Changing the basis of assessment for borrowers with salary or wage income

Clause 32

Submissions

(Lenore Bamfield, NZ Union of Students’ Associations, Whitireia Community Law Centre, Auckland University Students’ Association)

Currently, the same repayment obligations apply to all New Zealand-based borrowers – that is, the repayment obligation is 10 percent of the borrower’s annual net income that exceeds the repayment threshold (currently $19,084).

The bill proposes to have different repayment obligations for different classes of New Zealand-based borrowers, namely:

repayment deductions from salary or wages which generally will be determined on a pay-period basis;
repayment obligations on pre-taxed income is determined on an annual basis and applies when this income exceeds $1,500; and
repayment obligations on borrowers with other income is determined on an annual basis and is based on the borrower’s taxable income.

The four submitters were against changing the basis of assessment from an annual assessment to a pay-period assessment for borrowers who have salary and wage deductions made. Their view was because of potential negative effects on borrowers, particularly those with irregular or part-time employment, and students. Although the pay-period assessment basis may benefit borrowers in the long term submitters say it may not benefit borrowers in the short term, and may lead to borrowers undertaking non-compliant actions to reduce their liability. The submitters say there could also be a disincentive for students seeking full-time work during non-study periods, which could lead to increased borrowing or reduced income available to students for their next period of study. (Lenore Bamfield, NZ Union of Students’ Associations)

The NZ Union of Students’ Associations questions whether the change in the basis of assessment is necessary as part of an efficient student loan administration and suggest if the improvements should not come at the disadvantage or cost to borrowers. The submitter says the compulsory pay-period basis of assessment for salary or wage earners should be removed and replaced by borrowers having the choice over whether they want to apply the pay-period basis of assessment. (NZ Union of Students’ Associations)

The submitter says due to the different basis of assessment proposed in the bill, borrowers on the same total income may face different repayment obligations depending on the sources of that income. Some borrowers will have assessments and others will not and only borrowers with other income will be able to have small overpayments (below the significant overpayment threshold) refunded. (Lenore Bamfield)

The same submitter also refuted the following grounds for the changes in the bill:

that the current system is complex;
that they provide certainty for salary and wage earner borrowers;
that the pay period is a better basis of assessment for salary and wages than current annual system;
that the majority of overpayments are currently offset against a borrower’s loan balance; and
that the changes will result in shortened repayment times.

The following table summarises the submitter’s comments on each of these points and officials’ responses.

Justification for change	Submitter’s comment	Officials’ response
Complexity	The current system of an annual assessment process for all borrowers is already simple.	Retaining the current system still requires borrowers to file and IRD to assess returns. This does not reduce compliance and administration costs.
	The proposed system is complex – for example, there are two formula is to establish a pre-taxed assessment.	The proposed system may seem legislatively complex with different calculations required in different circumstances (for example, pre-taxed assessment). However, borrowers will only have to provide data and Inland Revenue will perform the calculations.
	Moving to an electronic environment would reduce complexity with an end-of-year square-up.	Under the proposal, borrowers with only salary or wage income will be removed from the requirement to file, with any small overpayments applied to the loan balance and under- payment not collected. Retaining the assessment basis and moving to electronic filing may reduce but would not remove compliance or administration costs.
	The requirement for students applying for the full-time, full-year repayment exemption will increase their compliance costs.	Although there are compliance costs involved with students applying for the repayment exemption, the cost of students responding to current requests to apply the SL deduction code would reduce.[1]
Certainty	If the PAYE system is working properly then large numbers of borrowers would have their repayments correctly deducted (within a $20 threshold).	Increasing the accuracy of the PAYE system alone will not address the situation when a borrower’s income fluctuates. This would still require an end-of-year assessment. Retaining the annual square-up will not reduce compliance or administration costs.
Pay-period vs annual basis of assessment	Not allowing student loan liabilities to be spread over the year could lead to hardship. However, relief is only available for serious financial hardship.	Currently if a borrower does not qualify for serious financial hardship, they have to wait until after the end of the year to receive a refund. The current relief in the form of a refund is not timely.
Pay-period vs annual basis of assessment	The proposal in the bill creates an inconsistent treatment between borrowers on the same income but who derive salary or wage income compared with those who derive other income.	Instead of grouping all borrowers together, the proposals try to segment borrowers into groups to reduce compliance costs for some classes of borrowers, where appropriate – that is, borrowers with salary or wages only. There is consistency within the group but not between groups of borrowers both in the current Student Loan Scheme Act 1992 and the bill. However, under the bill borrowers with salary or wage income have their repayment obligation determined on a pay-period basis. This enables both compliance and administration costs to be reduced.
Majority of overpayments currently offset against loans	Borrowers may not be advised they may have a refund – leading to low levels of refunds.	Previously Inland Revenue did not notify borrowers of potential overpayments (by way of a personal tax summary). There were 18,000 such borrowers affected in 2010 – approximately 5 percent of salary or wage borrowers. Inland Revenue has changed its policy and in the current year will provide advice to borrowers who have a potential overpayment. This will address the submitter’s concerns.
Shortened repayment times	In an interest-free environment, applying overpayments to the loan may not be in the borrower’s best interest. This money may be needed to meet current needs.	If the amounts are over a threshold (yet to be determined) the overpayment will be available for refund.

Comment

The current annual system has a number of problems. They are:

an annual basis of assessment where accuracy is achieved only at year-end;
inaccurate deductions during the year lead to end-of-year debts and refunds;
there is no incentive to ensure correct deductions are made during the year:
- Inland Revenue has limited resources to review every borrower;
- borrowers can benefit by deferring payment;
- employers may not be required to fix mistakes (not all mistakes are able to be checked during the year so are addressed at year-end);
- Inland Revenue undertakes annual assessments, follows up debts, and handles end-of-year contacts.

Under the pay-period proposal:

Inland Revenue resources will be shifted from undertaking the annual assessment and collecting large debts to ensuring deductions made during the year are correct (as far as possible).
Under the pay-period basis of assessment, greater accuracy would be achieved each payday and therefore the borrower has certainty of liability or over-deduction sooner.
Any resulting debt/overpayment will be smaller and occur for shorter durations – enabling certain tolerances to be applied.
If significant errors occur in a pay-period deduction, these can be considered for refund or recovery.
If an overpayment is not a significant amount but would cause hardship, Inland Revenue can provide relief and refund the amount to the borrower.
Inland Revenue will have the ability to move resources from the current end-of-year assessment processes to provide better services to borrowers during the year.
Borrowers’ compliance costs will fall as they will no longer be required to square-up their repayment obligations.

Twelve examples were provided in the submission by Lenore Bamfield. These examples can be grouped into five categories as outlined in the following table, along with officials’ responses.

Submitter’s examples	Officials’ response
Income which fluctuates under and over the repayment threshold. This results in too much being deducted on an annual basis.	Under the proposal, resources are put into ensuring pay-period deductions are correct (within certain tolerances). Amounts deducted for a pay-period would be a borrowers’ liability (providing certainty of liability during the year). Significant over- or under deductions that occur will either be collected/refunded if they are significant or ignored if below the threshold. This process will occur throughout the year. Any small overpayments (not considered significant) will be applied to the loan balance – which is to the borrower’s advantage. Relief is available if the borrower experiences hardship.
Lump sum payments received (such as redundancy, retiring, or bonus payments) results in over-deductions.	Same comments as above.
Full-time study but for only part of the year (commencing or ceasing study part-way through the year) does not qualify for the repayment exemption.	Officials agree with the submitter and an amendment is proposed below on the exemption applying to students who are undertaking full-time study for part of the year.
Deductions from secondary income (Inland Revenue’s existing practice is not in keeping with the proposed legislation).	The bill resolves this by clarifying that borrowers are required to have deductions made during the year on secondary income and enables a borrower to apply any unused repayment threshold from their primary income to their secondary income.
There are different treatments for borrowers with salary and wage income and borrowers with other income.	Borrowers with other income are different from salary and wage income earners and are currently treated differently (for example, they have losses, expenses to deduct and have a different repayment system during the year). The bill continues to treat these two classes of taxpayer differently.

Recommendation

The issue of students studying full-time for only part of the year, is dealt with later in this report. With regard to the rest of the submissions it is recommended that they be declined.

1 Inland Revenue undertakes checks of borrowers with salary and wage income to ensure they are applying the correct deduction code. As Inland Revenue is not currently aware whether a borrower is currently studying and therefore not liable the department therefore contacts borrowers seeking to change their deduction code to SL (requiring student loan deductions).