Interest, relief, penalties and offences, objections, disputes and challenges

Student Loan Scheme Act 2011 updates the interest and penalty provisions and brings them into line with those that apply more generally to tax offences.

Sections 133-188, 221 and schedule 7

Changes have been made to the interest and penalty provisions to bring the offences and penalty amounts up to date and into line with those that apply for tax offences more generally. These will have the effect of strengthening the rules applying to those who default on their student loan repayments.

Background

The offences and penalties in the Student Loan Scheme Act 1992 have not been changed since the Act came into effect. This means that offences and penalties that apply to non-compliant borrowers have not kept up with the changes to offences and penalties that apply for not complying with tax obligations more generally. An incentive therefore exists for borrowers to comply with tax obligations (due to higher penalties) ahead of student loans repayment obligations.

The Act will bring penalties for not complying with filing, information provision, and repayment obligations more into line with the penalties applying to taxes. These changes are intended to:

  • encourage borrowers to pay the correct interim payments when they are due;
  • bring the rules up to date with changes to equivalent tax obligations (for example, higher penalties for evasion and the introduction of a late filing penalty); and
  • reduce any tendency for borrowers to give student loan obligations a lower priority than tax repayment obligations.

The relief provisions currently available to a borrower namely, relief from late payment interest, hardship relief (limited to the current year, prior years or the next year), and financial relief by way of instalment arrangements have been retained.

The borrower currently has the contractual right to object to any loan advance that has been attributed to a borrower. These objections are dealt with by StudyLink. The borrower can also object to the Commissioner regarding any assessment made by the Commissioner, any penalty imposed, any decision concerning significant financial hardship, or the assessment of a repayment obligation. These objections are dealt with by the Commissioner and are retained in the new Act.

Key features

The new rules include the following changes:

  • The late payment penalty of 19.56% per annum has been replaced with a late payment interest of 10.6% per annum.
  • Late filing penalties will be imposed for incomplete or absent declarations, or notifications in certain circumstances.
  • The underestimation penalty that applies when a borrower has underestimated their repayment liability has been replaced with the ability to charge late payment interest from each overdue interim payment, and the penal repayment penalties that apply in cases of evasion will be replaced with a student loan shortfall penalty for borrowers who have taken an incorrect tax position.
  • Student loan shortfall penalties will be imposed at the same rate that would apply for taking an incorrect tax position.
  • The previous student loan criminal offences "rules" relating to wilfully or negligently failing to provide correct information will be replaced with the criminal offences that apply for tax purposes, such as absolute liability offences and knowledge and evasion offences. The same maximum penalty amounts that apply for income tax offences will also apply to student loan offences.
  • The previous offence rules for aiding and abetting an offence will be retained in the student loan rules, but with higher penalties to reflect those imposed in relation to tax.
  • The Commissioner can also enter into arrangements with borrowers for the repayment of outstanding amounts by way of instalments.
  • The Commissioner can refrain from collecting amounts due if this would cause significant hardship to the borrower. The Commissioner can also refrain from issuing notices of assessment and collecting small amounts.
  • The ability for borrowers to object to loan advances has been retained in the new Act. The current objection and challenge process has also been updated to reflect the process used in the Tax Administration Act 1994.

Detailed analysis

Interest

The legislation imposes interest on the loan balances of all borrowers and then provides a full interest write-off to borrowers for each day that they are New Zealand-based. The effect of this is to impose interest only on the loan balances of borrowers who are overseas-based.

The interest rate is determined by the following formula:

a% = b% + 0.74

where:
a is the interest rate for the tax year
b is the interest rate determined as the average of the monthly average 10-year Government bond yield rate published by the Reserve Bank for the 5 years ending in December in the year preceding the relevant tax year.

The interest rate for the year is currently 6.6%. Interest is calculated each day and charged and added to the loan balance on the last day of the tax year. The Commissioner is required to notify the borrower in writing of the amount of interest charged as soon as practical after interest is added to the borrower's loan balance.

Changes from 1 April 2013

Up to 31 March 2013, the current treatment will remain whereby loan interest will be imposed on all borrowers and a full interest write-off will be provided for New Zealand-based borrowers. From 1 April 2013, loan interest will only be imposed on overseas-based borrowers. This will contribute towards reducing the complexity of statements issued to borrowers as interest will not be shown on the statements of borrowers who are New Zealand-based.

The calculation of loan interest will also change. Previously, loan interest was calculated daily, charged and compounded annually. From 1 April 2013, loan interest will be calculated daily but charged and compounded monthly. This change in calculation method will not affect the overall annual interest rate imposed on a borrower. However, any change in the 10-year Government bond yield rate, on which the interest rate is based, will influence the interest rate charged.

Penalty for late payment

From 1 April 2012, the penalty for late payment will change its name from "late payment penalty" to "late payment interest". Also, when a borrower has not paid an amount by the due date and each individual unpaid amount is $334 or more, late payment interest will be imposed on each amount outstanding as follows:

  • 0.843% of the unpaid amount on the day after it was due; and
  • 0.843% of the unpaid amount as at the day that is one month since the last time the late payment interest was imposed.

Late payment interest will be calculated, charged and compounded monthly.

Again, the Commissioner must notify the borrower as soon as possible, after the late payment penalty is imposed.

Changes from 1 April 2013

From 1 April 2013, the way late payment interest is imposed will change.

Late payment interest will be calculated each day on the borrower's total unpaid amount above $500 and the interest will be charged and compounded each month.

Also, instead of late payment interest being charged on each individual unpaid amount of $334 or more, the threshold will be increased and late payment interest will apply if the total amount outstanding is $500 or more.

Small amounts

The Commissioner does not have to:

  • issue a notice of assessment to borrowers if the repayment obligation or total remaining repayment for the tax year is less than $20;
  • collect a repayment obligation or a total remaining repayment for the tax year if the amount payable is less than $20. This amount is not written off and remains part of the borrower's loan balance;
  • collect and may write-off an amount payable by an employer or PAYE intermediary if the amount payable is less than $20;
  • collect a repayment obligation if the amount has not been paid by the due date and is less than $334. This amount is not written off and is added back to the loan balance.

Relief

There are three types of relief that a borrower can apply to the Commissioner for:

  • relief from late payment interest;
  • hardship relief (limited to the current year, prior years or the next year);
  • financial relief by way of instalment arrangements.

Relief from late payment interest

Relief from late payment interest is available to the borrower when the borrower applies and the Commissioner considers that, having regard to the circumstances, it is equitable to do so and the relief is warranted. The relief can cancel all or some of the late payment interest imposed and refund any amount paid in relation to the cancelled interest.

Changes from 1 April 2013

From 1 April 2013, more detailed payment priority rules will apply. These rules are reflected in the provisions providing relief to borrowers from the late payment interest.

Some minor amendments will be required to the provisions providing relief to borrowers from the late payment interest both from 1 April 2012 and 1 April 2013 to correct technical errors. These amendments are included in the Student Loan Scheme Amendment Bill, which was before Parliament at the time of writing.

Hardship relief

When a borrower applies for hardship relief on the grounds that the payment of the repayment obligation would cause or has caused hardship or there are special reasons that make it fair and reasonable to provide relief, the Commissioner can decrease the borrower's repayment obligation.

The relief can be provided by either refunding a repayment obligation previously paid for the current year or for the previous tax year, or by reducing future deductions from salary and wages (by way of a special deduction rate) or a future pre-taxed repayment obligation or future other income repayment obligation. If the Commissioner reduces the borrower's repayment obligation due to hardship, the reduced amount is not written off and is not added to an unpaid amount but remains part of the borrower's loan balance.

Should the borrower's circumstances change and the change would have affected the borrower's entitlement to hardship, the borrower is required to notify the Commissioner who may review the previous decision to grant hardship relief. The hardship relief may be reversed and/or the borrower's repayment obligation may be reinstated.

Financial relief by way of instalment arrangements

Borrowers who have an unpaid amount can apply to the Commissioner to enter into an instalment arrangement for the repayment of the unpaid amount. Should the Commissioner grant the instalment arrangement, the borrower will continue to be liable for late payment interest on the amount outstanding during the instalment arrangement. If at the end of the arrangement the borrower has met all of the requirements of the instalment arrangement, the late payment interest that has accrued during the instalment arrangement will be reduced.

Changes from 1 April 2013

Up to 31 March 2013, borrowers who enter into an instalment arrangement and meet their obligations under the arrangement will have the late payment interest reduced to reflect their compliance.

From 1 April 2013, for each month that a borrower under an instalment arrangement meets their obligations, the late payment interest the borrower is liable for will be reduced by two percentage points. This ensures that borrowers receive the benefit of compliance sooner, while removing the previous requirement to apply for the reduction in late payment interest. These changes to instalment arrangements for student loans reflect the way tax instalment arrangements are generally administered.

Late filing penalty

A late filing penalty has been introduced to encourage borrowers to file their pre-taxed income declaration or declaration of world-wide income by New Zealand-based non-resident borrowers. Before the penalty can be imposed, the Commissioner must notify the borrower in writing or by public notice that the late filing penalty will be imposed if the borrower does not provide the declaration to the Commissioner within 30 days of the date of notice.

Once the 30-day period has passed, the Commissioner can impose the penalty. The penalty depends on the borrower's net income as follows:

  • a $50 penalty will be imposed if the borrower's net income is less than $100,000;
  • a $250 penalty will be imposed if the borrower's net income is between $100,000 and $1 million (inclusive);
  • a $500 penalty will be imposed if the borrower's net income is over $1 million.

To ensure that two penalties are not imposed for the same offence, a late filing penalty for student loan purposes will not be imposed if a late filing penalty has been imposed under the Tax Administration Act 1994 in relation to the same return.

The late filing penalty will be due and payable on the later of:

  • 60 days after the notification that the late filing penalty would be imposed;
  • the same date as the first standard interim payment1 for the borrower if the borrower does not have an extension of time to file a return. For a March balance date borrower, this will be 28 August;
  • the same date as the final standard interim payment1 for the borrower if the borrower has an extension of time to file a return. For a March balance date borrower, this will be 7 May.

Shortfall penalties

Currently, if a borrower evades or attempts to evade their repayment obligation, they can be subject to a penal repayment penalty of up to 300 % of the amount evaded. This penalty is now outdated and has been replaced with a range of shortfall penalties. These penalties increase in severity according to the offence ranging from not taking reasonable care in complying with repayment obligations to evasion.

The shortfall penalties will apply when a borrower:

  • has taken an incorrect tax position which is lower than the correct tax position; and
  • is also liable to pay a shortfall penalty for income tax.

Borrowers may also be liable to pay a student loan shortfall penalty if taking an incorrect tax position has also reduced their student loan repayment obligation.

The student loan shortfall penalty can be up to 150% of the shortfall in the borrower's repayment obligation, and will be the same percentage rate imposed for the borrower's income tax shortfall. This will ensure that borrowers who do not comply are penalised on the whole shortfall, and not just the income tax amount.

Offences

Criminal offences currently in the Student Loan Scheme Act relate to wilfully or negligently failing to provide correct information. These offences will be replaced with the criminal offences that apply for tax purposes, such as strict liability offences, and knowledge and evasion offences. The same maximum penalty amounts that apply for income tax offences will also apply to student loan offences.

The current offences for aiding and abetting an offence will be retained, but with higher penalty amounts to reflect those imposed in relation to tax, as will the offence relating to prejudicing employees because of their student loan liability. However, there will be no change to the penalty amount for the latter offence and the $2,000 penalty will continue to apply.

The following table provides a summary of the offences and penalties under both the Student Loan Scheme Act 1992 and the Student Loan Scheme Act 2011.

Civil offences Student Loan Scheme Act 1992 Student Loan Scheme Act 2011
Offence Penalty Offence Penalty
Failure to pay Late payment penalty 1.5% per month (19.56% pa) Late payment interest 0.84% per month (10.6% pa)
Failing to file n/a n/a Late filing penalty Penalties range from $50 to $500, depending on borrower's net income
Short-payment of interim payments Underestimation penalty (failure to pay 80% of liability by 3rd interim payment date 10% of under-estimation Short payment was due on interim payment dates for the same year with payments spread evenly over those dates Late payment interest imposed from interim payment due dates
Evasion Penal repayment obligation Up to 300% of deficient repayment obligation Shortfall penalties2:
  • Not taking reasonable care or taking an unacceptable tax position 20%
  • Gross carelessness            40%
  • Abusive tax position         100%
  • Evasion                            150%
Criminal offences Student Loan Scheme Act 1992 Student Loan Scheme Act 2011
Offence Penalty Offence Penalty
Prejudice employees Prejudice employees because of student loan Max $2,000 plus ability to award damages Prejudice employees because of student loan Max of $2,000 plus ability to award damages
Failure to provide information Refuses, fails or negligently fails to:
  • provide information or a return; or
  • attempts to mislead or obstruct.

Negligently:
  • fails to notify employer; or
  • misleads in relation to repayment deduction
Max of:
$2,000 for 1st offence
$4,000 for 2nd offence
$6,000 for 3rd offence
Does not provide information or returns to the Commissioner or other person Max of:
$4,000 for 1st offence
$8,000 for 2nd offence
$12,000 for 3rd offence
  Wilfully:
  • gives false information or returns; or
  • misleads or attempts to mislead;
  • fails to notify employer
Max of:
$15,000 for 1st offence
$25,000 for 2nd offence
Knowingly:
  • does not provide information or returns;
  • gives false or altered information or returns;
  • misleads;
  • does not make deductions; with intent to evade the assessment or payment of a repayment obligation
Max penalty of $50,000 and/or a maximum term of imprisonment of 5 years
  Aids, abets, incites, conspires to commit offence Max of:
$15,000 for 1st offence
$25,000 for 2nd offence
Aids, abets, incites, conspires to commit offence Same maximum fine or term of imprisonment as person who committed offence

Objection rights

A borrower can:

  • object to a loan advance;
  • dispute a decision by the Commissioner; or
  • challenge a Commissioner's decision once the borrower has completed the disputes process.

Objections

A borrower can object to the details of loan advances outlined on a statement issued by the Commissioner. The borrower has at least 31 days from the date of the statement to object, unless StudyLink has allowed an extension of time to object.

The Loan Manager must consider the objection and, as soon as practicable, notify the borrower and Inland Revenue of their decision and the reasons for that decision. If the objector does not agree with the Loan Manager's decision, the borrower can require the Chief Executive to determine the decision. The request must be made within 21 days of the Loan Manager's decision or the Chief Executive may provide an extension of time for the borrower to request a determination of decision by the Chief Executive.

Once the Chief Executive has received a request to consider the objection, they must consider the objection and, as soon as practicable, notify the borrower in writing of their decision and the reasons for that decision.

If a borrower disagrees with the decision of the Chief Executive, the borrower can, within 30 days3 of being notified of the Chief Executive's decision, apply to the Disputes Tribunal or District Court for determination of the dispute. The Court or Tribunal will only consider objections once they have been considered by the Loan Manager and the Chief Executive.

Dispute and challenge process

The same disputes process that applies for income tax disputes will apply to disputes involving a decision by the Commissioner under this Act.

Once a borrower has concluded the disputes process, and the dispute has not been resolved, the borrower may challenge the decision.

A borrower may dispute any of the following matters (excluding the details of a loan advance) under the Act:

  • any information (other than a loan advance) provided to the borrower;
  • the Commissioner's decision not to treat a borrower as being physically in New Zealand or regarding the start and end dates of the borrower being treated as a New Zealand resident;
  • the Commissioner's decision not to issue a special deduction rate certificate or that the certificate issued is erroneous;
  • that the additional deduction rate certificate is incorrect or has been issued in error;
  • the Commissioner's determination as to the salary or wage deduction to be made on the grounds that the determination is erroneous;
  • the Commissioner's determination that a significant over-deduction was not made was erroneous or that the amount of the significant over-deduction stated in the notice was erroneous;
  • the Commissioner's decision to prohibit a borrower from making an application for the borrower's unused repayment threshold to be allocated to their secondary income or an application for the exemption for full-time study;
  • an assessment of the borrower's repayment obligations on the basis that the assessment is erroneous, excessive or issued in error;
  • the imposition of interest or late payment interest, or the amount of interest charged or late payment interest charged;
  • the Commissioner's decision not to provide relief from late payment interest, hardship relief, or financial relief by way of an instalment arrangement. The borrower can also challenge the relief provided on grounds that relief is not fair and reasonable; and
  • the imposition of the late filing penalty or a shortfall penalty on the grounds that the penalty was imposed in error.

After considering the challenge the Commissioner must notify the borrower that the Commissioner has either:

  • allowed the challenge in full;
  • allowed the challenge in part; or
  • disallowed the challenge.

Application dates

The changes relating to shortfall penalties, late filing penalties, and criminal offences for not complying with obligations, apply from 1 April 2012 onwards. However, they apply to obligations for the tax year and therefore cannot be determined until the end of the year.

The changes relating to the rights of a borrower to object to the details of loan advances and challenge details of their consolidated loan balance, apply from 1 January 2012, being the date from which that the loan advances provisions apply.

The other changes outlined above apply from 1 April 2012.

1If a borrower is not liable to make interim payments, the date is the date at which the borrower would be liable to make interim payments if they were an interim payer.

2These penalties are adjusted to take account of reductions due to borrower's good behaviour, voluntary disclosure or temporary shortfall and increased penalty due to obstruction.

3 The referee of a Disputes Tribunal or a District Court judge may extend the time allowed to apply to a Disputes Tribunal or District Court.