Efficiency measures

Aligning the end-of-year repayment obligation thresholds for "pre-taxed" and other income"

(Clauses 6, 7, 10, 11, 13, 17, 37, 38, 42 and 49)

Summary of proposed amendments

The bill proposes amendments to ensure that the $1,500 threshold applies to both “pre-taxed income” and "other income" in addition to salary and wages (if any). This ensures that borrowers will only have an end-of-year repayment obligation if their income from these sources, including salary and wages (if any) is $1,500 or more over the annual repayment threshold (currently $19,084).

Application date

The amendments will apply from 1 April 2012 for the 2012–13 and later tax years.

Key features

Clause 13 replaces subparts 2 and 3 with new subpart 2. One set of rules now governs the treatment of all income that is currently dealt with in two separate sets of rules. Currently subpart 2 covers income defined as “pre-taxed income”. Subpart 3 covers income defined as “other income”. New subpart 2 amalgamates these two subparts to ensure that it applies to all New Zealand-based borrowers who derive $1,500 or more of adjusted net income for a tax year and whose income from adjusted net income and salary or wages is $1,500 or more over the annual repayment threshold.

Clause 6 amends section 4 to reflect the meaning of terms used in the Act consequential to the amalgamation of existing subparts 2 and 3 of part 2 in new subpart 2 (see paragraph above). The concepts of pre-taxed income and other income are being repealed and replaced with terms appropriate to the concept of “adjusted net income”. (Note that the concept of pre-taxed income will remain in the Act until 1 April 2014 for a limited purpose. See Losses and pre-taxed income).

Background

Borrowers who earn salary, wages and “pre-taxed income” will receive an end-of-year square-up on their "net pre-taxed income" [2]

if they earn over the repayment threshold and receive more than $1,500 of “net pre-tax income”.

In contrast, borrowers who earn business income – that is, self-employed borrowers, borrowers with rental income or borrowers required to declare their worldwide income, are required to include every dollar of non-salary and wage earnings over the repayment threshold.

Distinguishing between borrowers based on the type of income they derive is inequitable, and requires two separate systems for Inland Revenue to administer.

Therefore, the $1,500 threshold should apply to all borrowers, regardless of the type of income they earn.

As a consequence of the proposed changes, the Student Loan Scheme Act 2011 can be simplified, as there is no longer the need to distinguish between “other income” and “pre-tax income” based on the $1,500 threshold.

Retaining the current penalty interest rules on unpaid amounts

When late payment interest is charged

(Clauses 5, 36, 40 and 48)

Summary of proposed amendments

The proposed amendments repeal the rules that were to come into force on 1 April 2013 which provided the ability for late payment interest to be charged from each instalment date. Instead the current rules will be retained so that borrowers are only charged late payment interest if they fail to make full payment by the final instalment date.

Application date

The amendments will apply from the date of enactment.

Key features

Clause 36 will repeal section 221 which, but for its repeal, has the effect of amending the Student Loan Scheme Act 2011 in accordance with the provisions set out in schedule 7.

Clause 40 repeals schedule 7 consequential on the repeal of section 221. Schedule 7 introduced rules providing the ability for late payment interest to be charged from each instalment date.

Background

Most borrowers meet their repayment obligations through the deductions taken from their salary and wage income. However overseas-based borrowers and borrowers who have more than $10,000 of income that has not been deducted at source are also required to make instalment payments during the tax year.

Currently, late payment interest is only charged if full payment is not made by the final instalment date. From 1 April 2013, these rules were to change and borrowers were to be liable for late payment interest from each instalment date rather than from only the last instalment date.

When this policy was developed, it was expected that Inland Revenue would be building these rules within a new loan management system. Changing the way late payment interest is calculated in this system was only going to be worthwhile if the new loan system was in place. Since it is not, the cost of implementing the new late payment interest rules outweigh the benefits.

Therefore, late payment interest should continue to be charged from the last instalment date for borrowers who default on either their overseas-based borrower repayment obligations or interim payments. These amendments ensure that borrowers continue to be subject to the current late payment interest rules.

Re-instatement of the underestimation penalty

(Clauses 50, 51, 58 and 59)

Summary of proposed amendments

As a consequence of retaining the current rules for charging late payment interest from the last instalment date for borrowers who default, amendments are required to reinstate the underestimation penalty.

Application date

The amendments will apply from 1 April 2013.

Key features

Clause 50 adds the underestimation penalty as a defined term and adds the underestimation penalty to the definition of “loan balance” in section 4(1).

Clause 51 adds the underestimation penalty to an unpaid amount in section 5.

Clause 58 inserts new section 161A so that a borrower will be liable to pay an underestimation penalty if they have underestimated their end-of-year repayment obligation.

Clause 59 ensures the amendments currently in clauses 7 and 8 of schedule 7 remain. The effect of these changes is to add the underestimation penalty to the payment priority rules.

Background

Borrowers who are required to make interim payments have the option of estimating how much they should pay rather than relying on Inland Revenue’s calculation. Under the Student Loan Scheme Act 1992, a borrower who made an estimate that was later found to be significantly lower than their actual repayment obligation would be liable for an underestimation penalty.

The Student Loan Scheme Act 2011 repealed the underestimation penalty because charging late payment interest from each instalment date provided sufficient incentives for borrowers to make accurate estimates.

As the current late payment interest rules are being retained, then the incentive provided by the ability to charge late payment interest from each instalment date no longer applies. It is therefore appropriate to re-instate the underestimation penalty.

The amount of default late payment interest is charged on

(Clauses 36, 39(1) and 40)

Summary of proposed amendments

The effect of the proposed amendments will be to retain the current rules for only charging late payment interest on amounts in default of $334 or more.

Application date

The amendments will apply from the date of enactment.

Background

Under the Student Loan Scheme Act 2011, a borrower can have multiple unpaid amounts comprising different kinds of arrears and different periods of assessment. Each unpaid amount is liable for late payment interest if it is $334 or more.

From 1 April 2013, the meaning of “unpaid amount” was going to change. Borrowers would be charged late payment interest on all amounts in default if their total default is $500 or more.

As the student loan scheme is no longer being administered via a new loan management system, there is no benefit in moving to the new aggregate treatment of unpaid amounts.

The current rules will therefore be retained so that borrowers are only charged late payment interest if each repayment obligation in default is $334 or more.

How late payment interest is calculated and charged

(Clauses 36 and 40)

Summary of proposed amendments

The proposed amendments repeal the rules that were to come into force on 1 April 2013 which were to change how late payment interest was to be calculated and charged.

Application date

The amendments will apply from the date of enactment.

Background

Under the Student Loan Scheme Act 1992, borrowers who failed to pay their repayment obligations on time faced a 1.5% monthly penalty. This equated to an annual rate of more than 19.5%.

The new Student Loan Scheme Act 2011 reduced the monthly penalty to 0.843%, an equivalent annual rate of 10.8%. The penalty is now referred to as “late payment interest”.

Under changes included in the Student Loan Scheme Act 2011, the way penalties are applied was to change from being applied monthly charged on the day after the due date, to penalty interest calculated daily, charged and compounded monthly. These changes were to come into effect from 1 April 2013.

However, there is no longer any benefit in implementing the new rules as they primarily reflected the capabilities of a loan management system that is no longer being used. The current rules of charging late payment interest monthly the day after the due date will continue.

Retaining the current rules means that borrowers will still be charged the same penalty rate via a different calculation method.

When end-of-year repayment obligation are due

(Clauses 6, 13 and 58)

Summary of proposed amendments

The bill includes amendments to ensure that the end-of-year repayment obligation is due on the borrower’s terminal tax due date.

Application date

Clauses 6 and 13 will apply from 1 April 2012 for the 2012–13 and later tax years. Clause 58 applies from 1 April 2013 for the 2013–14 and later tax years.

Key features

Clause 6 amends section 4 and defines “terminal payment” to mean the amount that a borrower is obliged to pay in relation to an end-of-year repayment obligation.

The Student Loan Scheme Act 2011 currently aligns end-of-year payment obligations (known as “remaining repayments”) with the borrower’s interim payment dates from the 2012–13 tax year. The rules are replicated in subparts 2 and 3 respectively.

Clause 13 replaces the remaining repayment and due dates under existing subparts 2 and 3 with a single terminal payment and due date. Under new subpart 2, the terminal payment will be due in full on the borrower’s terminal tax date.

Clause 58 updates the payment priority rules that take effect from 1 April 2013 to reflect the single terminal payment date.

Background

Under the Student Loan Scheme Act 1992, borrowers’ end-of-year repayment obligations were due on their terminal tax due date – either 7 February or 7 April (for borrowers with a tax agent).

The Student Loan Scheme Act 2011 removed the requirement to pay on the borrower’s terminal tax due date and aligned the payments (known as “remaining repayments”) with the borrower’s interim payment dates. For most borrowers these are 28 August, 15 January and 7 May to align with provisional tax due dates.

The spreading of end-of-year repayment obligations over three instalments was intended to reduce compliance and administration costs by removing the terminal tax due date for student loans and to make use of the existing interim payment dates.

In hindsight, the potential reduction in compliance and administration costs may not be as great as previously thought. This is because most borrowers will still have to pay income tax on the terminal tax due date, so any compliance savings are reduced. In addition, the new rules are proving complicated to communicate to borrowers.

Therefore, the end-of-year repayment obligation will revert back to being due on the borrower’s terminal tax due date.

Aligning interim payment dates for six-monthly GST filers

(Clause 13)

Summary of proposed amendment

The proposed amendment ensures that borrowers who file GST returns six-monthly continue to make interim payments over three instalments. For these filers the interim payment due dates will not be aligned with their provisional tax due dates.

Application date

The amendment will apply from 1 April 2012 for the 2012–13 and later tax years.

Key features

New subpart 2, introduced by clause 13, does not carry forward the sunset provision in section 97(4), which has the effect of ending the requirement for borrowers who are registered for GST to pay for their interim payments in three instalments. This means borrowers who file GST returns six-monthly will continue to be able to make their three interim payments separately from their two instalments of provisional tax.

Background

Borrowers who have a repayment obligation for a tax year that is more than $1,000 are required to make interim payments.

Under the Student Loan Scheme Act 2011 most borrowers pay their interim payments on the same dates that their provisional tax is due. Borrowers who filed GST returns every six months were an exception; these borrowers paid their provisional tax in two instalments (usually 30 September and 31 March). They were also required to pay their interim payments over three instalments (usually 28 August, 15 January and 7 May).

From 1 April 2013, the interim payment due dates for a borrower who files their GST returns every six months were to be aligned with their six-monthly provisional tax due dates.

Approximately 650 to 750 borrowers will be both interim payers and six-monthly GST filers. Although there were tangible benefits of aligning these dates for both Inland Revenue and borrowers under the previously proposed loan management system, the cost of building this ability with Inland Revenue’s existing FIRST system for a small number of borrowers outweigh the benefits.

Overseas-based borrowers with New Zealand salary and wage income

(Clauses 52 and 53)

Summary of proposed amendments

The proposed amendments will ensure that all salary and wage deductions will be treated as satisfying the borrower’s repayment obligation on a pay-period basis regardless of whether the borrower is New Zealand-based or overseas-based.

Application date

The amendments will apply from 1 April 2013 for the 2013–14 and later tax years.

Key features

Clause 52 will repeal section 117 which allowed deductions to be treated as standard payments and offset against overseas-based borrower repayment obligations.

Clause 53 amends the definition of “obligations” so that standard deductions for overseas-based borrowers are included as obligations and therefore do not contribute to excess repayments.

Background

The Student Loan Scheme Act 2011 contains tests to determine whether a borrower is overseas-based or New Zealand-based. These tests are important as they determine whether interest should be charged. Borrowers who leave New Zealand and who do not return for 184 days are considered to be overseas-based. An overseas-based borrower only becomes New Zealand-based if they have been physically present in New Zealand for 183 days. Any change to the borrowers status is backdated to when the borrower left or returned to New Zealand.

Some borrowers earn New Zealand salary and wages while they are considered to be overseas-based. This typically happens if they return to New Zealand for a short period (less than 183 days) and take up casual work or when they return permanently and start to earn salary and wages during the 183-day qualifying period.

Any repayment deductions taken from an overseas-based borrower’s New Zealand salary or wages are treated as regular payments towards the borrower’s loan and can be used to pay off their overseas-based borrower obligation.

This treatment differs from the way that salary and wages are treated for New Zealand-based borrowers. Repayment deductions taken from New Zealand-based borrowers are considered to satisfy the New Zealand repayment obligation for that income and, barring significant errors, are not offset against other obligations.

The treatment of salary and wages earned by an overseas-based borrower is further complicated when an overseas-based borrower permanently returns to New Zealand and finds paid employment. These deductions are treated as regular payments and offset against the overseas-based borrower obligation, as the borrower is still considered to be overseas-based. However, once the borrower passes the 183-day test and becomes new Zealand-based, their repayment deductions are retrospectively considered to be standard deductions.

The rules governing full and final repayment deductions should apply consistently to all salary and wage income earned in New Zealand, regardless of whether that income is earned by a New Zealand-based or overseas-based borrower.

The effect of simplifying these rules means that overseas-based borrowers who earn New Zealand salary and wages will have their salary and wage deductions treated as full and final.

Late filing penalties for worldwide income declarations

(Clauses 24 and 25)

Summary of proposed amendments

The proposed amendments will repeal the late filing penalties on declarations of worldwide income.

Application date

The amendments will apply from 1 April 2012 for the 2012–13 and later tax years.

Key features

Clause 24 will amend section 155 to ensure that the late filing penalty no longer applies for borrowers who do not declare their worldwide income by the required date.

Background

From the 2012–13 tax year, borrowers who are overseas but who are treated as being New Zealand-based will need to make a declaration of their worldwide income to Inland Revenue so that their repayment obligations can be assessed.

The Student Loan Scheme Act 2011 introduced late filing penalties for these declarations. The penalty was to act as an incentive for borrowers to comply with their obligation to declare their worldwide income.

There are approximately 400 borrowers who will need to file a declaration of their worldwide income. Implementing a new late filing penalty is not justified given the small number of borrowers involved.

The Student Loan Scheme Amendment Act 2012 included an amendment allowing Inland Revenue to revoke the exemption from being treated as overseas-based if the borrower does not meet their filing requirements. This effectively acts as a deterrent as borrowers would then lose their interest-free status.

Losses and pre-taxed income

(Clauses 6 and 13)

Summary of proposed amendments

The Student Loan Scheme Amendment Act 2012 introduced amendments to exclude investment and business losses such as rental losses from the calculation of net income for student loan repayment purposes. The income and expenditure from an activity which results in a net loss should be ignored when calculating the net amount earned from both “other income” (business income) and pre-taxed income (for example, interest and dividends).

The proposed amendments delay the application of measures that ensure borrowers cannot offset a loss from pre-taxed income when calculating their repayment obligation until the 2014–15 tax year.

Application date

The amendments will apply from 1 April 2012 for the 2012–13 and 2013–14 tax years.

Key features

Clause 13 will amalgamate subparts 2 and 3 of part 2 into new subpart 2. New subpart 2 will apply to all New Zealand-based borrowers who derive $1,500 or more adjusted net income for a tax year and whose income from adjusted net income and salary or wages is $1,500 or more over the annual repayment threshold. As a consequence there is no longer the need to continue with the concept of “pre-taxed income”.

However, new section 73(5) has the effect that for a two-year period until 1 April 2014, the definition of “pre-taxed income” remains and the adjustments specified in subsections (2) to (4) do not apply to borrowers who derive pre-taxed income or a mixture of pre-taxed income and salary and wages. From 1 April 2014 the amendments contained in part 3 will come into force and the definition of “adjusted net income” will be replaced with the new broadened definition of “income” (see clause 64).

Background

Borrowers who incur losses will no longer be able to offset those losses against another source of income to reduce their income on which the repayment obligation is based. This change was announced as part of Budget 2011 and was enacted in the Student Loan Scheme Amendment Act 2012.

End-of-year repayment obligations are calculated by a number of processes. Borrowers with business or rental income file IR3 tax returns. Borrowers who are salary and wage earners with $1,500 or more of income from interest or dividends (pre-taxed income) make pre-taxed income declarations.

It is technically possible, although very uncommon, for a borrower who makes a pre-tax income declaration to incur a loss. This could occur, for example, if a borrower borrowed money to buy shares to derive income and the interest expense was larger than the dividend returned for the year, which would result in a loss. Based on 2011 information, approximately six borrowers are in this situation each year.

The definition of “income” for student loans is being broadened with effect from the 2014–15 tax year (see Definition of “income” for student loan repayment purposes). To accommodate this change, the IR3 tax return and pre-taxed income declaration require significant modification. Administratively, it is more efficient to delay the application date of the loss exclusion policy for borrowers who incur a loss from pre-taxed income until the 2014–15 tax year.

Notifying borrowers of excess repayments

(Clauses 20 and 21)

Summary of proposed amendments

The proposed amendments remove the requirement to notify borrowers of excess repayments if they are predominately salary and wage earners or overseas-based from the 2012–13 tax year.

Application date

The amendments will apply from the date of enactment.

Key features

Clause 20 will amend section 120 to ensure that the Commissioner’s obligation to notify a borrower of an excess repayment only applies if the borrower is a New Zealand-based borrower who has income other than, or as well as, salary or wages.

Clause 21 will amend section 132 to ensure that if a borrower has made an excess repayment and has not been notified of it, they retain the option of having the repayment refunded. This is achieved by requiring borrowers to make the choice either six months from the date they are notified or six months after the end of the tax year that the excess payment is for, or six months from the day after the due date of the final instalment of an overseas-based repayment obligation for a tax year, whichever is later.

Background

If a borrower pays more than they are required to pay during the tax year, Inland Revenue is required to notify them in writing that they have made an excess repayment. The borrower can then choose whether they wish to have the excess refunded or leave it on their loan balance (meaning they will pay off their loan sooner).

For borrowers who earn salary and wages, their repayment obligation is met through repayment deductions. Overseas-based borrowers have their repayment obligations set at the beginning of the tax year. Any excess repayment for these borrowers will be the result of a conscious decision to pay more towards their loans. There seems to be little benefit in notifying these borrowers that they have made an excess repayment and offering a refund.

These borrowers can still request a refund provided they contact Inland Revenue within six months from the end of the tax year.

The process where employer errors are detected and borrowers are notified of any significant over-deductions will continue, so that borrowers are protected from inadvertent overpayments. Equally, borrowers making interim payments based on a previous year’s obligation, or borrowers subject to an end-of-year square-up will continue to be notified if they have paid more than is necessary.

 

2Pre-taxed income includes interest, dividends, taxable Māori authority distributions, salary or wages from employment as a casual agricultural employee, and salary or wages from employment as an election day worker.