Broadening the definition of 'income' for student loan repayment purposes

2013 legislation broadens the definition of 'income' for student loan repayment purposes to include income from sources not previously included.

Sections 4, 73, 74, 76, 79, 83, 114, 114A, 202, schedule 1 (clause 11) and schedule 3

The new legislation makes changes to the definition of income for student loan repayment purposes to ensure that a borrower's repayment obligation accurately reflects their ability to repay their loan by including income from sources not currently included in the definition.

Background

The student loan scheme is an income-contingent scheme, meaning that the amount that a New Zealand-based borrower has to repay in any year is dependent on their income.

The previous definition of "income" for student loan repayment purposes captured income taxed to the individual rather than to another entity. It included income such as salary and wages, New Zealand superannuation, interest, dividends, business income and rental income.

For borrowers who derive other types of income, the previous definition of income may not have reflected their actual earnings or financial resources which were available to meet their student loan repayment obligation.

Broadening the definition ensures that a borrower's repayment obligation accurately reflects their ability to repay.

The change to the definition of "income" for student loan repayment purposes follows changes signalled by the Government in 2010 relating to the way that income should be defined for the purposes of Working for Families Tax Credits and other social policy programmes.

Broadening the definition to better align with that used for Working for Families ensures there is greater consistency across all social policy initiatives to improve the integrity of the social assistance system. It follows initial changes made in April 2012 to excluded investment and business losses such as rental losses for student loan repayment purposes.

Key features

The definition of "income" for student loan repayment purposes has been expanded to include further adjustments to ensure repayment obligations are determined on a fair and equitable basis for all borrowers who earn different types of income. The adjustments include types of income not previously captured so that the definition of income for student loan repayment purposes is broadly aligned with the definition of "family scheme income" under the Working for Families Tax Credit rules.

Application date

The amendments apply from 1 April 2014, for the 2014-15 and later tax years.

Detailed analysis

Section 73 simplifies the definition of "adjusted net income" to mean "net income" as defined in section YA 1 of the Income Tax Act 2007, with adjustments set out in new schedule 3.

The adjustments to "net income" in schedule 3 cover:

  • tax-exempt salary and wages, and certain overseas pensions that are exempt from New Zealand tax (clause 5)
  • PIE income that is not "locked in" (clause 6)
  • main income equalisation scheme refunds (clause 7)
  • income kept in a closely held company (clause 8)
  • distributions from superannuation schemes that relate to contributions made by a person's employer within the last two years, when the person has not retired (excluding KiwiSaver and locked-in superannuation schemes) (clause 9)
  • distributions from a retirement savings scheme when the person has retired early (clause 10)
  • income from a trust and companies owned by trusts when the borrower is the settlor (clause 11)
  • fringe benefits received by shareholder-employees who control the company (clause 12)
  • main income equalisation scheme deposits (clause 13)
  • 50% of non-taxable private pensions and annuities (clause 14), and
  • payments from trusts, not being beneficiary income, when the borrower is not the settlor (clause 15).

The adjustments above, except those relating to clauses 8 and 15, are based on recent adjustments for Working for Families Tax Credit purposes. For more information refer to the Tax Information Bulletin Vol 23, No 1 (February 2011).

Income kept in a closely held company (clause 8)

Under the new rules, if a borrower is a major shareholder in a close company a portion of the company's net income for the year will be included as the borrower's income for student loan repayment purposes.

The purpose of this adjustment is to attribute income to the borrower from a company in which they exercise a degree of control, that is they can influence the extent to which the company distributes income to its shareholders. This extends the adjustment currently used for Working for Families Tax Credits to apply to determining income for student loan repayment purposes.

A close company is one in which there are five or fewer shareholders and a major shareholder in a closed company is a person who controls at least 10% of the company (refer to the definitions in section YA 1 of the Income Tax Act 2007).

The portion of the company's income attributed to the borrower is a function of how many shares the borrower owns and the company's net income calculated using the formula:

(a / b) x c
where -
a is the number of shares issued by the company and held by the borrower, excluding fixed-rate shares, on the last day of the company's accounting year
b is the number of shares issued by the company, excluding fixed-rate shares, on the last day of the company's accounting year
c is the net income of the company for the company's accounting year.

The company may have distributed dividends to the borrower in the same year. If so, these dividends are subtracted from the income attributed by the formula above. This avoids counting the income twice.

Payments from trusts, not being beneficiary income, when the borrower is not the settlor (clause 15)

Under the new rules, payments from trusts to a borrower are included as income for student loan repayment purposes in the income year in which the distribution is made where:

  • the distribution is not beneficiary income in relation to the borrower, and
  • the borrower is not the settlor of the trust.

The Commissioner has discretion to determine whether certain trust distributions should not be included as income for student loan purposes.