Matters raised by FEC

At the Committee’s meeting on 8 February the Committee raised a number of questions about the bill. Officials’ responses to these questions are outlined below.


Submission

(Finance and Expenditure Committee)

The Committee asked how the student loan repayment threshold is set.

Comment

The student loan repayment threshold is currently $19,084 and set by the Student Loan Scheme Act 2011. The threshold applies for the tax year commencing on 1 April 2012. The threshold can be changed by way of a legislative amendment or by regulation.

Until the 2005–06 tax year, the student loan repayment threshold was set relative to the Domestic Purposes Benefit rate for a sole parent with two children. The threshold was then inflation-adjusted based on the movement in the Consumer Price Index until 2009. The Government has decided to hold the repayment threshold at the current level of $19,084 until 2015.

The rationale for retaining the current threshold was to increase repayments and increase the value of the interest-free Student Loan Scheme.

Recommendation

That the submission be noted.

 

Submission

(Finance and Expenditure Committee)

The Committee asked for further clarification on how excluding losses from the calculation of income for student loan repayment purposes will impact on borrowers, and specifically on a borrower who is in business for the first six months, who makes a loss, and then derives salary and wages during the last part of the year.

Comment

The bill proposed two changes to the way repayment obligations are calculated for borrowers who have income other than salary, wages and New Zealand-sourced investment income (“other income”).

First, a borrower who has a loss from a business or investment activity will not be able to use that loss to offset other income and thereby reduce their repayment obligation.

 When a borrower undertakes two or more similar or related businesses or investment activities – for example, a landscaping business and a lawn-mowing service, or a café and a catering business, the activities can be combined and treated as a single endeavour. This would mean that losses could be offset against income earned from similar or related activities. This provision is also found in the legislation that excludes losses from the calculation of income for Working for Families.

Secondly, borrowers who receive “other income” as well as a salary or wage will no longer have their salary or wage repayment obligations calculated on an annual basis. Instead, they will shift to pay-period assessments.

From 1 April 2012 student loan borrowers with salary, wage and New Zealand-sourced investment income only (87 percent of New Zealand-based borrowers), will not have an end-of-year square-up of student loan deductions taken from their salary and wages. Rather, the amount to be paid will be assessed against a weekly, fortnightly or monthly repayment threshold. This policy is known as “pay-period assessments” and was introduced in the Student Loan Scheme Act 2011.

Pay-period assessments work on the principle that student loans should be repaid in periods when a person has the ability to do so. The following example compares pay-period assessments with the existing end-of-year square-up.

 

Example

 

Jane is paid an annual salary of $72,000. She is paid monthly and receives $6,000 each pay-period. The monthly student loan repayment threshold is $1,590.

Monthly income liable for student loans: $6,000 – $1,590 = $4,410
Monthly student loan deductions: $4,410 x 10% = $441

She works for six months during the 2011–12 tax year but stops working at the end of September. She has earned $36,000 and had $2,646 deducted for her student loan.

Under pay-period assessments, the amount deducted from monthly salary satisfies her repayment obligations. There is no further amount to pay or refund.

Under the end-of-year square-up, Jane’s repayment obligation would be assessed by taking 10c out of every dollar over the annual threshold of $19,084.

Annual income liable for student loans: $36,000 – $19,084 = $16,916
Annual repayment obligation: $16,916 x 10% = $1,691.60

Jane can request a refund of $954.40, the difference between her annual obligation and her deductions.


A borrower who has a business loss in the first part of the year and then earns salary and wage income in the second part of the year will be affected by both of the repayment obligation changes contained in the bill. This is illustrated by the following example.

 

Example

 

Joe has a small business which he operates from 1 April 2012 to 30 September 2012. He incurs a $10,000 loss during this time. During this period Joe does not have the ability to make repayments.

From 1 October 2012 to 31 March 2013 Joe is employed at an annual salary of $60,000. He receives $30,000 during this time and has the ability to make loan repayments. He has $2,046 deducted for student loans.

Under the current legislation, Joe’s repayment obligation would be assessed by taking 10c out of every dollar over the annual threshold of $19,084. His annual income would be $20,000 ($30,000 wages minus his $10,000 loss) so his annual repayment obligation would be $20,000 – 19,084 = $916 x 10% = $91.60.

Joe would be able to receive a refund of $1,954.40, the difference between his annual obligation and his deductions.

Under the pay-period assessment approach, Joe’s repayment obligation would reflect his ability to pay at different points in time. While Joe is in business he incurs a loss and does not have the ability to repay his loan. However when Joe goes into employment he has the ability to make repayments. Under the changes proposed in the bill Joe would not be able to offset his business loss against his wage income, so his liable income would remain at $30,000. His repayment obligation for the period he was earning wage income would be equal to the deductions withheld.

Recommendation

That the submission be noted.

 

Submission

(Finance and Expenditure Committee)

The Committee asked officials to provide examples of how borrowers can structure their affairs in order to reduce their student loan repayments.

Comment

Currently, borrowers are able to structure their affairs in order to reduce their student loan repayments liability. As part of Budget 2011, the Government asked officials to report to Ministers on options to address this issue. Officials are in the process of developing proposals and will shortly be reporting to Ministers.

Two examples of how borrowers can structure their affairs are outlined below.

Trustee income

Currently, the income of a trust can be taxed as trustee income at a final rate of 33% and the trust can later distribute this income to beneficiaries of the trust tax-free. While beneficiary income is taxable at the beneficiaries’ level, and therefore included for student loan purposes, the distributed trustee income is not included in the taxable income of beneficiaries.

For example, Rachel is a borrower who earns $40,000 per annum working for Rachel’s Contracting Company (the Company). Rachel is also a sole director of the Company.

The Company is wholly owned by a family trust (the Trust). Rachel is both the settlor and a trustee of the Trust. Rachel’s family are discretionary beneficiaries of the Trust.

The taxable income of the Company is $200,000, on which it pays $60,000 tax. The Trust receives a $140,000 imputed dividend from the Company. The Trust then distributes $120,000 (which has already been taxed as trustee income) to Rachel’s family.

The family receives $152,790 ($32,790 salary after tax + $120,000 distribution from the Trust) excluding WFF tax credits, but the distribution from the Trust is not counted for student loan purposes. As a result Rachel’s repayment obligation does not match the income she has had available to meet her loan obligations. If the business income of the Company were included in Rachel’s income, she would have a much higher repayment obligation.

Unlocked PIE income

Income from portfolio investment entities (PIEs) is currently not counted for student loan purposes. This exemption is appropriate for PIEs that are mainly intended to provide retirement benefits and cannot be easily accessed.

However, the exemption may not be appropriate for unlocked PIE investments which are readily available. Unlocked PIEs are where the funds are not sufficiently locked-in until a person’s retirement. Examples include cash PIEs, which are akin to on-call bank accounts, PIEs that are unregistered superannuation schemes and listed PIEs.

A borrower who chose to invest in a savings account would face repayment obligations on this income if they earned enough. A borrower who invested in an unlocked PIE would not.

Recommendation

That the submission be noted.

 

Submission

(Finance and Expenditure Committee)

The Committee asked why borrowers cannot have the repayment holiday entitlement reset once they pay off their loan and get a new repayment holiday if they take out another loan.

Comment

Government policy is that the repayment holiday is available once, rather than repeatedly.

Taking a repayment holiday tends to increase, rather than decrease, a borrower’s lifetime loan obligations, so a further entitlement to a repayment holiday would not necessary advantage borrowers over their lifetimes. It would also increase the cost to government by extending the term of the loan. The repayment holiday enables people who leave New Zealand briefly, such as for an “OE”, to prevent penalties increasing their loan balances due to missed payments while they holiday or set themselves up overseas. However, interest charges continue to apply during the repayment holiday, so that loan balances will continue to increase if the borrower makes no payments during a repayment holiday.

There is no repayment holiday for borrowers who remain in New Zealand, so if the policy was changed to provide a further entitlement to a repayment holiday, the change could be seen as inequitable to people who remain in New Zealand and have no temporary break from making loan payments.

Changes to the repayment holiday in Budget 2011 reinforce that the break from making compulsory repayments is a privilege rather than a right, and increase equity between borrowers who remain in New Zealand (and do not have any repayment holiday) and people who move overseas. These changes include the reduction in length of the repayment holiday, and the requirement to apply for the repayment holiday and provide a contact person.

Recommendation

That the submission be noted.

 

Submission

(Finance and Expenditure Committee)

The Committee asked what the impact of the three-year repayment holiday has been on borrower compliance since its introduction, and has there been enough time to properly gauge the impacts.

Comment

The Government considered that the current three-year repayment holiday provided to overseas-based borrowers was generous compared with New Zealand-based borrowers who contribute to New Zealand society and who are required to make repayments as soon as their income exceeds the repayment threshold. It therefore seemed reasonable for overseas-based borrowers to begin making repayments after a 12-month period away from New Zealand.

The first group of borrowers to come off a 3-year repayment holiday occurred in the 2010–11 tax year. These borrowers would have had a repayment obligation due in that year.

In 2011 Inland Revenue undertook research to evaluate the provision of the repayment holiday. The research concluded that the repayment holiday was not seen to have any significant influence on whether borrowers would start repaying their student loans at the end of their holiday or on whether they return to New Zealand. It also found that borrowers involved in the research had generally travelled and had casual work in the first 12 to 18 months of their “OE”, but after this they aimed to gain professional overseas experience and to remain in the one city, and have steady employment. Other research has also shown that around three quarters of overseas borrowers have income above NZ $30,000 per annum.

A recent study undertaken by KEA foundation of approximately 15,000 New Zealanders living overseas found that the major factors influencing borrowers’ decision to live overseas were the economic factors and family lifestyle. Having a student loan was not seen as significant.

Recommendation

That the submission be noted.

 

Submission

(Finance and Expenditure Committee)

The Committee asked what the revenue impact of the proposals is? What are the valuation impacts/cost of lending and what are the assumptions?

Comment

The extension of pay-period assessments is estimated to lead to an additional $5 million per annum collected through student loan deductions, which is 8 percent more than would be required for these borrowers under the current end-of-year square-up policy ($65.6 million).

These estimates are based on 2010 tax year data from borrower returns and employer monthly schedules.

The change to exclude losses from the calculation of repayment obligations affects approximately 13,000 borrowers and will increase student loan repayment obligations by an estimated $9 million per annum.

This estimate is based on 2010 tax year data from borrowers’ returns and has been adjusted for the anticipated impact of the Budget 2010 changes to depreciation which is expected to reduce losses incurred in some sectors.

The overall impact of the Budget 2011 package on the cost of lending was calculated at the time of Budget 2011 to reduce the cost of lending from the current level of 45.25 cents to 43.74 cents in the dollar, once the package is fully implemented. The impacts on the operating balance for the initiatives included in the bill are forecast to be as follows:

Table A: Operating impact of the student support package
Proposals Operating ($ million)
  2010/11 2011/12 2012/13 2013/14 2014/15 Total
Excluding (adding back) losses to income for student loan repayment purposes - -  (1.400) (1.400) (0.140) (2.940)
One-year application based repayment holiday - - - - - -
Require a contact person for all new loan applications - 0.284 0.071 - - 0.355

 The pay-period assessment was done outside the Budget process and is not included in the above figures.

Costing assumptions have been designed to be conservative, so that savings and improvements to the valuation are not overstated. In the case of the repayment holiday and contact person initiatives, that has meant that we have assumed no increase in repayments in the short term. In the case of the initiative to exclude losses from income, that has meant we have assumed the initiative has most impact in its first two years and then has a smaller on-going impact. The valuation of the Student Loan Scheme as at 30 June 2011 assumed no impact on the valuation from these initiatives.

Recommendation

That the submission be noted.

 

Submission

(Finance and Expenditure Committee)

The Committee asked what proportion of women borrowers are in default?

Comment

Of the total number of borrowers in default, 47 percent are female. The following table provides a breakdown of the number of males and female borrowers in default and the amounts in default by residence status.

    Number Amount in default
NZB Female 15,888 $38,778,074.00
  Male 17,535 $62,272,860.00
  Undisclosed 15 $54,427.00
OBB Female 21,821 $135,690,211.00
  Male 24,871 $175,510,963.00
  Undisclosed 78 $618,707.00
  Total 80,208 $412,925,243.00


Recommendation

That the submission be noted.

 

Submission

(Finance and Expenditure Committee)

The Committee asked what information is held on Inland Revenue’s examination of student loans by English language students that are in default.

Comment

Inland Revenue does not hold information on courses undertaken by borrowers. We are therefore unable to provide information on the extent to which English language students are in default.

There was a significant increase in student loan borrowing by English language students, particularly new permanent residents in older age groups, in 2007. There was a concern that new permanent residents were using student loans as income support. The Government has responded to this increase, including through:

  • Budget 2010 changes to create a stand-down period of two years for all new permanent residents, consistent with the existing stand-down period for income support; and
  • Budget 2011 changes to limit student loan borrowing to fees only for people aged over 55 years.

Officials are monitoring the impact of these changes.

Recommendation

That the submission be noted.