Amnesty on student loan penalties

2005 amendment means borrowers who are not resident in NZ will be able to apply to have penalties on any overdue student loan assessment remitted.

Sections 45A to 45D and 66A of the Student Loan Scheme Act 1992

Borrowers who are not resident in New Zealand for income tax purposes on 31 March 2006 will be able to apply to have penalties on any overdue student loan assessment remitted. Remission will be dependent on their giving an undertaking, and adhering to that undertaking, that all future liabilities arising under the Student Loan Scheme Act 1992 for the next two years will be met as they fall due.

Background

The purpose of the amnesty is to give non-resident borrowers in arrears the chance of a "fresh start". The penalty rate is equivalent to an annual interest rate of 26.82 percent, which means that once borrowers fall behind in their payments, the level of debt rapidly gets out of control. For many borrowers the amount of their overdue debt, including penalties, is a barrier to their return to New Zealand.

Key features

The amnesty will apply to borrowers who are not resident in New Zealand for income tax purposes on 31 March 2006.^[1] It will include borrowers who are non-resident, but are not being treated as such as they have failed to advise Inland Revenue that they have left New Zealand, and therefore their correct residency status has not been determined.

Borrowers will be required to give an undertaking (and adhere to it) to meet all their obligations under the Student Loan Scheme Act for a two-year period to qualify for the amnesty. For borrowers returning to New Zealand this will mean meeting their income-contingent liability, including having repayment deductions made from their salary and wages. For borrowers remaining overseas it will mean making each quarterly instalment as it falls due. A combination of the two will be allowed - for example, one year overseas and one year in New Zealand - provided the relevant liability is kept up-to-date.

When an application for the amnesty is received and accepted, any penalties incurred up to that time will be remitted, and the overdue assessments on which the penalties were charged will be "returned" to the loan balance. As interest would have ceased once an assessment became subject to penalties, interest will be charged in place of the remitted penalties. If borrowers fail to meet their liability as it falls due for the two-year period, the original assessments and penalties proportional to the degree of non-compliance can be reinstated.

The amnesty will apply for the period 1 April 2006 to 31 March 2007. It will apply to both those non-resident borrowers who return to New Zealand and those who do not. Borrowers who return to New Zealand will be entitled to interest-free student loans once they have been back in New Zealand for a continuous period of 183 days or more (subject to the 31-day rule referred to earlier relating to interest-free student loans).

Borrowers will be able to challenge the following decisions made by Inland Revenue:

not to write-off penalties;
the amount of penalties written off;
that the amnesty conditions have been breached; and
to reinstate penalties if the amnesty conditions were breached.

Application date

The amnesty applies to applications received during the year ending 31 March 2007.

Example one: Borrower returning to New Zealand
Rachel moved to live long-term in Australia in January 2004. On 1 April 2004 her student loan balance was $15,000, and she has been issued with non-resident assessments for the 2004-05 and 2005-06 tax years of $2,050 and $1,980 which she has failed to pay. As at 1 April 2005 the 2004-05 assessment ceased to be subject to standard interest (of 7.0%) and instead became subject to compounding late payment penalties of 2% per month. The 2005-06 assessment became subject to penalties one year later on 1 April 2006. Her total late payment penalties on 1 April 2006 are $641. Her loan, excluding the overdue assessments, is $13,000, making her total debt $17,671.

On 2 April 2006 Rachel returns to New Zealand and applies for her penalties to be remitted under the amnesty provisions. Inland Revenue accepts Rachel's application and reverses the penalties and overdue assessments. Interest is charged in place of the penalties. Overall, Rachel's loan balance on 1 April 2006 is reduced by $498 (penalties of $641 less interest of $143 charged in place of penalties), to $17,173.

Rachel starts working for salary and wages on 1 May 2006. After she has been back in New Zealand for 183 continuous days she qualifies for an interest-free student loan, backdated to the date she returned. Rachel's repayment obligation (based on her income) is $2,200 for the 2006-07 tax year and $2,400 for the 2007-08 tax year, which she has deducted each fortnight by her employer. By having the correct repayment deductions made each fortnight, Rachel has met her obligations. Her loan balance on 31 March 2008 will have reduced to $12,573.

Example two: Borrower remaining overseas
Same as in example one, but Rachel remains overseas. Because she has remained overseas, her loan remains subject to interest.

Rachel will have non-resident assessments for the 2006-07 and 2007-08 tax years. These assessments will be due in four equal instalments at the end of June, September, December and March during each tax year. Rachel's two-year period runs until 2 April 2008. She must therefore make all payments for these two tax years as they fall due, with the last instalment falling due on 31 March 2008.

Example three: Borrower failing to meet the two-year test
Same as example one, but 12 months after having her application for the amnesty accepted Rachel changes jobs and fails to give her new employer the correct deduction code. Despite reminders from Inland Revenue, Rachel continues to fail to do so.

As the conditions were met for only half the amnesty period, Inland Revenue decides to reinstate half the non-resident assessments and the associated penalties previously remitted.

Example four: Borrower not entitled to the amnesty
Mike left New Zealand on 20 February 2003 to live in the UK for three years. Mike advised Inland Revenue of his departure and he was determined to be a non-resident from that date. He was issued with non-resident assessments for each of the 2003-04, 2004-05 and 2005-06 tax years, but he failed to pay anything. Mike returned to New Zealand permanently on 21 February 2006 and regains his New Zealand tax residence from that date. On 30 April 2006 he contacts Inland Revenue and asks to come within the amnesty.

Mike is ineligible as he was not a non-resident on 31 March 2006. However, once he has been back in New Zealand for 183 days, he will be entitled to have interest charged on his loan from 1 April 2006 written off.

^[1] Borrowers are considered to be resident if they have a permanent place of abode in New Zealand. Borrowers who do not have a permanent place of adobe in New Zealand will cease to be resident if they are personally absent from New Zealand for more than 325 days in any 12-month period. Further information on residence can be found in Inland Revenue's New Zealand tax residence guide (IR292).