Excluding losses from the calculation of net income for student loan repayment purposes

2012 amendment to Student Loan Scheme increases personal responsibility for debt repayment and maximises repayments from NZ based borrowers.

Sections 4 and 73, new section 88A, section 46(2)(a), sections 101 to 104 (repealed), sections 149(2) and 219, and schedule 6

The changes introduced by the new legislation are intended to increase personal responsibility for debt repayment, maximise repayments from New Zealand-based borrowers and ensure fairness across the student loan scheme.

Broadening the income base from which student loan repayments are made contributes to maximising repayments from New Zealand-based borrowers. Under the new rules business and investment losses such as rental losses will be excluded from the calculation of net income for student loan repayment purposes.

Background

In Budget 2011, the Government announced that, as a first step to maximise repayments from New Zealand-based borrowers, business and investment losses (such as rental losses) would be excluded from the calculation of net income when determining the repayment obligation for a student loan.

The previous definition of "net income" in the Student Loan Scheme Act 2011 was based on the "net income" definition for income tax purposes. It includes income such as salary and wages, income-tested benefits, NZ superannuation, interest, dividends and income such as business profits. In determining "net income" losses can be offset, but not carried forward.

The new legislation removes the ability to offset losses against income when calculating a repayment obligation, making the legislation fairer for all student loan borrowers irrespective of how they arrange their financial matters.

Key features

When a borrower has one or more business or investment activities, the income and expenditure from an activity which results in a net loss should be ignored when calculating the net amount earned from both "other income" (business income) and pre-taxed income (for example, interest and dividends) for student loan purposes. For "other income", this is achieved by replacing the definition of "net income" with a new definition of "adjusted net income". For "pre-taxed income" the definition of "net pre-taxed income" also reflects that losses can no longer be offset against income.

Application date

The amendments apply from 1 April 2012.

Detailed analysis

Other income (business income)

Subpart 3 of part 2 determines the repayment obligation of New Zealand-based borrowers with "other income" (business income).

New section 88A replaces the definition of "net income" with a new definition of "adjusted net income".

Section 88A(1) contains the formula that borrowers with "other income" should use to determine their "adjusted net income". The borrower's annual total deductions should be subtracted from the borrower's annual gross income (other than from salary and wages) to arrive at their "adjusted net income".

Section 88A(2) contains a proviso which states that if the income and deductions from any investment or business activity result in a net loss, the income and deductions should be ignored when calculating the borrower's adjusted net income.

Example

Ingrid owns a café which makes a profit of $55,000 a year. She also owns a rental property. For the 2012-13 income year the rental property makes a loss of $10,000. In calculating her "adjusted net income" for student loan repayment purposes, Ingrid can no longer use the $10,000 loss to offset against her café profits which would have meant her student loan repayment obligation is based on $45,000. Ingrid must make repayments based on her café profits of $55,000.

When two or more business or investment activities are normally carried on in association with each other, the Commissioner may treat those activities as a single activity (section 88A(3)). For example, a car sales yard and a car rental agency.

When applying subsections (2) and (3) above, deductions relating to an asset used in carrying on two or more activities must be appropriately apportioned between those activities on the basis of the use of that asset in those activities.

Pre-taxed income

Subpart 2 determines the repayment obligation for pre-taxed income (that is, income from interest, dividends, a taxable Maori authority distribution, salary or wages from employment as a casual agricultural employee, or salary or wages from employment as an election day worker).

New section 73 sets out the meaning of "net pre-taxed income".

Section 73(1) contains the formula that borrowers with pre-taxed income should use to determine their net pre-taxed income. A borrower's allowable expenses should be subtracted from the borrower's pre-taxed income to determine their net pre-taxed income.

Section 73(2) contains a proviso which states that if the income and deductions from any investment activity result in a net loss, the income and deductions should be ignored when calculating the borrower's net pre-taxed income.

When two or more investment activities are normally carried on in association with each other, the Commissioner may treat those activities as a single activity (section 73(3)).

As a consequence of denying the ability to offset losses, sections 101 to 104 have been repealed because they contemplate being able to apply for a reduction of deduction rate as a consequence of incurring a loss from "other income".

Sections 46, 149(2), 219 and schedule 6 have also been amended to remove references to sections 101 to 104, following their repeal.