Charitable organisations for the purposes of the Student Loan Scheme Act 2011
AGENCY DISCLOSURE STATEMENT
This Regulatory Impact Statement (RIS) has been prepared by Inland Revenue.
It provides an analysis of options to provide student loan borrowers working overseas for a charitable organisation better access to an interest write-off on their loan. This policy ensures that the differing treatment with regards to interest for New Zealand-based and overseas-based borrowers does not affect a borrower’s decision to volunteer for a charitable organisation overseas.
To assess the likely administrative and fiscal impacts, assumptions have been made about the numbers of expected applications from charitable organisations and borrowers seeking an interest write-off. These are based on the number of applications received in previous years and further assumptions about the volumes of applications if the preferred option is implemented. The amount of interest foregone is approximate, based on average loan balance and the current interest rate. These assumptions do not materially affect the analysis in this RIS.
Officials consulted on details of the preferred option with other government agencies, in particular with the Ministry of Education, the Treasury, the Department of Internal Affairs’ Charities Services, the Ministry of Foreign Affairs and the Ministry of Social Development.
No public consultation was carried out in respect of the preferred option. Due to the difficulty and cost involved in identifying individuals and organisations that might be affected from the change in process, and the expected benefit from consulting widely, it was considered that a full public consultation process and its associated costs would have been disproportionate to the expected benefits and the magnitude of the impact.
The preferred option will require a legislative amendment to the Student Loan Scheme Act 2011 (and a consequential amendment to the Income Tax Act 2007). The required legislation could be included in the student loan scheme bill which is scheduled for introduction in the second half of this year.
None of the proposed options are expected to impair private property rights, reduce market competition, or override common law principles. The preferred option does not involve any additional compliance costs on businesses or charitable organisations.
Chris Gillion
Policy Manager, Policy and Strategy
Inland Revenue
23 June 2015
STATUS QUO AND PROBLEM DEFINITION
Background
1. Student loan borrowers who are New Zealand-based do not pay interest on their student loans, while overseas-based borrowers do. There are some circumstances where an overseas-based borrower may be treated as New Zealand-based and therefore eligible for the interest write-off.
2. An overseas-based borrower may apply to be treated as New Zealand-based and receive the interest write-off when they are volunteering or working for token payment for an approved charitable organisation for the purposes of the Student Loan Scheme Act 2011 (“the Act”). This policy aims to ensure that interest does not create a disincentive for borrowers wishing to volunteer overseas.
3. The policy was intended to ensure that only students working for bona fide charitable organisations would benefit from the concessionary treatment. It pre-dated implementation of the Charities Act 2005, and the introduction of Charities Commission register in February 2007 which introduced more rigorous requirements for the registration of charities.
4. To qualify as a charitable organisation for the purposes of the Act, the organisation must be listed in the Student Loan Scheme (Charitable Organisations) Regulations 2011 (the Regulations). If not listed, the organisation must apply for inclusion in the Regulations and provide evidence that it meets criteria established by the Government when the policy was introduced in 2006. To benefit from the interest write-off, each borrower must make an individual application to Inland Revenue with evidence their volunteer work meets requirements specified in Schedule 1 of the Act.[1]
5. The Regulations are also used in defining the eligibility for KiwiSaver member tax credits. Under the Income Tax Act 2007, KiwiSaver members are eligible for member tax credits provided they are working overseas as a volunteer or for token payment for a charitable organisation named in the Regulations.
Status quo – the current process
6. The current process for a charitable organisation to obtain approval for the purposes of the Act involves Inland Revenue’s assessment against the criteria set out below in paragraphs 7 - 8. Once assessed, the charities must then be submitted to Cabinet and approved to be added to the Regulations via Order in Council.
7. In March 2006, the Government established the following criteria for listing charitable organisations in the Regulations:
- The organisation must carry on charitable activities[2] and be established for charitable purposes; and
- It must have been established and operating for at least two years.
8. In addition consideration should be given to:
- the credibility of the organisation (with the presence in at least five countries being an indication of the organisation’s credibility);
- the not-for-profit status of the organisation;
- whether it has recognised record keeping
- whether it is publicly accountable
- the monitoring and evaluation processes it has in place; and
- whether it has a New Zealand base (but this is not a determinative criterion).
9. The requirement for a charity to be listed in Regulations, combined with the length of time it takes to add a charitable organisation, can mean a borrower who meets the policy intent is denied access to the interest write-off.
10. As noted earlier, for an individual borrower to be entitled to an interest write-off, they must make an application to Inland Revenue with evidence that they are working for an approved charitable organisation and carrying out work that meets criteria specified in Schedule 1 of the Act.[3]
Problem definition
11. The current process for approving charitable organisations is inefficient, as it does not always meet the policy intent of providing interest relief for borrowers volunteering overseas for a charitable organisation. There is also a duplication of processes which are already in place for assessing charities for an income tax exemption.
12. One of the five most common reasons a borrower’s individual application for an interest write-off is denied is that the charitable organisation is not listed in the Regulations at the time the borrower is volunteering overseas. This can be partially attributed to the slow process involved in adding an organisation to the Regulations.
13. It is helpful to illustrate the steps in the current process and how this may impact on a borrower gaining access to the interest write-off provision. Of particular concern is the situation where an organisation is only prompted to apply to be an approved charitable organisation for the purposes of the Act because one or more of their prospective or current volunteers has a student loan. When an organisation applies to Inland Revenue, it must be assessed against the criteria set out in paragraphs 7 - 8. This often involves correspondence between Inland Revenue and the organisation to gather the appropriate information to support their application. Once Inland Revenue is satisfied the organisation meets the criteria, it is recommended to Ministers, and subsequently Cabinet, for approval. Following Cabinet approval, an Order in Council can take a minimum of 4 weeks to draft, depending on the Parliamentary Counsel Office’s availability. The Order in Council must be presented to the Cabinet Legislation Committee before a second approval by Cabinet and signing by the Governor General. An Order in Council cannot come into effect earlier than 28 days after date of publication in the Gazette.
OBJECTIVES
14. The objectives are to:
(a) provide an interest write-off to borrowers who are volunteering overseas for charitable purposes
(b) have an efficient and timely process for assessing a charitable organisation’s application for charitable status
(c) reduce administration costs for Inland Revenue
(d) reduce compliance costs for charitable organisations
(e) ensure integrity of the process and mitigate abuse of the interest write-off provision.
15. The key objective, objective (a), reflects the original policy intent, which was to ensure student loan interest did not deter borrowers from volunteering with charitable organisations overseas. The remaining objectives concern the efficiency and effectiveness of the process.
REGULATORY IMPACT ANALYSIS
16. Three options were considered to address the problem identified above: retaining the status quo, delegating the authority for approval of organisations to the Commissioner of Inland Revenue, and backdating the effective approval date of the charitable organisations.
Option one - status quo
17. The status quo is to continue the current process, which is set out in paragraphs 6 - 10. The authority to approve charitable organisations would remain with Cabinet. As a consequence, there would continue to be a delay, as outlined in paragraph 13, between when an organisation applies to be a charitable organisation for the purposes of the Act and when the Order in Council comes into effect, adding it to the Regulations.
18. All charities seeking to be included in the Regulations and therefore be a charitable organisation for the purposes of the Act will continue to be required to apply to Inland Revenue and provide information in support of the criteria outlined in paragraphs 7 - 8.
Option two - Delegate the authority for the approval of charitable organisations to the Commissioner of Inland Revenue (Officials’ preferred option)
19. Option two would involve the delegation of authority to approve charitable organisations for the purposes of the Act to the Commissioner of Inland Revenue. Once approved, a charity will be added to a list of charitable organisations for the purposes of the Act (“the approved list”). Such a list is already published on Inland Revenue’s website.
20. The Commissioner could utilise current process for the assessment of charities for income tax exemptions and therefore reduce the duplication of assessing a charity separately for the purposes of income tax and the student loan scheme. It is proposed that the Commissioner will automatically approve charities that are registered with Charities Services, or already approved by Inland Revenue for an exemption from income tax.
21. Charities that are already registered with Charities Services would not be required to apply to Inland Revenue for inclusion in the list, because their charitable status will have already been established through the Charities Services process. Similarly if a charity has already been assessed and approved by Inland Revenue for an exemption from income tax, the charity will be automatically added to the approved list for the purposes of the Act.[4]
22. Under this proposal, when a borrower volunteering for an organisation that already has charitable status with Charities Services, or has been approved by Inland Revenue for an income tax exemption, applies to Inland Revenue for the interest write-off, the organisation will automatically be approved and consequently added to the approved list.
23. Charities that are not registered with Charities Services, or approved by Inland Revenue for an income tax exemption, will still be required to apply to Inland Revenue. However, the process is likely to be quicker, as the charity will be able to be immediately added to the approved list once Inland Revenue has completed the assessment. This is unlike the current process, which requires two Cabinet approvals and the subsequent Order in Council to come into effect before the charitable organisation is added to the approved list.
24. Those charities referred to in paragraph 23, will be assessed against the existing criteria set out in paragraphs 7 - 8 with the exception of the two year rule. To ensure consistency with the criteria used by Charities Services and by Inland Revenue when assessing charities for an income tax exemption, the requirement of a charity having been established and operating for two years could be removed for charities that apply and are assessed on the existing criteria.
25. This option would also decrease compliance costs for applicant organisations, as those that are already registered with Charities Services or approved by Inland Revenue for an exemption from income tax will not be required to provide additional documentation to Inland Revenue to support their application.
26. The application requirements and process for individual borrowers would not change. To qualify for the interest write-off, a borrower will still be required to provide Inland Revenue with evidence that they are volunteering for a charitable organisation and carrying out work specified in Schedule 1 of the Act[5].
27. It is proposed that the Commissioner would also have the authority to remove a charitable organisation from the approved list if she becomes aware that the organisation no longer meets the charitable criteria, such as when the organisation has been de-registered by Charities Services. This will increase the integrity of the approved list by mitigating the risk of borrowers working for charities that no longer meet the criteria.
28. The removal of an organisation from the approved list will not affect the eligibility of borrowers to an interest write-off if they volunteered for the organisation during the time period that the organisation was on the approved list.
Option three - Change rules around effective date
29. Another option considered would be to retain the Cabinet approval process but change the rules around the effective date that an organisation becomes a charitable organisation for the purposes of the Student Loan Scheme Act 2011 and is added to the approved list. This would potentially involve retrospective legislation.
30. This could allow for the approval to be backdated to the beginning of the tax year or to another earlier specified time from which Inland Revenue and Cabinet are satisfied the organisation meets the charitable criteria.
31. This would give more borrowers access to the interest write-off. Charitable organisations would still be required to apply to Inland Revenue and provide information to support their application in line with the criteria set out in paragraphs 7 - 8. The time delay outlined in paragraph 13 would still occur, however this delay would be less likely to restrict a borrower’s access to the interest write-off as they could still be able to claim an interest write off dependent on the effective date.
32. To ensure the charitable organisation met the criteria at the earlier point in time, Inland Revenue may need additional information from the organisation, potentially increasing compliance costs. In addition, determining the effective start date and applying a date retrospectively would be more complex to administer.
33. This table summarises our impact assessment of the options.
| Options | Does it meet the objectives (a, b, c , d, e)? | Impacts | |||||
| Fiscal | Administration | Compliance | Environmental , social and cultural | Risks | Net impacts | ||
| Option one –status quo | a, e | No change. | No change. | No change. | Lack of support for borrowers who are volunteering for an overseas charitable organisation. | Time to process applications undermines policy intent. | Neutral. Does not address the problem definition. |
| Option two – delegate the authority for the approval of charitable organisations to the Commissioner of Inland Revenue | a, b, c, d, e | Negative. Expected to result in more applications for interest write-off being accepted, with interest foregone of approximately $1,000 per student per year [6]. Estimated to be $30,000 interest forgone per year[7]. |
Overall expected to decrease. Reduce administration costs for Inland Revenue in processing applications. There will be a small administrative cost for Inland Revenue in moving from a non-disputable to a disputable decision. Reduce administration cost for Cabinet and reduce use of Cabinet time. |
Reduction in compliance costs for charitable organisations – those already registered with Charities Services or approved by Inland Revenue for income tax exemption are automatically accepted. |
Increase support to borrowers volunteering for an overseas charitable organisation. |
Potentially some time delays if organisations that are not automatically approved are slow to provide necessary information. |
Overall positive, as allows better access to interest write-off in line with the policy intent. |
| Option three – backdate effective date of approval | a, partially b, e | Negative. Expected to result in more applications for interest write-off being accepted (but less so than option 2). |
Small increase in administration costs for Inland Revenue. Extra decision involved in deciding what effective date should apply for each organisation. |
Small increase in compliance costs – may increase the information some organisations are required to provide to Inland Revenue to support application. |
Increase support to borrowers volunteering for overseas charitable organisations. |
Potentially some time delays if organisations that are not automatically approved are slow to provide necessary information. |
Small positive effect; likely to give rise to greater access to interest write-off for borrowers volunteering overseas. |
Objectives:
(a) provide an interest write-off to borrowers who are volunteering overseas for charitable purposes
(b) have an efficient and timely process for approving a charitable organisation applying for charitable status
(c) reduce administration costs for Inland Revenue
(d) reduce compliance costs for charitable organisations
(e) ensure integrity of the process and mitigate abuse of the interest write-off provision
CONSULTATION
34. The following agencies were consulted on option two and support the proposal: the Ministry of Education, the Treasury, the Department of Internal Affairs’ Charities Services, the Ministry of Foreign Affairs and the Ministry of Social Development.
35. The Ministry of Education raised a concern around organisations which might cease to become charitable remaining on the approved list. To address this concern, officials recommend that the Commissioner is also given the power to remove a charitable organisation from the approved list if she becomes aware that it no longer meets the criteria.
36. There was no public consultation carried out in respect of option two. This decision not to consult was made in consideration of the difficulty and cost involved in identifying individuals and organisations that might be affected from the change in process, and the likely (marginal) benefit from consulting widely.
CONCLUSIONS AND RECOMMENDATIONS
37. Inland Revenue recommends proceeding with option two – delegating authority to approve charitable organisations for the purposes of the Student Loan Scheme Act 2011 to the Commissioner of Inland Revenue.
38. This proposal meets all five objectives. An interest write-off is provided to borrowers who are working for a charitable organisation overseas and who meet specified criteria, which meets the original policy intent as reflected in objective (a).
39. Objective (b) is achieved, as the process removes the requirement for Cabinet to approve each charitable organisation and the subsequent addition to the Regulations by Order in Council.
40. The delegation of authority to the Commissioner also reduces administration costs for Inland Revenue, as there would be automatic approval of charitable organisations that are already registered with Charities Services or approved by Inland Revenue for an income tax exemption (objective (c)). This will decrease the duplication of assessing charities separately for income tax and student loan scheme purposes.
41. The automatic approval and removal of the requirement for charitable organisations to apply if they are already registered with Charities Services also reduces compliance costs for many charitable organisations, achieving objective (d).
42. The integrity of the approved list is maintained (objective (e)) by giving the Commissioner the authority to remove a charity if she becomes aware it no longer meets the criteria. This will apply to any charity on the approved list.
43. Options one and three also achieve objective (a) and (e), as they both continue to provide an interest write-off to borrowers working overseas for volunteer organisations and use the existing criteria for inclusion in the Regulations.
44. Option three allows backdating of the effective date that the organisation is deemed charitable for the purposes of the Act, which makes the process more effective in providing eligible borrowers with access to the interest write-off, and therefore partially meets objective (b). However, option three does not meet objectives (c) or (d) and may increase the administration costs for Inland Revenue and compliance costs of charitable organisations.
IMPLEMENTATION
45. To implement option two, the Commissioner of Inland Revenue could assess charitable organisations that apply to be a charitable organisation for the purposes of the Act in the following way:
i. Automatic approval: Charitable organisations that are already registered with Charities Services, or independently approved by Inland Revenue for exemptions from income tax, would be automatically approved for the purposes of the Act.
ii. Consideration under existing criteria: Applications from other charitable organisations would be processed by Inland Revenue and considered in accordance with the existing criteria set out in paragraphs 7 - 8 (without the need to be established and operating for two years).
46. To ensure consistency of the criteria used for the organisations automatically approved with those charities individually assessed for the purposes of the Act, the requirement of a charity having been established for two years could be removed for charities that apply and are assessed on the existing criteria.
47. Charitable organisations already listed in the Regulations will automatically be added to the new approved list at the time when the Regulations are revoked. These charities will not need to be re-assessed in order to be included on the approved list which replaces the Regulations. The approved list will continue to be published on Inland Revenue’s website.
48. Decisions on registration of resident charitable organisations with Charities Services in accordance with the Charities Act 2005 are made by an independent Charities Registration Board. The Board tests each application against a set of nine criteria, which are intended to provide assurance that the organisation operates in accordance with the Charities Act 2005, meets minimum standards of reporting, and is publicly accountable. Each of the officers in a registered charity must also be qualified as an officer under the Charities Act 2005.
49. Charities Services tests applications for registration of non-resident charitable organisations against the same criteria, but the organisation must also demonstrate a strong connection with New Zealand.
50. The charitable organisations that are registered in accordance with paragraphs 48 and 49 are automatically accepted by Inland Revenue as eligible for an exemption from income tax. However, Inland Revenue also has an internal process for assessing applications for income tax exemptions from non-resident charitable organisations that are unable to be registered by Charities Services because they cannot demonstrate a sufficient connection with New Zealand.
51. An organisation will be able to dispute the Commissioner’s decision to decline adding a charity to the approved list. Where possible this will use existing processes in place – for example, the disputes resolution process provided for in the Tax Administration Act 1994.
52. The necessary legislative amendments to bring option two into effect could be included in the Student Loan Scheme Amendment Bill planned for introduction in October of this year. It will be necessary to concurrently revoke the Student Loan Scheme (Charitable Organisations) Regulations 2011.
MONITORING, EVALUATION AND REVIEW
53. In general, Inland Revenue’s monitoring, evaluating and reviewing of new legislation takes place takes under the GTPP. The GTPP is a multi-stage tax policy process that has been used to design tax policy in New Zealand since 1995. The final stage in the GTPP is the implementation and review stage, which involves post-implementation review of the legislation, and the identification of any remedial issues. Opportunities for external consultation are also built into this stage. In practice, any changes identified as necessary for the new legislation to have its intended effect would be prioritised in the context of the current Tax Policy Work Programme, and any proposals would go through the GTPP.
1 A borrower must provide the Commissioner with evidence the work they are doing is for the relief of poverty, hunger, sickness, or the ravages of war or natural disaster, or improving either the economy or educational standards of a country which is on the Organisation for Economic Co-operation and Development’s list of countries receiving development assistance.
2 The borrower must also provide evidence as specified in footnote 1, which limits the borrower to a subset of charitable activities in order to be eligible for the interest write-off.
4 Charities registered with Charities Services are automatically approved for an income tax exemption, and Inland Revenue follows Charities Services criteria when independently assessing an organisation for an income tax exemption.
6 Based on the average loan balance held by Inland Revenue at 30 June 2014 of $19,731 and the current interest rate of 5.3% p.a
7 This estimate is based on the following assumptions about borrower applications: 25% increase in the number of applications currently approved (one of the top 5 reasons a borrower’s application is currently declined is due to the borrower working for a charity that is not currently approved), and an increase in the number of individual applications by 30% (using the year with the highest volume of borrower applications and assuming all new applications are also approved).