Student loans


LIMITING ABILITY TO REOPEN REPAYMENT OBLIGATIONS PRIOR TO 1 APRIL 2013


(Clause 57 and Schedule)

Summary of proposed amendments

Several proposals are made to limit the situations where either the Commissioner or the borrower can reopen a borrower’s repayment obligation for tax years prior to 1 April 2013.

Application date

The proposed amendments would apply from 1 April 2020.

Key features

The proposed amendments to the Student Loan Scheme Act 1992 and the Student Loan Scheme Act 2011 limit the situations where a borrower’s repayment obligations for tax years prior to 1 April 2013 can be amended. For these tax years a borrower’s repayment obligation would only be reopened where a borrower:

  • becomes overseas or New Zealand based;
  • has committed fraud;
  • has not filed information to the Commissioner when required to do so under the Act and it is cost effective for the Commissioner to reopen the repayment obligation.

A savings provision is proposed to allow the Commissioner to correct the position of any borrower who might be unduly disadvantaged by these proposals.

Background

Inland Revenue is currently required to maintain the student loan scheme rules back to 1992 when the scheme was introduced in case either the Commissioner or the borrower seeks to review a borrower’s repayment obligation. Retaining rules back to 1992 has increased the complexity of the scheme over time as changes have been made to the scheme in 21 of the last 26 years. Compliance costs for borrowers are high, as understanding changes to their loan balance is difficult due to historical rules applying for prior years. Administration costs for Inland Revenue are also high, as are the costs of building the rules back to 1992 into new systems and processes, with little benefit.

As part of Inland Revenue’s Business Transformation programme, it is proposed that a simplified set of rules will apply for the period from 1992 to 1 April 2013. This will reduce compliance costs for borrowers, the administration costs for Inland Revenue, and the time and cost of implementing changes to the student loan scheme.

The 1 April 2013 date was chosen as nearly all adjustments to borrowers’ repayment obligations have occurred within this timeframe and the rules applying from that date onwards are largely the same as applies today.

Detailed analysis

Schedule 6 of the Act is amended by introducing a new part, Part 5. This part sets out the proposed new rules for tax years prior to 1 April 2013.

A new definition of closed-off tax years is proposed relating to tax years from 1992 up to 1 April 2013. During this period both the Commissioner and the borrower are precluded from reopening any repayment obligation except where the borrower: has a change in residency status; has committed fraud; has not provided information (for example. an unfiled return) and it is cost effective for the Commissioner to reopen the obligation; or has been disadvantaged because of this proposal.

If one of these exceptions apply, the borrower’s repayment obligation can be reopened.

Residency changes

If a change in a borrower’s residence status is identified after 1 April 2020 and the change relates to a closed-off tax year, a simplified set of rules will apply. Loan interest would be calculated on the borrower’s loan balance from the date the borrower went overseas, or loan interest would cease to apply from date they returned to New Zealand.

Where a borrower goes from New Zealand-based to overseas-based during the closed-off period, no overseas-based borrower repayment obligation for the period will be imposed.

Where a borrower goes from overseas-based to New Zealand-based during the period, overseas-based repayments would not be collected. Any payments already collected would go against the loan balance.

However, changes to a borrower’s repayment obligations due to residency changes will apply from 1 April 2013 onwards.

Example 1

Bob went overseas in April 2008 but did not advise Inland Revenue. Since 2008, Bob has been treated as a New Zealand-based borrower (so was not charged loan interest). Bob has not met his repayment obligations since 2008. In April 2021, Bob returns to New Zealand and Inland Revenue identifies that Bob has been overseas since April 2008. Bob’s obligations for the 2008–2013 tax years can be reopened only to the extent that Bob must pay loan interest from April 2008. His repayment obligations for the 2008–2013 tax years cannot otherwise be assessed or reassessed. Bob’s obligations for the 2014–2021 tax years can be reopened in full (because those tax years are not closed off). For the period from 1  April 2013 until he returned to New Zealand, Bob may be liable to an overseas-based borrowers’ repayment obligation and loan interest. From 1 April 2013 onwards, associated late payment interest charges can apply.

Example 2

Ngaire went overseas in April 2000 and advised Inland Revenue of her departure. Ngaire returned to New Zealand in July 2008 but did not advise Inland Revenue. Since April 2000, Ngaire has been treated as an overseas-based borrower (so was charged loan interest and assessed with an overseas-based repayment obligation). Ngaire has not met her repayment obligations since March 2000. In April 2021, Inland Revenue identifies that Ngaire returned to New Zealand in July 2008. Ngaire’s obligations for the 2008–2021 tax years can be reopened. For the period from July 2008 to 31 March 2013, the loan interest charge, and any overseas-based borrower repayment obligations, can be reversed but no New Zealand-based repayment obligation can be assessed in its place. For the 2013–2014 tax year and later tax years, Ngaire can be assessed with a New Zealand-based borrowers’ repayment obligation (because those tax years are not closed off). From 1 April 2013 onwards, associated late payment interest charges can apply.

Example 3

Pip went overseas to work as a volunteer for a recognised charity in April 2008 and returned in April 2010. Pip could have applied under section 25 of the Student Loan Scheme Act 2011 to be treated as if still physically in New Zealand during the period of absence but did not. Pip’s obligations for the 2008–2009 to 2009–2010 tax years can be reopened if she makes an application under section 25 of the Student Loan Scheme Act 2011. For the period of absence, the loan interest charge, and any overseas-based borrower repayment obligations, can be reversed but no New Zealand-based repayment obligation can be assessed in its place.

Fraud or unfiled returns or information

Where fraud is involved, or the borrower has failed to provide a return or information to the Commissioner, the borrower’s repayment obligation may be reopened during the closed-off period. In these situations, a simplified calculation would be used to calculate the borrower’s repayment obligation, namely, 10 percent of the difference between the income of the borrower that should have been used to calculate the repayment obligation and the income that was used less any unused repayment threshold. Other rules that applied in that year would be disregarded.

A one-off penalty may also apply to penalise the non-compliant action. Late payment interest will not be imposed for the closed-off period. However, late payment interest may apply from 1 April 2013 onwards. Imposing late payment interest on repayment obligations for the period 1992 to 2013 can disproportionately increase the debt owed to Inland Revenue to the point where the borrower cannot repay the debt and disengages with the Student Loan Scheme.

Example 4

Chris fraudulently failed to declare a large source of income for the 2008–09 tax year. This has implications for both income tax and student loan obligations. The four-year (statute bar) period for making changes to an income tax obligation after a return is filed does not apply where fraud is involved. Therefore, the Commissioner of Inland Revenue amends Chris’s income tax liability for the 2008–2009 year and the student loan repayment obligation for that year is also amended. The reopened student loan repayment obligation is the difference between the previous income amount and the new income amount, less any unused repayment threshold, multiplied by the repayment percentage (which was 10% up to 1 April 2013). Chris could be considered for a shortfall or criminal penalty for not filing or for the fraudulent activity.

Borrowers adversely affected

Where a borrower considers that they are worse off because of these changes, they can apply to the Commissioner and if the Commissioner agrees then their repayment obligation will be corrected.


OVERSEAS-BASED BORROWERS WITH SERIOUS ILLNESS OR DISABILITIES


(Clauses 40 to 44, 53, and 56)

Summary of proposed amendment

The proposed amendment to the Student Loan Scheme Act 2011 will allow the Commissioner of Inland Revenue to treat borrowers who are unable to meet their overseas-based repayment obligation as a result of a serious illness or disability as being physically in New Zealand. This means they could be eligible for an interest-free loan and have repayment obligations based on their income.

Application date

The proposed amendment would apply from 1 April 2020.

Key features

The Bill provides a new circumstance for when a borrower can be treated as being physically in New Zealand.

Borrowers with a serious illness who are unable to meet their overseas-based repayment obligations will be able to be treated as physically in New Zealand for the purposes of determining whether they are New Zealand-based or overseas-based.

The amendment will require the borrower to provide evidence of their medical and financial position as the Commissioner of Inland Revenue requires. Unlike for hardship relief, the borrower would not necessarily need to supply evidence annually. Instead they would need to do so as the Commissioner of Inland Revenue reasonably requires. This helps to recognise that some borrowers have long term medical conditions.

The borrower will be required to notify the Commissioner of Inland Revenue of their adjusted net income. This is required of all borrowers who have repayment obligations based on their income.

Background

Many borrowers with serious illnesses can work and can meet their repayment obligations. However, some overseas-based borrowers with serious illnesses can struggle to meet their overseas-based repayment obligation and over time their loan can increase in size because of loan interest being charged.

New Zealand-based borrowers, as defined in section 22, do not pay loan interest and their repayment obligations are based on their income. Whereas overseas-based borrowers incur loan interest and their repayment obligations are based on their loan size.

The treatment will be available to borrowers who have an injury, illness, or disability that results in them being unable to engage in paid work, other than work for which the person is paid a token payment or a very low wage, or where that injury, illness or disability poses a serios and imminent risk of death.

Example 5

Ben lives overseas and was seriously injured in a car accident. Ben after the accident had to quit his job and he is now financially unable to meet his overseas-based repayment obligation. Ben is now working at his local community gardens, as part of the country’s welfare programme. Ben, as part of this welfare programme, receives a payment for his work that is below the country’s minimum wage. Ben is eligible to apply to be treated as a New Zealand-based borrower, meaning he would have an interest free loan and repayment obligations based on his income.

The proposed amendment will assist in aligning the repayment obligation of overseas-based borrowers in serious illness with their ability to make repayments. It also ensures the size of the borrower’s loan does not increase as a result of loan interest charges.

The proposed amendment will not change borrowers’ abilities to receive hardship relief.


NOTIFYING EMPLOYERS WHEN STUDENT LOANS ARE CLOSE TO BEING REPAID


(Clause 45)

Summary of proposed amendment

This proposed amendment will allow Inland Revenue to notify employers of a borrower’s remaining loan balance when the borrower’s loan is close to being fully repaid. Employers will be instructed to reduce the amount of the final deduction to an amount equal to the remaining loan balance. This will reduce the likelihood of overpayments being made.

Application date

The proposed amendment would apply from 1 April 2020.

Key features

Employers will be notified of a borrower’s loan balance when Inland Revenue becomes aware that the borrower’s loan is close to being fully repaid. Where possible, borrowers will also be notified that their loan is close to being repaid. Employers will need to reduce the amount of the final deduction.

Background

Currently, employers make salary and wage deductions from their employee’s wages at the rate of 12 cents in the dollar for every dollar over the repayment threshold. This flat rate generally leads to employers deducting more than the remaining loan balance. These overpayments often require contact between Inland Revenue and the borrower to resolve.

Inland Revenue currently contacts employers after loans are fully repaid to instruct them to cease making student loan deductions.

This proposal is possible now because since 1 April 2019, employers have been required to provide information on employees’ income and deductions each payday giving Inland Revenue more timely and accurate information regarding an employee’s earnings.


RENAMING THE STUDENT LOAN REPAYMENT HOLIDAY


(Clauses 46 to 52, and 54)

Summary of proposed amendment

The proposed amendment changes the name of the Student Loan Repayment Holiday to Student Loan Temporary Repayment Suspension.

Application date

The proposed amendment would will apply from 1 April 2020.

Background

The repayment holiday reduces a borrower’s overseas-based repayment obligation to zero. Renaming the repayment holiday will send a better signal to borrowers that their repayment obligations are only on hold. In practice, there will be no change to the effect of the policy on borrowers.


WRITING OFF HISTORIC FRAUDULENT LOANS


(Clause 57(4) and Schedule)

Summary of proposed amendment

The proposed amendment allows Inland Revenue to write off loans taken out before 2000, where the Commissioner is satisfied that the borrower did not take out the loan, and the correct borrower cannot be identified.

Application date

The proposed amendment would apply from 1 April 2020.

Key features

The proposed change will allow Inland Revenue to write off loans that were transferred before 1 April 2000 where the Commissioner is satisfied that the person who has been allocated the loan did not take it out, and the correct borrower cannot be identified.[2]

This is intended to be used in a small number of cases that officials are aware of and suspect identity theft has occurred. If the correct borrower could be identified the loan would be transferred to them.

 

[2] If Inland Revenue discovers a similar case for a loan taken out after 2000, the loan can be sent to Studylink, who are able to write off the loan. Loans taken out before 2000 were not issued by Studylink so cannot be sent back to them.