The student loan scheme is a significant Crown asset and a major financial commitment by Government towards supporting those in tertiary education. The amendments contained in this bill, announced as part of Budget 2012, build on the policy changes introduced through Budgets 2010 and 2011 which focused on improving the value of the student loan scheme and encouraging personal responsibility for loan repayments.
The bill proposes to broaden the definition of “income” for student loan repayment purposes to broadly align with the definition of income used for determining entitlement to Working for Families tax credits. The definition of “income” for student loan repayment purposes is important in terms of meeting the policy objective of ensuring a borrower’s repayment obligation accurately reflects their ability to repay.
Consistent with the Government’s focus on encouraging personal responsibility for loan repayments, the bill also proposes to introduce an information match with the New Zealand Customs Service to locate borrowers who are in serious default when they enter or leave New Zealand. The key impediment to collecting repayments from overseas-based borrowers is a lack of contact details which prevents Inland Revenue engaging with this group. This information match will mean that Inland Revenue can initiate contact with a borrower to discuss their situation and the outstanding arrears.
A number of amendments revisit aspects of the design of the student loan scheme to ensure that the administration of the Act is as efficient as possible.
Finally, the bill contains a number of technical remedial amendments to ensure the Act works as intended.
Definition of “Income” For Student Loan Repayment Purposes
(Clauses 63 to 66)
Summary of proposed amendments
The bill makes changes to the definition of “adjusted net income” for student loan repayment purposes to ensure that a borrower’s repayment obligation accurately reflects their ability to repay their loan. Amendments make further adjustments to “net income” to broaden the definition of income to include other types of income not currently captured.
The amendments will apply from 1 April 2014 for the 2014-15 and later tax years.
A New Zealand-based borrower’s non-salary and wage income repayment obligation is based on their adjusted net income.
Clause 66 introduces new schedule 3 which makes further adjustments to the definition of “adjusted net income” for the purposes of the repayment obligation.
The following further adjustments will be made to the definition of net income for student loan repayment purposes to cover:
- income from a trust and companies owned by trusts when the borrower is the settlor;
- tax-exempt salary and wages, and certain overseas pensions that are exempt from New Zealand tax;
- distributions from superannuation schemes that relate to contributions made by a person’s employer within the last two years, when the person has not retired (excluding KiwiSaver and locked-in superannuation schemes);
- distributions from a retirement savings scheme when the person has retired early;
- income kept in a closely held company;
- fringe benefits received by shareholder-employees who control the company;
- PIE income that is not “locked in”;
- 50 percent of non-taxable private pensions and annuities;
- main income equalisation scheme deposits; and
- payments from trusts, not being beneficiary income, when the borrower is not the settlor.
Clause 64 incorporates the Income Tax Act 2007 definition of “net income” in the definition of “adjusted net income” in new section 73. There will no longer be any need for the definition to refer to annual gross income minus annual gross deductions because this is what net income is.
Clause 63 therefore repeals the definitions of annual gross income and annual total deductions in section 4. As a consequence of repealing these definitions the requirement to include foreign-sourced income and deductions in the assessment of adjusted net income is now located in clause 3 of new schedule 3 (see clause 66).
Clause 64 replaces section 73 with a new section 73 which provides that “adjusted net income” has the same meaning as net income in section YA 1 of the Income Tax Act 2007 but with the adjustments set out in new schedule 3 of the Act as inserted by clause 66.
The student loan scheme is an income-contingent scheme, meaning that the amount that a borrower has to repay in any year is dependent on their “net income”. The current definition of “income” for student loan repayment purposes captures income that is taxed to the individual rather than to another entity. It includes income such as salary and wages, income-tested benefits, New Zealand superannuation, interest, dividends and IR3 income such as business profits.
For borrowers who derive other types of income, the current definition of income may not reflect their actual earnings or available financial resources which are available to meet their student loan repayment obligation.
Therefore, broadening the definition is important in terms of meeting the policy objective of ensuring a borrower’s repayment obligation accurately reflects their ability to repay. It is inequitable and unfair that borrowers have different repayment obligations depending on whether that income is currently included as income for student loans.
Changes were signalled by the Government in 2010 relating to the way that “income” should be defined for the purposes of Working for Families tax credits and other social policy programmes. Broadening the definition to better align with that used for Working for Families ensures there is better consistency across all social policy initiatives to improve the integrity of the social assistance system.
Information-Matching with the New Zealand Customs Service for Borrowers in Serious Default
(Clauses 34, 43, 44, 45, 46 and 47)
Summary of proposed amendments
The bill introduces an information match with the New Zealand Customs Service to locate borrowers in serious default when they enter or leave New Zealand.
The amendments will apply from the date of enactment.
Clauses 45 and 46 amend sections 280H and 280I of the Customs and Excise Act 1996 to provide for information-matching between the Customs Service and Inland Revenue to allow the Commissioner of Inland Revenue direct access to departure and arrival information. The purpose of the information match is to assist the Commissioner to locate borrowers who are in serious default of their repayments when they enter or leave New Zealand.
Clause 44 defines “serious default” to mean the state of having an unpaid amount due and owing, and satisfying criteria established by the Commissioner.
Clause 47 amends section 103(1) the Privacy Act 1993 to ensure that the Commissioner is relieved from the requirement to issue a notice of adverse action. New section 103(1C)(a) provides that the Commissioner can take action to recover unpaid amounts owed by a borrower in serious default identified in information supplied to the Commissioner under section 280H of the Customs and Excise Act 1996.
The key impediment to collecting repayments from overseas-based borrowers is a lack of contact details which prevents Inland Revenue from engaging with this group.
This new information match with the New Zealand Customs Service will enable certain borrowers in serious default to be identified by the Customs’ system immediately upon their arrival or departure. Customs will then be able to quickly transfer to Inland Revenue any contact details obtained from the borrower.
This information will then be used by Inland Revenue to initiate contact with the borrower to discuss the borrower’s situation and the outstanding arrears.
The proposed new information match is based on the existing child support alerts match used by Inland Revenue and the New Zealand Customs Service. Inland Revenue will send Customs the names, date of birth and IRD number of a selected number of borrowers who are in serious default. Customs will then match this list against the names and birthdates of people crossing the border.