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Inland Revenue

Tax Policy

Chapter 4 - Student allowances

4.1 Student support (student loans and allowances) is intended to reduce financial barriers to participation in tertiary education. Government funding for student support is substantial but not unlimited, so student allowances are targeted at those who need them most. The student allowance parental income test reflects the Government’s expectation that parents who can afford to should provide financial help to their children in tertiary study into their mid-20s. This expectation is shared by the governments of most developed countries.

4.2 As part of the reforms outlined in this paper, the new definition of “family scheme income” discussed in chapter 3 could be adopted as a more appropriate method for determining the parental income for student allowances.

Current income tests

4.3 Student allowances are administered by StudyLink, which is a service line of the Ministry of Social Development (MSD).

4.4 To determine eligibility for student allowances, a number of income tests are used, depending on circumstances. These income tests are the student’s income, their spouse’s income and parental income.[22] Students are currently required to provide income details to StudyLink.

4.5 The definition of “parental income” is based on taxable income as defined in the Income Tax Act 2007. Taxable income is a person’s assessable income (wages, salary, interest etc) after deductions and any losses. The adjustments made to taxable income for WFF purposes are not made for the purposes of student allowances, that is, the student allowance regulations do not refer to family scheme income. However, unlike family scheme income, the parental income test for student allowances includes the parents’ worldwide taxable income regardless of whether the student’s parent(s) are resident or not.

4.6 Taxable income was adopted because, for families reliant substantially on a salary or wages, it is a reliable proxy for determining a family’s ability to pay for regular outgoings and reduced some of the compliance costs of applying for a student allowance. However, for some parents it is not a true reflection of their economic circumstances and ability to support the student while studying.

The issue

4.7 Since the parental income relies solely on the definition of taxable income with adjustments for non-resident worldwide income, similar problems arise as mentioned in chapter 3. Accordingly, parents may earn income through closely held arrangements involving trusts and companies or receiving other types of income mentioned in chapter 3 without impacting the student allowance eligibility of their children.

4.8 In comparison, the student whose parents rely substantially on salary or wages and are unable to use alternative arrangements may not qualify for student allowances. If these two families’ economic income is the same, there would be a lack of horizontal equity as entitlement becomes based on the ability to divert income through different arrangements rather than the ability to meet expenses. Lack of equity undermines public confidence in the integrity of student allowances. As more people become aware of such arrangements, more are adopting them, while other parents feel they are being treated unfairly. Reviewing the definition of “parental income” responds to this growing level of concern from the public.

Proposed definition of “parental income”

4.9 The proposal is to replace the current taxable income definition by amending the student allowance regulations to refer to the definition of family scheme income in the Income Tax Act 2007. The proposed changes to the definition of family scheme income, referred to in chapter 3, would also apply. This would more accurately reflect the family’s economic income and better reflect their ability to provide financial help for their children undertaking study.

4.10 An alternative option would be for the parental income test to use the Social Security Act 1964 (SSA) definition of “income”. It captures all money received that is not a one-off capital payment. It includes the value of payments in kind and services provided. Particular payments are listed as being included or excluded from the definition.[23] The SSA definition is more focused on cash received rather than income available and may not include income being held in a family trust or company, for example. However, the SSA reinforces this definition by making further adjustments when a person is considered to have deprived themselves of income, such as if they invested in loss-making assets or shifted income-generating assets into a trust or company.

4.11 All other criteria for student allowances would remain unchanged, including the income test applying to the student and/or spouse.

When would the new definition apply from?

4.12 Student allowances relate to the academic year which generally runs from January to December, while the tax system measures annual income for the year ending 31 March. While the proposals are intended to take effect from 1 April 2011 for the WFF tax credit, it is proposed that they apply to student allowances from the start of the academic year. An implementation date is yet to be determined although it may be applied to applications for the academic year starting 1 January 2012. This would measure parental income for the tax year 1 April 2010 to 31 March 2011.

Submission point

Should the parental income test be aligned with the proposed new family scheme income definition or the Social Security Act 1964 definition of “income”?


22There are specific rules concerning when a spouse’s income or the parental income is considered in a student allowance application.

23See section 3 of the Social Security Act 1964.