Interest and alignment of penalties with income tax rules
OVERSEAS-BASED INTEREST AND LATE PAYMENT INTEREST
(Clauses 124 to 135)
Summary of proposed amendments
Overseas-based borrowers’ loans are subject to interest, which is currently set at 6.6% for the 2010–11 tax year. Loans for New Zealand-based borrowers are interest-free. This reflects the contribution that these borrowers make to New Zealand society.
Borrowers who do not pay their repayment obligations by the due date are currently subject to a late payment penalty of 1.5% which compounds monthly and is equivalent to approximately 19.56% per annum.
The bill contains amendments to the way interest charges are administered and also replaces the late payment penalty rules with a less punitive late payment interest rate so student loan debt does not become insurmountable.
Application date
The amendments will apply from 1 April 2012.
Key features
The bill introduces the following changes:
- StudyLink will cease to charge interest.
- Inland Revenue will only charge interest when borrowers are overseas-based.
- Overseas-based interest will be charged at the base interest rate, which is currently 6.6%.
- The current late payment penalties of approximately 19.56% per annum will be replaced by late payment interest which will be set at the significantly lower rate of 4% above the base interest rate (currently 6.6%) giving a combined rate of 10.6% per annum.
- The late payment interest rate will be reduced by 2% if the borrower enters into an instalment arrangement.
- Interest will not be charged if the unpaid amount is less than $500. In these cases the unpaid amount will be added back to the loan balance.
Detailed analysis
Overseas-based interest
Currently, interest is charged by StudyLink on loan advances for the period prior to the loan being transferred to Inland Revenue. Once the loan is transferred, Inland Revenue writes off the interest charged by StudyLink. Inland Revenue subsequently charges interest (currently 6.6%) on all loans and writes off that interest for borrowers who meet the interest-free criteria. Under the changes proposed in the bill, StudyLink will no longer charge interest. Instead, interest will only be charged by Inland Revenue for borrowers who are based overseas.
Late payment interest
Late payment interest will replace the current late payment penalty rules that are applied to student loans. Borrowers who do not meet their loan repayment obligations will be subject to late payment interest on the total unpaid amount at the base interest rate plus a penalty margin of 4% each year. Based on the current base interest rate of 6.6%, this gives a late payment interest rate of 10.6%. The penalty margin will be lowered to 2% for borrowers who enter into instalment arrangements, giving a total interest rate of 8.6%, based on the current base interest rate.
This replaces the monthly 1.5% (equivalent to 19.56% a year) late payment penalty which currently applies. As well as creating simpler consequences for non-payment, the replacement of penalties with late payment interest is also intended to reduce the rate at which student loan debt grows which is seen by some as a barrier to keeping up-to-date with current repayment obligations.
$500 threshold
Clause 129 provides that a borrower is liable to pay late payment interest if the total unpaid amounts are $500 or more. This amount may be changed by regulation. This is a change from the current policy of not charging late payment penalties on individual unpaid amounts less than $334. In addition, the Commissioner may refrain from collection if the unpaid amounts total less than $500.
Unpaid amounts in these circumstances will be added back to the loan balance and collected as part of the borrower’s general repayment obligations.
Background
Borrowers with repayment obligations who fail to pay on time are currently subject to monthly compounding late payment penalties of 1.5%. To facilitate the move to a dedicated loan management system and reduce the extent to which overdue amounts grow due to penalties, late payment penalties will be replaced with an interest charge.
PENALTIES AND OFFENCES
(Clauses 148 to 159)
Summary of proposed amendments
The bill contains amendments that will impose penalties for offences relating to the late or non-filing of information by borrowers, and aligns the imposition of both civil and criminal penalties for non-compliant activities with those that apply to other tax offences.
The bill also replaces the penal repayment obligation that applies for repayment obligations with a student loan shortfall penalty to align this with the treatment of borrowers who have taken an incorrect tax position.
Application date
The amendments will apply from 1 April 2012.
Key features
The bill introduces the following changes:
- late filing penalties will be imposed for incomplete or absent declarations or notifications in certain circumstances;
- student loan shortfall penalties will be imposed at the same rate that would apply from taking an incorrect tax position; and
- penalties for wilfully or negligently failing to provide information to Inland Revenue will be aligned with those for other tax types.
Detailed analysis
Late filing penalty
Under the proposed changes, a borrower will be liable for a late filing penalty if they do not complete and provide the required declaration of their pre-taxed income as specified in clause 68, or notify Inland Revenue of their world-wide income as specified in clause 106, and the Commissioner has previously notified the borrower that the penalty will be imposed if they do not provide the declaration or notification.
The late filing penalty imposed will be the same amount that applies for income tax purposes, depending on the borrower’s income. For example, the penalty imposed will be $50 if the borrower’s income is less than $100,000, $250 if the borrower’s income is between $100,000 and $1,000,000, and $500 if their income is over $1,000,000.
The borrower will not be liable for a late filing penalty if he or she has other income and a late filing penalty has been imposed under the Tax Administration Act for the same declaration or notification.
Student loan shortfall penalties (clauses 150 to 154)
The current penalty that applies to cases of evasion of assessment or payment of a repayment obligation will be replaced with a new student loan shortfall penalty. The student loan shortfall penalty will apply when a borrower:
- has taken an incorrect tax position which is lower than the correct tax position; and
- is also liable to pay a shortfall penalty for income tax.
Borrowers may also be liable to pay a student loan shortfall penalty if taking an incorrect tax position has also reduced their student loan repayment obligation.
The student loan shortfall penalty can be up to 150% of the shortfall in the borrower’s repayment obligation, and will be the same percentage rate imposed for the borrower’s income tax shortfall. This will ensure that borrowers who do not comply are penalised on the whole shortfall, and not just the income tax amount.
Criminal offences (clauses 155 to 159)
Criminal offences currently in the Student Loan Scheme Act relate to wilfully or negligently failing to provide correct information. These offences will be replaced with the criminal offences that apply for tax purposes, such as strict liability offences, and knowledge and evasion offences. The same maximum penalty amounts that apply for income tax offences will also apply to student loan offences.
The current offences for aiding and abetting an offence will be retained, but with higher penalty amounts to reflect those imposed in relation to tax, as will the offence relating to prejudicing employees because of their student loan liability. However, there will be no change to the penalty amount for the latter offence and the $2,000 penalty will continue to apply.
Background
The bill will bring penalties for not complying with filing, information provision, and repayment obligations more into line with those for taxes generally. These changes are intended to:
- encourage borrowers to pay the correct interim instalments when due;
- bring the rules up-to-date with changes to equivalent tax obligations (for example, higher penalties for evasion and the introduction of a late payment penalty); and
- reduce any tendency for borrowers to give student loan obligations a lower priority than tax repayment obligations.