Refunds of student loan over-payments

2005 legislation introduces rules regarding refunds of student loan over-payments that relate to the 2005-06 and prior tax years.

Sections 21, 57A to 57D, 58A and 66B of the Student Loan Scheme Act 1992

New legislation introduces new rules regarding refunds of student loan over-payments that relate to the 2005-06 and prior tax years. An over-payment is any amount deducted or paid in excess of a borrower's repayment obligation for a year.

Background

The changes were made to protect the integrity of the Student Loan Scheme following reports of a borrower seeking to arbitrage between the interest rate charged when an over-payment was made and the "interest-free" student loans policy.

They were added to the Taxation (Urgent Measures) Bill by means of Supplementary Order Paper.

Key features

Refunds can no longer be issued for student loan over-payments that relate to the 2003-04 and prior tax years. Refunds of over-payments which relate to the 2004-05 and 2005-06 tax years are not eligible for the new full interest write-off, except in the case of significant financial hardship. Significant financial hardship includes difficulties that arise because of:

borrowers' inability to meet minimum living expenses; or
their inability to carry out their usual occupation because of illness, injury, or disability; or
their inability to meet mortgage repayments on their primary residence, resulting in the mortgagee seeking to enforce the mortgage on the residence; or
the cost of modifying a residence to meet special needs arising from a disability of a borrower or a borrower's dependant; or
the cost of medical treatment for an illness or injury of a borrower or a borrower's dependant; or
the cost of palliative care for a borrower or a borrower's dependant; or
the cost of a funeral for a borrower's deceased dependant.

Any student loan repayments will go first to the portion of a borrower's loan that is not eligible for the new interest write-off.

Any amount refunded that is not eligible for the new interest write-off will be eligible for the full interest write-off while the borrower is studying and for the base interest write-off and reduction provisions. Borrowers must be resident for income tax purposes to qualify for any of these exemptions.

Borrowers whose repayment obligation is reduced upon reassessment for periods prior to 1 April 2006 are able to claim a refund of the difference in the assessed repayment obligations.

Borrowers are not able to apply for a special student loan repayment deduction rate below the standard deduction rate of ten percent until 1 April 2006.

Example one
In the 2006 tax year Pita has a repayment obligation of $6,000. He made total repayments for the year of $10,000. On the 1st May 2006 he requests and then receives a refund of his $4,000 over-payment to pay for an overseas holiday. His loan balance increases by $4,000. Because the amount refunded was not due to significant financial hardship, interest charged on $4,000 of Pita's loan is not eligible for the new interest write-off. Any repayments Pita makes on his student loan go first to the portion that is not eligible for the new interest write-off (the $4,000 portion).

Objection to decisions made by Inland Revenue

Borrowers will be able to object to the decision made by Inland Revenue that an over-payment refunded was not because of significant financial hardship.

Application date

The changes apply to refunds of over-payments requested on or after 30 November 2005.