessed if it will result in a refund. This provision was inadvertently omitted from the bill. Officials therefore propose that clause 196 be amended to refer to the relevant refund limitation provisions of the Income Tax Act.
Recommendation
That the submission be accepted.
Issue: Electronic communication
Clauses 204 and 205
Submission
Clauses 204 and 205 of the bill provide for the borrower and Inland Revenue to communicate with each other by electronic means, and also to override the requirements in the Electronic Transactions Act 2002 to seek the borrower’s consent before communicating with them electronically.
There are two section references to the Electronic Transactions Act that have been omitted from clauses 204 and 205 of the bill. The references are to section 6 of the Tax Administration Act 1994, which refers to the responsibility of Ministers and officials to protect the integrity of the tax system, and section 20 of the same Act which deals with seeking a person’s consent before communicating with them electronically.
Recommendation
Officials recommend that clauses 204 and 205 be amended accordingly.
Issue: Requirement to receive a personal tax summary
Schedule 8
Submission
With student loan deductions being finalised on a pay-period basis and the removal of the end-of-year square-up, the requirement in the Tax Administration Act for borrowers to receive a personal tax summary is no longer required. Accordingly, it is therefore proposed that section 33A(1)(g) of the Tax Administration Act be repealed.
Recommendation
That the submission be accepted.
Issue: Extension of time to make a declaration of pre-taxed income
Clause 68
Submission
The bill enables a borrower to apply to the Commissioner for an extension of time to file a pre-taxed income declaration. The due date for the declaration is the extended timeframe to file.
However, the bill does not provide a due date for an extension of time to file a declaration without the borrower having applied for one. Officials propose that when an extension of time to file a pre-taxed declaration is provided by the Commissioner without the borrower applying for it, the due date should be the extended timeframe for the declaration.
Recommendation
That the submission be accepted.
Issue: Rounding of payments when instalments are not divisible into equal amounts
Submission
The provisions in the bill that calculate remaining repayments for a borrower’s pre-tax repayment obligation or other income repayment obligation and instalments of overseas-based repayment obligations do not provide for when these payments cannot be divided into equal amounts.
When this situation occurs for provisional tax, the final payment carries the difference. Officials propose that a similar provision be included in the bill and apply to interim payments, remaining repayments, and instalments of overseas-based repayment obligations that are not divisible into equal instalments.
Recommendation
That the submission be accepted.
Issue: Charging the administration fee
Clause 181 and schedule 7
Submission
The policy intent is that the administration fee is to be imposed on the closing balance of the account on 31 March, to enable payments and any interest charged to be taken into account. However, the administrative impact of this is that the administration fee will be imposed based on the loan balance at the close of the business day on 31 March and charged with an effective date of 1 April. The administration fee will be shown in Inland Revenue statements and the website as having been imposed on 1 April. The bill will need to be amended to reflect this administrative process.
Recommendation
That the submission be accepted.
Issue: Provisions which restrict refunds of voluntary payments made before 2006
Submission
Sections 57A and 57D of the Student Loan Scheme Act 1992 have been inadvertently omitted from the bill. These provisions prevented borrowers from receiving interest write-offs on refunds for the 2005 and 2006 tax years as a result of the removal of interest on New Zealand-based borrowers.
Officials propose that this policy is not carried forward into the bill as it would be difficult to implement for what would only be a two-year application period and affect a minimal number of borrowers. Instead, officials propose that a change be made to the Student Loan Scheme Act 1992 and to the bill to restrict the refunding of repayments made during the 2005 and 2006 years to prevent future refunds that will be subject to the current policy. This provision will only be required for the 2012 and 2013 tax years as the statute bar will apply after this period to reassessments.
Recommendation
That the submission be accepted.
Issue: Small amounts of unpaid and uncollected repayment obligations
Schedule 6, clause 6
Submission
Under the Student Loan Scheme Act, amounts under $334 for each tax year which were not paid, were treated as unpaid debts but no late payment penalties were imposed. To transition these amounts into the structure of the current bill, these amounts should be added back to the loan balance, rather than treating them as unpaid amounts (with no interest imposed). If the borrower is New Zealand-based, no interest should be imposed on these amounts. If a borrower is overseas-based, the amounts added back to the loan balance should be subject to interest.
This treatment will reduce Inland Revenue’s administration costs and be easier for borrowers to understand.
Recommendation
That the submission be accepted.
Issue: Care and management
Clause 215 and schedule 8
Submission
When introduced, the care and management provisions in the Tax Administration Act were meant to have a wide application to the Student Loan Scheme Act 1992.
However, the current application of the care and management provisions to the Student Loan Scheme Bill relies on finely balanced arguments around what is considered to be a “repayment obligation”. This creates an unintended risk that the Commissioner’s decisions may be challenged in the future.
To address this, officials propose that a consequential amendment be made to the Tax Administration Act to clarify what is meant by repayment obligations for student loan purposes.
Recommendation
That the submission be accepted.
Issue: Cross-references and other minor issues
Submission
A number of cross-references in the bill either need updating or have been omitted, and minor wording changes are needed to ensure consistency throughout the bill and to give effect to the original intent. These changes will not change the policy intent and officials propose that these changes be made.
Recommendation
That the submission be accepted.