Matters raised by officials
REPAYMENT OBLIGATIONS FOR FIRST-TIME BORROWERS
Submission
(Matter raised by officials)
Officials recommend that the bill amend the end-of-year assessment legislation to provide that when a person becomes a new borrower after 31 December in a tax year, they are not subject to the end-of-year assessment for that tax year. This corrects an unintended consequence of the change from an annual loan transfer to a near real-time transfer of loan advances from the loan manager (StudyLink) to Inland Revenue, Repayment deductions from the salary or wages of borrowers should continue to be made from the date that borrowers first draw down a loan.
The amendment should apply from 1 April 2012 for the 2013 and future tax years.
Officials also recommend including the relief provided through the Student Loan Scheme Act 2011 (Transitional Provisions) Regulations 2012 in the current bill.
Comment
The Student Loan Scheme Act 2011 changed the law relating to when and how student loan information is transferred from StudyLink to Inland Revenue.
Previously, borrowers’ loan balances only transferred to Inland Revenue annually in February. This transfer included all of the loan advances relating to courses of study that had finished in the previous calendar year. For example, a borrower who took out a loan in February 2011 to cover their fees, and then received living costs payments throughout the 2011 year, would have all of this lending information transferred to Inland Revenue in February 2012.
From 1 January 2012 Inland Revenue has received information about every loan advance in near real-time. A borrower who took out a loan in February 2012 to cover their fees would have that loan transferred to Inland Revenue immediately.
This near real-time transfer of information between agencies gives borrowers a single view of their consolidated loan balance, rather than having amounts held by both agencies.
However this earlier transfer has had the unintended consequence that new borrowers’ repayment obligations will be calculated on the borrower’s income for the entire tax year, even when they have had the loan for a short time.
Officials consider that under the new loan transfer process, borrowers’ repayment obligations in the first tax year of becoming a borrower should be similar to what they were under the previous annual loan-transfer process. Under the annual loan transfer process, a person who became a new borrower after 31 December in a tax year would not have an end-of-year assessment for that tax year. New borrowers were still required to have repayment deductions from their salary and wages earned after they become a borrower.
The Student Loan Scheme Act 2011 (Transitional Provisions) Regulations 2012 provided relief from repayment obligations for borrowers affected by this situation for the 2012 tax year. The regulation will expire on 1 April 2015. However, the relief provided under the regulations should continue to be available after 1 April 2015 if necessary in relation to assessments for the 2012 tax year.
Recommendation
That the submission be accepted.
DEFINITION OF “ADJUSTED NET INCOME”
Clause 66 and schedule 3
Submission
(Matter raised by officials)
Recent clarifications to the definition of “family scheme income” under the Working for Families tax credit rules were not reflected in the proposed changes to the definition of “adjusted net income” for student loan purposes.
Officials recommend that these amendments to the definition of “family scheme income” also apply to the definition of “adjusted net income” for calculating student loan repayment obligations.
The amendments should apply from 1 April 2014 for the 2014–15 and later tax years.
Comment
The changes to the definition of “adjusted net income” in the bill are broadly aligned with the definition of “income” used for determining entitlement to Working for Families tax credits. Therefore it is appropriate that amendments made to the definition of “family scheme income” are reflected in the definition of “adjusted net income” for student loan purposes in the bill.
The definition of “family scheme income” has recently been amended by the Taxation (Annual Rates, Returns Filing, and Remedial Matters) Act 2012. The amendment ensures that a withdrawal made from KiwiSaver after a member has reached the date of entitlement to withdraw is not regarded as family scheme income. The amendment also ensures that early withdrawals made from KiwiSaver for a first home purchase, significant financial hardship or serious illness are also disregarded. The amendment also applies to withdrawals from complying superannuation funds.
The Taxation (Livestock Valuation, Assets Expenditure, and Remedial Matters) Bill also corrects and rationalises cross-references for the exemption of parts of overseas pensions for which the definition of family scheme income refers to. These exemptions are still relevant but their interaction with other legislation is complex and it is proposed that these are simplified. As a result, minor technical amendments to the definition of “adjusted net income” for student loan purposes are required to ensure the cross-references are correct.
Recommendation
That the submission be accepted.
SYSTEM REPRIORITISATION MEASURES
To ensure the delivery of the core policy changes in the Student Loan Scheme Act 2011, officials recommend the following changes.
Issue: Retain the existing loan interest calculation method
Submission
As the student loan scheme will continue to be administered in Inland Revenue’s existing computer system, loan interest should continue to be accrued daily and charged and compounded annually. Therefore the changes due to come into force from 1 April 2013 should be repealed. Borrowers will see no change from the current practice.
The 2011 Act introduces changes from 1 April 2013 under which loan interest will be calculated daily and charged and compounded monthly. These changes were based on officials’ expectations of how a loan management system would impose loan interest, and more closely resembles treatment of a commercial loan.
The amendment should apply from 1 April 2013.
Recommendation
That the submission be accepted.
Issue: Retain the existing interest-free loan process
Submission
As the student loan scheme will continue to be administered in Inland Revenue’s existing computer system, the current application of the interest-free loan policy by calculating interest on the loans of all borrowers and applying the interest-free write-off to the loans of New Zealand-based borrowers should continue. Therefore the changes due to come into force from 1 April 2013 should be repealed. Retaining the current regime does not financially affect borrowers, as they will continue to be charged interest if they are overseas-based and will continue to have an interest-free loan if they are New Zealand-based.
Since the introduction of the student loan scheme, interest has been calculated for all borrowers. Since 2006 the interest-free policy has been implemented by charging interest to all borrowers and writing off interest for New Zealand-based borrowers.
In anticipation of the move to a new loan management system, the 2011 Act introduced a change from 1 April 2013 under which interest would not be calculated for New Zealand-based borrowers at all.
The amendment should apply from 1 April 2013.
Recommendation
That the submission be accepted.
Issue: Re-instate the under $20 obligation write-off
Submission
As the student loan scheme will continue to be administered in Inland Revenue’s existing computer system, the discretion to write off small obligation amounts of less than $20 should continue. Borrowers will see no change from the current practice.
Under the Student Loan Scheme Act 1992, repayment obligations under $20 were not collected and were written off. For example, if a borrower had a repayment obligation of $1,000 for the tax year but Inland Revenue received only $983 during the year, the $17 was written off the loan, rather than remaining to be collected in the future.
When the loan scheme was proposed to be administered in a new loan management system, the provision regarding not collecting small amounts was revised when included in the Student Loan Scheme Act 2011. Under the 2011 Act, small amounts are not written off and remain part of a borrower’s loan balance. These amounts would be collected through future repayment obligations.
The amendment to reinstate the $20 obligation write-off should apply from 1 April 2012 for the 2012–13 and later tax years.
Recommendation
That the submission be accepted.
Issue: Payment allocation
Submission
As the student loan scheme will continue to be administered in Inland Revenue’s existing computer system, the existing payment-priority rules should apply. Therefore the new payment-allocation rules due to come into force from 1 April 2013 should be repealed. Borrowers will see no change from the current practice.
The current payment-priority provision offsets payments and deductions first against any interest charged, and then any remainder is used for any principal outstanding.
From 1 April 2013 the Student Loan Scheme Act 2011 introduces new payment-allocation rules based on officials’ expectations of the new loan management system.
The amendment should apply from 1 April 2013.
Recommendation
That the submission be accepted.
TECHNICAL ISSUES
The following matters are proposed by officials to address technical issues that arose during the detailed analysis and design process to implement the changes in the student loan scheme legislation.
Issue: Notification of student loan shortfall penalty
Submission
Officials recommend that the notification of a student loan shortfall be considered separate from the notification of the student loan shortfall penalty.
The Student Loan Scheme Act 2011 requires Inland Revenue to notify a borrower of a student loan shortfall penalty, including details of the shortfall in the borrower repayment obligation. This requirement was based on the earlier proposal to move the administration of the loan scheme into a new loan management system.
As the administration of the loan scheme will remain in Inland Revenue’s FIRST system, the implementation of the new student loan shortfall penalty will need to follow the tax rules. This means notifying borrowers separately of their student loan shortfall and shortfall penalty.
The amendment should apply from the day after Royal assent.
Recommendation
That the submission be accepted.
Issue: Calculation of loan interest during a leap year
Submission
Leap years are currently not accounted for in the calculation of loan interest. Officials consider it appropriate that for the purposes of calculating loan interest in a leap year, the additional day is taken into account. We therefore recommend that the legislation be amended.
The amendment should apply from the day after Royal assent.
Recommendation
That the submission be accepted.
Issue: Definition of “due date” for unpaid instalments of overseas-based obligations
Submission
There is a minor technical error in the current definition of “due date” in relation to an overseas-based instalment default. The definition incorrectly refers to “the dates determined” whereas it should refer to “the final date determined”.
The amendment should apply from the day after Royal assent.
Recommendation
That the submission be accepted.
Issue: Relief from penalties
Submission
The student loan penalties in the Student Loan Scheme Act 2011 (late filing penalty and student loan shortfall penalty) are modelled on penalties imposed for income tax. The Commissioner of Inland Revenue can grant taxpayers relief from penalties imposed under the income tax rules, however there is currently no such relief provided for penalties imposed for student loan purposes. Officials consider that as relief from penalties is provided under the income tax rules, similar relief should be provided for student loan penalties.
The ability to provide relief from penalties should also apply to the under-estimation penalty that is reintroduced by the bill. As relief from this penalty was provided under the Student Loan Scheme Act 1992, the 2011 Act should reflect this for consistency.
The amendment should apply from 1 April 2013.
Recommendation
That the submission be accepted.
Issue: Calculation of excess repayments from 1 April 2013
Submission
The definition of “excess repayment” should be amended to include any payments and voluntary borrower deductions received and applied to a tax year regardless of when the payments were received.
The current definition of “excess repayment” is used to determine borrowers’ excess repayment bonus and any amount overpaid for a tax year that may be refunded.
The calculation of an excess repayment is currently limited to payments and deductions made up to either the end of the tax year or the final interim payment or overseas-based instalment due date for a tax year, which can be due after the end of the tax year.
Because of the repeal of the excess repayment bonus from 1 April 2013, this limitation is no longer required. Additionally, borrowers may pay an amount after the final interim payment or overseas-based instalment due date for a tax year that exceeds their repayment obligation or penalties for that tax year and these amounts should be considered excess repayments.
The amendment should apply from 1 April 2013 for the 2013–14 and later tax years.
Recommendation
That the submission be accepted.
Issue: Limiting repayment obligation and interim payments by excluding amounts due in future
Submission
The amount a borrower is required to repay, which is limited to the amount of the loan balance, should also exclude any amounts already assessed or required to be paid with a due date in the future.
There are situations when the amount a borrower is required to pay for a tax year is limited to the loan balance, but the borrower also has an amount owing for a previous tax year due in the future. As the amount owing for the previous tax year is not overdue it is still part of the loan balance. This means that a borrower’s repayment obligation will include an amount that is already required to be paid in the future and the borrower would be billed twice for that amount. This is not the correct outcome.
The amendment should apply from 1 April 2012 for the 2012–13 and later tax years.
Recommendation
That the submission be accepted.
Issue: Providing assessments in certain situations
Submission
The bill currently limits notifying a borrower of their end-of-year repayment obligation to those borrowers who exceed the $1,500 adjusted net income thresholds.
Due to an oversight, this precludes notifying a borrower that they have no end-of-year repayment obligation. This can occur when a borrower is initially required to make payments for the tax year but upon confirmation of their actual income for the tax year, it exceeds the $1,500 threshold.
Officials recommend that these oversights are corrected and that borrowers in these situations are notified they have no end-of-year repayment obligation.
The amendment should apply from 1 April 2012 for the 2012–13 and later tax years.
Recommendation
That the submission be accepted.
Issue: Cross-referencing 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 these changes be made.
Recommendation
That the submission be accepted.