Extending the amnesty on student loan penalites

2007 legislation extends the amnesty on student loan penalties until 31 March 2008.

Sections 2 and 89 to 105 of the Student Loan Scheme Act 1992

The amnesty on student loan penalties has been extended until 31 March 2008.

Background

An amnesty on student loan penalties was introduced by the Student Loan Scheme Amendment Act 2005. The amnesty allowed non-resident borrowers in arrears the chance of a fresh start by having their penalties cancelled. The amnesty was introduced to remove barriers to borrowers returning to New Zealand.

Key features

The amnesty on student loan penalties has been extended by one year, until 31 March 2008. This will allow borrowers identified as non-resident as a result of the information match with Customs the chance of a fresh start. The old amnesty provisions (sections 45A to 45D and section 66A of the Act) have been repealed.

Fresh start for certain non-resident borrowers

Under section 90, the Commissioner is not obliged to issue a non-resident repayment obligation for any period before 1 April 2007 if it has not already been made.

Section 91 provides that any existing repayment obligations (whether resident, non-resident, assessed or not assessed) and penalties will be cancelled. The section applies to borrowers who were non-resident for tax purposes on 31 March 2006 and who were in arrears on all or part of a repayment obligation on 1April 2007. However, the amount cancelled is still subject to compounding interest at the applicable rate(s) from the date that the repayments were (or would have been) due, and remains part of the loan balance.

The effect of the amendments is to wipe the penalties slate clean for borrowers who were non-resident on 31 March 2006. For borrowers who were resident on 31 March 2006, but who were non-resident at any time before that date, Inland Revenue will not issue any non-resident assessment if not already made.

Example 1

Lenore has a loan balance on 1 April 2005 of $15,000. Lenore was issued with non-resident assessments of $1,997 for the 2005-06 tax year and $1,919 for the 2006-07 tax year, which she has failed to pay. The 2005-06 assessment ceased to be subject to standard interest (7% for the 2005-06 tax year) and instead became subject to compounding late payment penalties of 2% per month from 1 April 2006. The 2006-07 assessment ceased to become subject to standard interest (6.9% for the 2006-07 tax year) 1 year later on 1 April 2007. Her total late payment penalties on 31 March 2007 are $536 and her loan balance is $17,555. On 1 April 2007 her overdue debt is reduced to zero and her loan balance is reduced by $398 (penalties of $536 less interest of $138 charged in place of penalties) to $17,157.

Example 2

Keith left New Zealand on 31 March 2005 with a loan balance of $20,000. Inland Revenue was not aware that Keith was a non-resident and therefore did not issue non-resident assessments while Keith was overseas. After 1 April 2007, Inland Revenue becomes aware that Keith is non-resident and has been since 1 April 2005. Inland Revenue is not required to make non-resident repayment obligation assessments for tax years before 1 April 2007. Keith has not made any repayments while overseas and his loan balance is $22,877 on 1 April 2007, including compounding interest.

New amnesty

In exchange for not establishing or removing penalties under the "fresh start for certain non-resident borrowers" provisions, borrowers will have the chance to apply to Inland Revenue for the new amnesty and begin making regular payments. Borrowers will have from 1 April 2007 to 31 March 2008 to apply to come within the amnesty.

Who does it apply to?

Section 92 of the Act specifies that the new amnesty applies only to borrowers who were:

  • non-resident for tax purposes on 31 March 2006; and
  • in arrears on all or part of a repayment obligation on 1 April 2007.

Section 92 also specifies that the accounts of borrowers who had repaid their loans by 13 November 2006 will not be adjusted, although the borrowers concerned might technically have been in arrears.

Meeting repayment requirements

Sections 94 to 98 set out the repayment requirements for borrowers who come within the amnesty. Borrowers must give an undertaking to repay, and actually pay the following amount, to the Commissioner:

  • $2,000, if the borrower's loan balance on the date they apply for the amnesty is $15,000 or less;
  • $4,000, if the borrower's loan balance on the date they apply for the amnesty is $15,001 to $30,000; or
  • $6,000, if the borrower's loan balance on the date they apply for the amnesty is more than $30,000.
Borrowers who apply for the amnesty between 1 April 2007 and 31 August 2007

For borrowers who apply for the amnesty between 1 April 2007 and 31 August 2007, the payments must be made in four equal instalments and will be due on 30 September 2007, 31 March 2008, 30 September 2008 and 31 March 2009.

The amount payable applies instead of:

  • any overseas-based repayment obligation to which the borrower would otherwise be liable, if the amount is received by the Commissioner in the tax year ending 31 March 2008 or 31 March 2009; and
  • any repayment holiday the borrower may have during the tax years ending 31 March 2008 or 31 March 2009.
Example

Kirsty applies for the amnesty on 6 April 2007. Her loan balance on that date is $25,000. To meet the amnesty conditions, Kirsty must make repayments as follows:
30 September 2007 $1,000
31 March 2008 $1,000
30 September 2008 $1,000
31 March 2009 $1,000
These repayment requirements apply instead of any overseas-based repayment obligation or repayment holiday Kirsty would have otherwise been entitled to.
Borrowers who apply for the amnesty between 1 September 2007 and 29 February 2008

For borrowers who apply for the amnesty between 1 September 2007 and 29 February 2008, the payments must be made in four equal instalments and are due on 31 March 2008, 30 September 2008, 31 March 2009 and 30 September 2009.

The amount payable applies instead of:

  • any overseas-based repayment obligation the borrower may otherwise have for the tax years ending 31 March 2008 or 31 March 2009; and
  • is offset against any overseas-based repayment obligation the borrower may have for the tax year ending 31 March 2010; and
  • any repayment holiday the borrower may have during the tax years ending 31 March 2008 or 31 March 2009.
Example

Fran applies for the amnesty on 10 February 2008. Her loan balance on that date is $7,000. To meet the amnesty conditions Fran must make repayments as follows:
31 March 2008 $500
30 September 2008 $500
31 March 2009 $500
30 September 2009 $500
The payments due in 2008 and 2009 apply instead of any overseas-based repayment obligation or repayment holiday Fran would otherwise be entitled to.
Borrowers who apply for the amnesty in March 2008

For borrowers who apply for the amnesty in March 2008, the payments must be made in four equal instalments and are due on 30 September 2008, 31 March 2009, 30 September 2009 and 31 March 2010.

The amount payable applies instead of:

  • any overseas-based repayment obligation the borrower may have for the tax years ending 31 March 2009 or 31 March 2010; and
  • any repayment holiday the borrower may have during the tax year ending 31 March 2009.

For the tax year ending 31 March 2008, the borrower's repayment obligation is reduced to zero.

Example

Nicolas applies for the amnesty on 10 March 2008. His loan balance on that date is $48,000. To meet the amnesty conditions, Nicolas must make repayments as follows:
30 September 2008 $1,500
31 March 2009 $1,500
30 September 2009 $1,500
31 March 2010 $1,500
The payments due in 2008 and 2009 apply instead of any overseas-based repayment obligation or repayment holiday Nicolas would otherwise be entitled to. The payment in 2010 is offset against his repayment obligation (if any) for that year.

Hardship

Section 98 enables the Commissioner to reduce a payment instalment if the Commissioner is satisfied the reduction is necessary to alleviate significant financial hardship. Significant financial hardship includes difficulties that arise because of:

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

Nicolas (as outlined in the example above) could not afford to make the full $1,500 payment in 2008 because he had been in hospital for six weeks and was not earning any income during that period. The Commissioner reduces the instalment amount to $600, which Nicolas can afford to repay. Nicolas is still required to repay $1,500 for every other instalment, as the financial hardship was only temporary.
Relationship with New Zealand-based repayment obligations

Section 99 enables the amount a borrower pays to meet their amnesty repayment requirements to be offset against any New Zealand-based repayment obligations.

Example

Maria applied for the amnesty in June 2007 and was required to repay the following amounts:
30 September 2007 $500
31 March 2008 $500
30 September 2008 $500
31 March 2009 $500
Maria returns to New Zealand on 20 April 2008. Her New Zealand-based repayment obligation for the 2008-09 tax year is $2,050. All of her repayments while she is in New Zealand are made by deductions from her salary. The repayment deductions are more than enough to meet her amnesty repayment requirements.
People who applied for old amnesty

If a person applied for the old amnesty (before 1 April 2007) they must meet the repayment requirements outlined above. However, under section 100, the Commissioner can give credit for the extent to which the borrower complied with the conditions of the old amnesty.

Example

Bob applied for the old amnesty in April 2006 and met his repayment obligations for the 2006 tax year. Under the new amnesty, Bob is required to repay $4,000 in four six-monthly instalments. The Commissioner gives Bob credit for meeting the old amnesty conditions for a 12-month period, and Bob is required to meet the new amnesty conditions for a further 12-month period. Bob's new amnesty repayment requirement is $2,000, payable in two six-monthly instalments of $1,000 due on 30 September 2007 and 31 March 2008.
What happens if the amnesty condition is breached?

Under section 102, the first breach of the amnesty conditions, the Commissioner must give the borrower written notice of:

  • the breach that has occurred;
  • the action that must be taken by the borrower to remedy that breach;
  • the date by which the breach must be remedied, which is 30 days after the date of the Commissioner's notice; and
  • the fact that the Commissioner is exercising a discretion that can be used only once in relation to that borrower.

If the borrower remedies the breach according to the terms in the Commissioner's notice, the Commissioner must treat the borrower as having met the obligations outlined above.

A borrower may object under section 104 to a Commissioner's decision not to treat the borrower as having met their obligations on the ground that the decision is erroneous.

Increase to loan balance if borrower does not come under amnesty or amnesty condition breached

Under section 103, if a borrower does not apply for the amnesty before 1 April 2008, the borrower's loan balance will be increased by an amount equal to five percent of the borrower's loan balance on 31 March 2008, including any interest compounded by that date.

If the Commissioner considers, however, that the five percent penalty would be more than the late payment penalties that would have been charged if not for the "fresh start for certain non-resident borrowers" provisions, the Commissioner may reduce the amount added to the borrower's loan balance to an amount the Commissioner considers fair and reasonable. The intention is for the increase to the loan balance to be the lesser of five percent or the penalties that would have been charged if not for the "fresh start for certain borrowers" provisions.

If the borrower comes within the amnesty but fails to meet the repayment requirements, the borrower's loan balance will be increased on 31 March as outlined above, but the amount added to the loan balance will be reduced in proportion to the degree of the breach.

Under section 104, a borrower may object to the Commissioner's decision to increase the borrower's loan balance on the grounds that the decision is erroneous.

Example 1

Christian was a non-resident on 31 March 2006 and was in arrears. Christian does not apply for the old or the new amnesty, and on 31 March 2008 his loan balance is $41,000 (including interest compounded as at that date). On 1 April 2008 his loan balance will be increased by $2,050 (5%). His new loan balance is $43,050.

Example 2

Charlotte was a non-resident on 31 March 2006 and was in arrears. Charlotte does not apply for the old or the new amnesty and on 31 March 2008 her loan balance is $6,000 (including interest compounded as at that date). Because a 5% increase in Charlotte's loan balance is greater than the penalties that would have been charged if not for the "fresh start for certain non-resident borrowers" provisions, Charlotte's loan balance is increased by the amount of the penalties that would otherwise have been charged. As a result, on 1 April 2008 Charlotte's loan balance is increased by $260, to $6,260.

Example 3

Michael was a non-resident on 31 March 2006 and was in arrears. He applied for the new amnesty on 1 December 2007 and met the first three $1,000 repayments required but failed to meet the last one, even after notification by the Commissioner, and being given 30 days to remedy the breach. On 31 March 2008 his loan balance is $12,000 (including interest compounded as at that date). Because Michael met three-quarters of the instalments required, his loan balance is increased by (5% x ¾). As a result, on 1 April 2008 his loan balance is increased by $450, to $12,450.

Application date

The changes applied on or after 1 April 2007.