Borrower's repayment obligations

Sections 30-117, 221 and schedules 2, 3, 4 and 7

The basis of assessment for salary and wage earners has been changed from an annual basis with an end-of-year assessment, to a pay-period basis. This means student loan deductions from salary and wages will be considered correct each pay day, unless there has been a significant over- or under-deduction.

Background

Currently, the same repayment obligations apply to all New Zealand-based borrowers. That is, the repayment obligation is 10% of the borrower's annual net income if it exceeds the current repayment threshold of $19,084.

The majority of borrowers who receive salary and wages only are required to file an end-of-year personal tax summary to square-up their repayment obligations for the year. The annual basis of assessment ensures accuracy of repayments only at the end of the year. There is no incentive to encourage correct deductions to be made during the year.

Changing from an annual basis of assessment to a pay-period basis for salary and wage deductions removes the requirement for salary and wage earners to file an end-of-year return and reduces compliance costs for the majority of borrowers. It will also enable Inland Revenue to shift resources from undertaking the end-of-year assessment and collecting large debts to ensuring deductions made during the year are correct, providing higher value services to borrowers.

Key features

The Act changes the way New Zealand-based borrowers repay their loans by providing different repayment obligations for different classes of New Zealand-based borrowers as follows:

• For borrowers with salary or wages only or salary and wages and pre-taxed income, the repayment obligation on their salary and wages will be determined on a pay-period basis.
• For borrowers with pre-taxed income (which is defined as income from interest, dividends, taxable Māori authority distributions, or salary or wages from employment as a casual agricultural employee or as an election-day worker) or salary and wages and pre-taxed income only, the repayment obligations on their pre-taxed income will be determined on an annual basis and will apply when this income exceeds $1,500.
• For borrowers with other income (income other than from salary or wages and pre-taxed income) the repayment obligation on the borrower's taxable income (including salary and wages, pre-taxed income, and other income) will be determined on an annual basis.

The Act simplifies the loan repayment process by removing the current annual assessment for the vast majority of borrowers whose income is from salary and wages only. Repayment deductions from salary and wages will be determined on a pay-period basis. That is, deductions made on a pay-period basis will be the borrower's repayment obligation, provided the employer has not made a significant under- or over-deduction. This will provide greater certainty for borrowers about their repayment obligations.

A separate loan repayment mechanism is provided for borrowers who have pre-taxed income. These borrowers will now be required to make a declaration of their pre-taxed income rather than the annual return as previously. The new legislation sets out how and when their repayment obligation must be paid.

Borrowers with business or other income will be required to file an end-of-year return to determine their other-income repayment obligations. The new legislation sets out how and when their repayment obligation must be paid, including the requirement to make interim payments during the year.

The current interim payment rules will continue to apply to borrowers with pre-taxed income and borrowers with other income. These rules require borrowers to pay their repayment obligation for the year in instalments during the year, similar to the way provisional tax operates.

Also, the current terminal payment will be replaced with remaining repayments due on the same dates as interim payments. Remaining repayments are discussed later in this bulletin.

Overseas-based borrowers will continue to have a repayment obligation of $1,000, $2,000 or $3,000, depending on their loan balance. These borrowers will continue to be required to make repayments in two equal instalments, on 30 September and 31 March.

Application dates

The provisions that deal with special assessments issued to borrowers with salary or wage income to recoup a significant under-deduction and the changes to enable six-monthly interim payments to be made when borrowers pay provisional tax six-monthly, apply from 1 April 2013.

Applications for special deduction rates for unused thresholds and declarations for full-time study exemptions and requests for borrower deductions to be made from salary and wages apply from 1 March 2012. This enables deduction rate certificates and exemptions, and borrower-requested deductions to be in place for a 1 April 2012 commencement of salary and wage deductions.

The remaining changes apply from 1 April 2012.

Detailed analysis

New Zealand-based borrowers will be required to make repayments from salary and wage income, pre-taxed income, and other income.

Repayments from salary and wages

Repayment codes

New Zealand-based borrowers are required to have repayment deductions made from their salary and wage income. They are required to apply one of the following repayment codes to their salary or wages to enable repayment deductions to be made at the correct rate:

• SL - this is the standard code when deductions are made at the rate of 10 cents in the dollar on income above the pay-period repayment threshold (annual repayment threshold is $19,084/number of pay days per year); or
• STC - this code is applied if a reduced deduction is required to be made and the borrower has applied to the Commissioner for a reduced rate. Reduced rates are available to a borrower when there is an unused repayment threshold from their primary job which can be used to reduce their deductions from their secondary job, if the borrower is in hardship, or when repayment deductions are reduced to take account of a business loss.
• SLBOR and SLCIR − these codes apply in cases where the employer is instructed to make additional deductions from a borrower's salary or wages by either the borrower or the Commissioner.

The SLCIR code is applied when the borrower is required to make additional deductions to repay a previous significant under-deduction which arose in either the current year or a prior year.

The SLBOR code is applied when the borrower wishes to make additional repayments to count towards qualifying for the 10% excess repayment bonus. The application of this tax code enables these additional payments to be identified so they are not included in the borrower's standard repayment deductions for the pay-period.

Significant under- and over-deductions

Standard deductions made from a borrower's salary or wages are considered correct and final unless there is a significant under-or over-deduction. The Commissioner will determine the threshold for what is a significant over-deduction or a significant under-deduction, having regard to the resources available to the Commissioner and the need to maintain the integrity of the student loan scheme. The Commissioner must inform borrowers on or before 31 March of the significant over-deduction threshold that will apply for the following tax year.

When an error is made in the collection of standard repayment deductions from salary or wages, and the amount is considered to be a significant under-deduction or over-deduction, the borrower will either receive a refund or be required to repay the under-deduction.

There are two mechanisms available to recoup a significant under-deduction, either by way of a special deduction rate (SLCIR) from future salary or wages or by the Commissioner issuing a special assessment with a due date (at least 30 days after the date of the assessment notice) for the repayment of the under-deduction.

Significant over-deductions may be refunded or the borrower can choose to leave the over-payment against their loan to be considered as an excess repayment. Excess repayments are outlined later in this commentary.

If a borrower has been over-deducted or under-deducted but the amount does not exceed the significant threshold amount, the borrower's deduction will be considered to be correct and final and the amount will not be refunded or collected.

Unused repayment threshold

Borrowers with two or more jobs who estimate that the income from their main job for a three-month period will be below the repayment threshold for that period, can apply to the Commissioner to have the unused repayment threshold applied against their second job. The Commissioner will calculate the special deduction rate that should apply to the borrower's secondary job and issue a special deduction-rate certificate code to the borrower for the borrower to give to their employer.

The borrower will be required to review their estimate each quarter and advise Inland Revenue if any of the information or circumstances on which the special deduction rate is based change.

Full-time study exemption

Borrowers who study full-time but also work and earn under the annual repayment threshold can apply for a repayment exemption. This exemption ensures students are not disadvantaged as a result of the introduction of the pay-period basis of assessment where, but for the exemption, students would be required to make repayments if their earnings are above the pay-period threshold.

To qualify for the exemption, borrowers must:

• be engaged in a full-time study workload, being a programme of study which is 32 weeks or longer in a year and the study is at least 0.8 of equivalent full-time student units; or
• a period of at least 12 weeks or longer in a year and the study is at least 0.3 of equivalent full-time student units.

The exemption period commences when a borrower has a loan advance and continues while the borrower is undertaking a programme of study. The exemption period will not be broken by holiday periods between semesters provided there has been at least one semester of study completed and the holiday period does not exceed 15 weeks over the Christmas holiday period or three weeks for any other holiday period.

The exemption does not apply if the borrower has other income (income other than salary or wage or pre-taxed income).

Also, generally the PAYE rules in the Tax Administration Act 1994 apply to student loan deductions, and these deductions are in addition to PAYE deductions for income tax.

Pre-taxed income and other income repayment obligations

Repayment obligations on pre-taxed income

Pre-taxed income is income that is not required to have student loan deductions made from it. If a borrower has income other than salary or wages and pre-taxed income, such as business income, they are an "other-income" borrower and are not required to comply with the pre-taxed repayment obligations.

For borrowers who derive solely pre-taxed income or salary and wages, and pre-taxed income, they will only have a pre-taxed income repayment obligation if the net pre-taxed income is $1,500 or more and their total income is above the annual repayment threshold.

A borrower's net pre-taxed income is their total pre-taxed income less the borrower's allowable expenses for the year. Borrowers will be required to make an annual declaration of their pre-taxed income. The declaration must be made by 7 July following the end of the tax year, or another date specified by the Commissioner where the borrower has requested an extension to file the declaration or the Commissioner considers it appropriate.

The Commissioner will determine the borrower's pre-taxed repayment obligation once the borrower files the declaration.

The calculation used to determine a borrower's pre-taxed repayment obligation depends on whether their annual salary or wage income exceeds the annual repayment threshold.

If the borrower's annual salary and wage income is less than the annual repayment threshold, the borrower's pre-taxed repayment obligation is determined by the following formula:

a = b x (c − d)

where:
a is the amount of the borrower's pre-taxed repayment obligation
b is the repayment percentage (currently 10%)
c is the sum of the borrower's net pre-taxed income (gross pre-taxed income less allowable expenses) and salary and wage income for the tax year
d is the annual repayment threshold (currently $19,084).

If the borrower's pre-taxed repayment obligation is zero or negative, the borrower will have no pre-taxed repayment obligation for the year.

If the borrower's annual salary and wage income is equal to or greater than the annual repayment threshold, the borrower's pre-taxed repayment obligation is determined by the following formula:

a = b x c

where:
a is the borrower's pre-taxed repayment obligation
b is the repayment percentage (currently 10%)
c is the borrower's net pre-taxed income (gross pre-taxed income less allowable expenses).

The Commissioner will notify the borrower of their pre-taxed repayment obligation and the requirement for the borrower to make interim payments for the following year. These rules are outlined below under "Interim payment obligations".

Other income repayments

Borrowers with other income (defined as income other than salary or wages and pre-taxed income) will be required to make student loan repayments based on their net income. A borrower's net income is defined as their annual gross income less annual total deductions. If a borrower's net income is less than the annual repayment threshold (currently $19,084), the borrower has no other income repayment obligation.

If the borrower's net income is above the annual repayment threshold and they have other income they will be required to file either a return at the end of the year (for New Zealand-based borrowers) or a declaration of details for New Zealand-based borrowers who are non-resident, outlining their annual gross income and their annual total deductions in order to determine the borrower's net income. Once the return or declaration is filed, the Commissioner must assess the borrower's other income repayment obligation for the year and advise them of the amount of their other income repayment obligation and the due dates on or before which the amount must be repaid.

A borrower's other income repayment obligation for a tax year is determined using the following formula:

a = (b x (c - d)) - e

where:
a is the amount of the borrower's other income repayment obligation
b is the repayment percentage (currently 10%)
c is the borrower's net income for the year
d is the annual repayment threshold (currently $19,084)
e is the standard deduction made from the borrower's salary and wages derived during the year.

However, if the "other income" repayment obligation determined by the formula is zero or negative, the borrower will have no other income repayment obligation for the year.

Remaining repayments

If the borrower's interim payments made during the year do not fully satisfy the borrower's pre-taxed repayment obligation or the borrower's other "income repayment" obligation (as applicable) for the year, the difference is the borrower's "remaining repayments".

A borrower's remaining repayment due dates are determined as follows:

• For borrowers whose pre-taxed repayment obligation or other income repayment obligation for the year is less than $1,000, the total remaining repayment is due in one instalment. The due date for the remaining repayment will be the interim payment date that immediately follows the date for filing the borrower's pre-taxed declaration, return of income, or details of annual gross income for New Zealand-based non-residents (as applicable).
• For borrowers whose pre-taxed repayment obligation or other income repayment obligation is $1,000 or more but less than $16,000, and who do not estimate their repayment obligation, the remaining repayments are due on the interim payment dates for the following tax year, that occur after the date the borrower is required to file their pre-taxed declaration or return of income. For example, a borrower with other income is required to file a return for the 2012-13 year on 7 July 2013 is required to pay remaining repayments in relation to their other income repayment obligation on the three interim payment dates that occur after the date the borrower was required to file a return of income (7 July 2013), being 28 August 2013, 15 January 2014 and 7 May 2014.
• Where the borrower's pre-taxed repayment obligation or other income repayment obligation is $16,000 or more, or their pre-taxed repayment obligation or other income repayment obligation is $1,000 or more and they estimated their pre-taxed or other income repayment obligation, the remaining repayments are due on the interim payment dates for the same tax year that the declaration or return of income relates to. The effect of this is to impose late payment interest on borrowers who pay less than their repayment obligation during the year. For example, a borrower with other income who is required to file a return for the 2012-13 year on 7 July 2013 will have remaining repayments in relation to their other income repayment obligation due on the three interim payment dates during the 2012-13 year being 28 August 2012, 15 January 2013 and 7 May 2013.

Interim payment obligations

Borrowers with either a pre-taxed repayment obligation or another income repayment obligation will be required to pay interim payments during the year in the same manner as provisional tax with payments due on the three standard provisional tax dates.¹ For example, if a borrower has a March balance date, payments would be due on 28 August, 15 January and 7 May.

The following exceptions apply when a borrower has other income and they pay provisional tax:

• On a six-monthly basis: the borrower would pay their interim payments on the three standard provisional tax dates. For a March balance date borrower, these are 28 August, 15 January and 7 May. This rule will change from 1 April 2014.
• Using the GST ratio method, the borrower's interim payments will be due on the three standard provisional tax dates.

Changes from 1 April 2013

From 1 April 2013, borrowers who account for provisional tax on a six-monthly basis will be required to pay interim payments on the same two dates as they pay provisional tax. For a March balance date borrower, this will be 28 October and 7 May.

As with provisional tax, borrowers can choose between two methods to calculate interim payments for student loan purposes: the standard method or an estimation of their liability.

Standard method

Borrowers who use the standard method to calculate their interim payments are required to uplift their prior year's pre-taxed repayment obligation or other income repayment obligation by 5%. If the borrower has not filed their prior year's pre-taxed declaration or other income return, their interim payments will be based on their repayment obligation for the prior year uplifted by 10%. If a borrower's uplifted pre-taxed repayment obligation or other income repayment obligation is less than $16,000, the amount of each interim payment is determined by the following formula:

where:
a is the amount of the borrower's interim payment
b is the amount of the borrower's uplifted pre-taxed repayment obligation or other income repayment obligation
c is the number reflecting which of the interim payments is being calculated (eg, first, second or third)
d is the total number of interim payment due dates the borrower has for the tax year
e is the total of interim payments that were previously due.

If the borrower's interim payment is not divisible into equal amounts, the final interim payment makes up any difference.

If the borrower's uplifted pre-taxed repayment obligation or uplifted other income repayment obligation exceeds the borrower's loan balance at the beginning of the year plus any loan advances made, the uplifted repayment obligation will be reduced accordingly.

Estimation method (including borrowers whose uplifted repayment obligation is $16,000 or more)

Borrowers whose pre-taxed repayment obligation or other income repayment obligation is $1,000 or more, and who estimated their pre-taxed repayment obligation or other income repayment obligation or their uplifted repayment is $16,000 or more, will determine their interim payments by dividing their estimated repayment obligation (or uplifted repayment obligation) by the number of interim payment due dates for the year.

Special deduction rate certificate for lower repayment obligation

If a borrower derives other income and salary and wages in a tax year, and considers that their standard deductions from salary or wages will exceed their repayment obligations for the year, they can apply to the Commissioner for a special deduction rate certificate to apply a lower deduction rate to their salary or wages.

If the Commissioner accepts the application, the Commissioner will issue the borrower with a special deduction rate certificate, specifying the lower deduction rate and the period the rate applies for. The borrower will be required to provide the certificate to their employer. The certificate will cease when either the period outlined on the certificate is exceeded or the borrower or Commissioner withdraws the certificate by advising the employer accordingly.

Extensions of time to file a declaration of pre-taxed income

With the introduction of the requirement to file a declaration of pre-taxed income, a new provision has been introduced to enable the borrower to apply (in a manner acceptable to the Commissioner) for an extension of time to file the declaration. The Commissioner also has the ability to provide borrowers with an extension of time to file a declaration without the borrower requesting such an extension.

Overseas-based borrowers' repayment obligations

The current repayment obligations for overseas-based borrowers continue in this Act. That is, a borrower's repayment obligation is either $1,000, $2,000 or $3,000, depending on their loan balance. These borrowers will continue to be required to make repayments in two equal instalments, on 30 September and 31 March.

Under the new provisions, the repayment obligations of overseas-based borrowers ($1,000, $2,000 or $3,000) and repayment thresholds ($1,000, $15,000 and $30,000) can be changed by Order in Council rather than by primary legislation. This ensures consistency with the way changes can be made to the annual repayment threshold and the repayment percentage that applies to New Zealand-based borrowers.

Changes have also been made to the definitions of "consolidated loan balance" and "loan balance" to ensure overseas-based borrowers' repayment obligations reflect adjustments to the loan balance at 31 March, including any administration fee charged, but excluding the excess repayment bonus. This gives effect to the original policy intent.

¹ When a borrower is in a transitional year (due to changing their balance date), the interim payment dates are the same dates as the provisional tax dates for that transitional year. The exception is when the borrower only has one payment date or when there is an odd number of payment dates.