"Interest-free" student loans for borrowers living in New Zealand

2005 amendments mean no interest on student loans for borrowers living in NZ. IR will give a full write-off for the period during which a borrower qualifies.

Sections 37, 38, 38AA to 38AK, 41, 65A and 69 of the Student Loan Scheme Act 1992

New legislation gives effect to the government's decision not to charge interest on student loans for borrowers living in New Zealand. This will be achieved by way of Inland Revenue giving a full interest write-off for the period during which a borrower qualifies. With a small number of exceptions, borrowers living overseas will not be entitled to the interest write-off.

If borrowers do not qualify for the new interest write-off, they may still be eligible for a full interest write-off if they are studying, or a base interest write-off or reduction. Borrower eligibility for a base interest write-off or reduction has been restricted to two years for each.

Background

The legislation addresses one of the government's stated objectives of encouraging student loan borrowers to remain in, or return to, New Zealand. The new legislation also addresses the government's concern over the affordability of tertiary education. Efforts to reduce debt have been limited for some borrowers because of the need to service interest payments. The removal of interest will reduce total debt and reduce the repayment times of borrowers.

Key features

From 1 April 2006, all borrowers personally present in New Zealand for 183 or more consecutive days (the 183-day requirement) will qualify for a full interest write-off. If a period that would have been 183 or more consecutive days in New Zealand is broken by a period or periods in the aggregate of 31 days or less overseas, the time spent overseas will be treated as having been spent in New Zealand. Borrowers must be personally present in New Zealand for the first day of that 183-day period.

Borrowers who qualify will have all interest charges written off from the day they first met the 183-day requirement.

Once borrowers have qualified for the full interest write-off they will continue to be eligible for the write-off until they have been overseas for 184 consecutive days or more (a 184-day absence). If a period that would have been 184 or more consecutive days overseas is broken by a period or periods in the aggregate of 31 days or less in New Zealand, the time spent in New Zealand will be treated as having been spent overseas. Borrowers must be personally present overseas on the first day of a 184-day absence.

When borrowers cease to be eligible for the interest write-off, any interest charged from the first day of the 184-day absence will not be written off or, if already written off, will be reinstated.

Borrowers who are present in New Zealand for part of a day will be treated as being present in New Zealand for the whole of that day and not absent from New Zealand for any part of that day.

Example one
Scott has been living in England for the last two years and returns to New Zealand to live here permanently on 1 June 2006. Scott meets the 183-day requirement on 30 November 2006 and is eligible to have all interest charged from 1 June 2006 written off.

Example two
Maria lives in New Zealand and travels to Australia for two weeks in May 2006. Maria would have spent 183 consecutive days in New Zealand from 1 April 2006 if she had not gone overseas. Because she spent 31 days or less overseas, in what otherwise would have been 183 days in New Zealand, the time spent in Australia is treated as if she had stayed in New Zealand. Maria will be eligible for a full interest write-off from 1 April 2006.

Example three
Lucy has been living in Fiji for two years. On 1 September 2006 Lucy returns to New Zealand for three months. Lucy does not meet the 183-day requirement and is not eligible for the interest write-off.

Example four
Tom lives in New Zealand and has met the 183-day requirement. On 1 December 2006 Tom goes to the UK to travel. Once Tom has been out of New Zealand for 184 days he ceases to be eligible for the interest write-off because he does not meet the criteria for an exemption. Any interest written off since 2 December 2006 (the day after he left New Zealand) will be reinstated.

Example five
Emily lives in New Zealand and has met the 183-day requirement. She moves to Australia on 1 January 2007. In March 2007 she returns to New Zealand for a one-week holiday before returning to Australia. Emily would have spent 184 consecutive days in Australia from 2 January 2007 if she had not returned to New Zealand for the one-week holiday. Because she spent 31 days or less in New Zealand, the time spent in New Zealand is treated as if she had stayed in Australia. Emily ceases to be eligible for the interest write-off, and any interest written off from 2 January 2007 will be reinstated.

Exemptions

The Commissioner of Inland Revenue may grant an exemption to the 183-day requirement in certain circumstances. Borrowers who are granted an exemption will qualify for the full interest write-off for the period for which the exemption is granted, even if they have a 184-day absence. For borrowers to be granted an exemption they must meet certain conditions and provide proof, as outlined below, to Inland Revenue that they meet these conditions. Borrowers must also provide any other information that the Commissioner of Inland Revenue may reasonably require to establish if an exemption applies.

All borrowers who meet the 183-day requirement or are granted one of the following exemptions will have an interest write-off credited to their student loan account after the end of each tax year (31 March).

Exemptions can be granted in the following circumstances:

Full-time study overseas at post-graduate level

Post-graduate study must be at levels equivalent to 8, 9 or 10 on the New Zealand Register of Quality Assured Qualifications under section 253(1)(c) of the Education Act 1989. For borrowers to be granted an exemption under this category they must provide the following proof:

documentation from New Zealand Qualifications Authority (NZQA) verifying that the post-graduate course is equivalent to levels 8, 9 or 10; and
evidence from the overseas education provider verifying full-time, post-graduate enrolment, for the course verified by the NZQA.

Example six
Louise does not meet the 183-day requirement because she is doing her Masters in Arts at the London School of Economics and Political Science. She provides proof to Inland Revenue that she meets the criteria for the full-time study at post-graduate level exemption. She is granted an exemption and is eligible for the interest write-off.

Working for the New Zealand government

Borrowers who are away from New Zealand in the service in any capacity of the government of New Zealand - for example, a member of the armed forces - may qualify for an exemption.

Example seven
John does not meet the 183-day requirement because he is working for the Ministry of Foreign Affairs and Trade at the New Zealand Embassy in the Cook Islands. John applies for, and is granted, an exemption. John is eligible for the interest write-off.

Unexpected delay in returning to New Zealand

Borrowers who are unexpectedly delayed in returning to New Zealand because of events or circumstances beyond their control may be eligible for the exemption. They must be resident for income tax purposes during the time in question and must provide proof:

of their intended return to New Zealand; and
that, had they returned to New Zealand as intended, they would have met the 183-day requirement; and
of the unexpected delay that resulted in their not being able to return to New Zealand as intended; and
that the unexpected delay was due to an event or circumstance beyond their reasonable control, such as:

an airline strike;
personal illness;
death of a family member;
fire, flood, storm, earthquake, landslide, volcanic eruption or other act of God;
an explosion or nuclear, biological, or chemical contamination; or
sabotage, terrorism or an act of war (whether declared or not).

Example eight
Robert has met the 183-day requirement. He planned to travel overseas for five months but becomes unwell while overseas and cannot travel home to New Zealand for another two months. Robert has a 184-day absence overseas but applies to the Commissioner of Inland Revenue for an exemption. He provides proof that he was unexpectedly delayed in returning to New Zealand, is granted an exemption and continues to be eligible for the interest write-off for the entire time he was overseas.

Unplanned absence

Borrowers who have an unplanned absence owing to an event or circumstances beyond their control may be eligible for the exemption. They must be resident for income tax purposes during the time in question and must provide proof:

of the duration of their unplanned absence from New Zealand; and
that the absence was due to an event or circumstance beyond their reasonable planning or control, such as:

the illness or death of a family member overseas;
their employer requiring attendance at a conference overseas.

Example nine
Liz has met the 183-day requirement and travels to Brazil for a holiday. She was overseas for 180 days and returns permanently to New Zealand. After one week back in New Zealand she has to go to Australia for her grandmother's funeral and stays there for 10 days. Because Liz spent less than 31 days in New Zealand in what otherwise would have been 184 or more consecutive days overseas, the time spent in New Zealand is treated as having been spent overseas. Liz has a 184-day absence overseas. She provides proof to Inland Revenue of her unplanned absence overseas and is granted an exemption. She remains eligible for the interest write-off while she was overseas.

Absence because of employment or occupation

Borrowers who are required to be absent from New Zealand because of their employment or occupation may be eligible for the exemption. They must be resident for income tax purposes during the time in question and have a permanent place of abode only in New Zealand. They must provide proof:

that they receive either a source deduction payment (such as salary or wages) as defined in section OB 2(1) of the Income Tax Act 2004; or
income from a business that has a permanent place of business in New Zealand; and
the majority of their absences from New Zealand are because of their employment or occupation.

Example ten
Billy has met the 183-day requirement. Billy's New Zealand employer sends him to Australia to work in the Sydney office for seven months. He stays in a hotel in Sydney and keeps in regular contact with his wife and children, who have remained in their family home in Auckland. (Billy's permanent place of abode is in New Zealand only.) He continues to receive salary from his New Zealand employer. He has a 184-day absence overseas but provides proof to Inland Revenue that he meets the conditions for the absence because of employment exemption. He is granted an exemption and remains eligible for the interest write-off while he is overseas.

Working or volunteering for a charitable organisation

Borrowers who are working as a volunteer or for token payment for a charitable organisation named in the regulations made under section 87 of the Student Loan Scheme Act 1992 can receive an exemption under this category for a maximum aggregate period of 24 months.

Partner of someone who would meet one of these exemptions

Borrowers who go overseas with partners who would meet the conditions for one of the earlier exemptions may be eligible for the exemption. They must be resident for income tax purposes during the time in question and provide proof:

of their relationship with their wife or husband, civil union partner or de facto partner (hereafter referred to as "partner"); and
that the absence from New Zealand resulted because they accompanied their partner overseas; and
the partner was absent from New Zealand -

undertaking full-time study overseas at post-graduate level and satisfies the conditions of the full-time study overseas at post-graduate level exemption (as outlined earlier); or
in the service in any capacity of the government of New Zealand; or
as a result of employment or occupation (as outlined earlier); or
because the partner was working as a volunteer or for token payment for a charitable organisation named in regulations (as outlined earlier).

Borrowers can receive an exemption for a maximum aggregate period of 24 months if their partner was working as a volunteer or for token payment for a charitable organisation listed in the regulations to the Student Loan Scheme Act 1992.

Transitional provision

A transitional provision gives the Commissioner of Inland Revenue the discretion to grant a full interest write-off to borrowers who fail to meet the 183-day requirement from 1 April 2006. An interest write-off may be granted for up to 183 days during the period 1 April 2006 to 30 September 2006. This provision will ensure that borrowers are treated the same as if the "interest-free" student loans policy was implemented as a true interest-free policy, with borrowers not being charged interest on their loans until they have been overseas for 184 days.

Example eleven
Sam has lived in New Zealand all of his life. On 1 September 2006 he moves to the United States permanently. He has not met the 183-day requirement from 1 April 2006. Under the transitional provision, the Commissioner of Inland Revenue grants Sam an interest write-off for the period 1 April 2006 to 1 September 2006. This is because if interest was not charged, Sam would have been entitled to an interest-free loan until he moved to the United States.

Example twelve
Belinda has also lived in New Zealand all of her life. On 1 May 2006 she leaves New Zealand, travels around Asia for four months, returning to New Zealand on 31 August 2006. She has not met the 183-day requirement from 1 April 2006. Under the transitional provision, the Commissioner of Inland Revenue grants Belinda an interest write-off for the period 1 April 2006 to 30 August 2006. This is because if interest was not charged, Belinda would have been entitled to an interest-free loan for this period. Belinda meets the 183-day requirement on 1 March 2007 and is eligible for an interest write-off from 31 August 2006 onwards.

Objections to decisions made by Inland Revenue

Borrowers will be able to challenge the decision made by Inland Revenue not to grant an exemption to the 183-day requirement.

Consequential changes

All borrowers are required to advise Inland Revenue when they have been, or expect to be, overseas for more than three months. All borrowers who have advised Inland Revenue of their absence, or expected absence, overseas are required to advise Inland Revenue when they return to New Zealand.

From 1 April 2006, a base interest write-off or an interest reduction can be granted for a maximum aggregate period of two tax years each.

Example thirteen
Alex does not meet the 183-day requirement because he spends all of the 2007 tax year in South America. He remains a resident for income tax purposes because he has a permanent place of abode in New Zealand. He works part-time and his income is below the repayment threshold. He is eligible for a base interest write-off for the 2007 tax year. On 1 April 2007 he returns to New Zealand, meets the 183-day requirement on 30 September 2007, and is eligible for the full interest write-off from 1 April 2007. On 1 April 2008 he leaves for a one-year holiday in Australia and remains a resident for income tax purposes. He has a 184-day absence and is not eligible for the full interest write-off from 2 April 2008 (the day after he left New Zealand) but is eligible for a base interest write-off for the 2009 tax year because his income is below the repayment threshold.

Application date

The new interest write-off applies to interest charged on or after 1 April 2006.