Simplifying the law on which repayment rules apply

2007 Student Loan amendment means repayments will be based on whether the borrower is eligible for an interest-free loan, rather than where they are tax-resident.

Sections 2, 14, 14A, 44 and 57 of the Student Loan Scheme Act 1992

To simplify the law on which set of repayment rules apply - those for borrowers based in New Zealand or those for borrowers based overseas - annual repayment obligations will be based on whether the borrower is eligible for an interest-free loan, rather than on where they are tax-resident.

Background

Borrowers' residence for student loans purposes was previously based on where they were tax-resident. Tax residence can be difficult to determine because it depends on whether a person has a permanent place of abode in New Zealand, which is not always clear-cut (and Inland Revenue cannot always establish whether a permanent place of abode exists). It also makes administration of the student loan scheme difficult for borrowers to understand which repayment rules they are subject to.

Key features

Two new definitions have been inserted into section 2 of the Act. A borrower is "New Zealand-based" for each day on which they are entitled to the full interest write-off which gives effect to interest-free student loans. A borrower is "overseas-based" for each day on which they are not entitled to the full interest write-off which gives effect to interest-free loans.

The heading to Part 2 and sections 14, 44 and 57 of the Act have been amended to replace "resident" and "non-resident" with "New Zealand-based" and "overseas-based", respectively. The effect is that borrowers' repayment obligations will be based on whether they satisfy the eligibility criteria for an interest-free loan, rather than where they are tax-resident.

Aligning repayment obligations with when a borrower ceases to be entitled to an interest-free loan simplifies matters because there is just one, clear-cut rule for both: borrowers are either eligible for an interest-free loan, and therefore subject to the repayment rules for New Zealand-based borrowers, or they are not eligible for an interest-free loan, so are subject to the repayment rules for overseas-based borrowers. Borrowers are subject to the repayment rules for New Zealand-based borrowers from the effective date of entitlement to an interest-free loan.

Generally, borrowers who are overseas for more than six months are not eligible for an interest-free loan. However, the Commissioner can grant an exemption to these rules in certain circumstances. Borrowers who are granted an exemption will also be subject to the repayment rules for New Zealand-based borrowers.

In certain limited circumstances, a borrower may be non-resident for income tax purposes but be New Zealand-based for student loan purposes (meaning their repayment obligation will be based on their income). Sections 14A, 38AE, 38AEA and 38AJ require these borrowers to give details to the Commissioner of all amounts of their gross income that do not have a source in New Zealand. This will enable the Commissioner to have full details of their income so the correct repayment obligation can be established. The information must be provided to the Commissioner at the same time as the borrower would have provided a return of income for a tax year under the Tax Administration Act 1994 if he or she was a tax resident. The Commissioner may require the borrower to provide evidence of that income.

Application date

The changes applied from 1 April 2007.