Excess repayments

Sections 118-132, 222 and schedule 8 

Changes have been made to the way excess repayments are dealt with to account for the move towards loan repayments being determined on a pay-period basis. This includes re-enacting the existing excess repayment bonus provisions.

Background

When a borrower makes payments or deductions of $500 or more in excess of their compulsory repayment obligation for the year, they are entitled to a 10% excess repayment bonus. The bonus is calculated following the end-of-tax year assessment. The bonus is available to both New Zealand-based and overseas-based borrowers.

As a result of the repayment obligations on salary and wages being determined on a pay-period basis under the new rules, changes have been required to reflect the pay-period basis of assessment on the excess repayment bonus provisions.

There are also different time periods within which a borrower is required to request a refund of an excess repayment depending on whether the borrower is New Zealand-based or overseas-based.

Key features

The major change to the excess repayment provisions policy is to exclude minor over-deductions that occur through the PAYE system from counting towards the 10% excess repayment bonus. This change is required to enable the pay-period assessment basis to apply to salary and wages. Any over-deductions that are determined as significant will be eligible for the 10% bonus, provided the other criteria for the bonus are met.

In addition, as a result of the introduction of the pay-period assessment basis for salary or wages, borrowers who want to make voluntary repayments through the PAYE system and qualify for the bonus can do so by separately tagging these payments with a new deduction code, SLBOR. This will allow Inland Revenue to separate these payments from standard salary or wage deductions when paid through the employer monthly schedule. This will allow the current practice, whereby some borrowers have their employer deduct additional amounts from their salary and wages, to continue.

When a borrower has a repayment or deduction made that exceeds their compulsory repayment obligations, the Student Loan Scheme Act 1992 only enabled borrowers to either apply the amount to their loan balance or have the amount refunded. The new rules provide another option for borrowers - to have their excess repayment applied to a future repayment obligation. This will be of benefit to borrowers whose excess repayment is below the $500 threshold to qualify for the bonus. In this situation, the borrower could apply the excess to satisfy the following year's repayment obligation and thereby combine it with any other excess payments in that future year in the hope of the amount exceeding the $500 threshold and thereby qualifying for the bonus in that year.

Previously, when the Commissioner advised a borrower that they had an excess repayment, overseas-based borrowers had two months from the date of the statement to request a refund of the excess, whereas New Zealand-based borrowers had six months.

The new rules standardise the period to request a refund at six months for both New Zealand-based and overseas-based borrowers.

Generally the excess repayment bonus is credited:

• on the day that the final excess repayment was made, if the borrower repays their loan in full; or
• on the date the borrower died or was declared bankrupt; or
• on 1 April in the year that follows the tax year that the excess repayment was made, in all other cases.

Changes from date of enactment to 1 April 2012

Changes have been made to the Student Loan Scheme Act 1992 to ensure that from the date of enactment of the new rules, until 1 April 2012, the excess repayment bonus will be credited:

• on the date the borrower died or was declared bankrupt; or
• on 1 April in the year that follows the tax year that the excess repayment was made, in all other cases.

If a borrower has repaid their loan in full part-way through the year, has died or been declared bankrupt, the excess repayment bonus is calculated based on the borrower's obligations up to the date the borrower repaid their loan, died, or was declared bankrupt. This treatment should benefit the majority of borrowers. However, if finalising the excess repayment bonus part-way through the year would disadvantage the borrower, the borrower can request that the bonus be finalised as at the end of the year.

During the Select Committee stage of the bill, a technical amendment was made to ensure that borrowers who receive other income in addition to salary or wages are able to receive a refund of overpaid loan deductions from their salary or wage income.

Application date

The changes apply from 1 April 2012, with effect from the 2012-13 tax year.