Student Loan Scheme Amendment Bill (No 2) A briefing note prepared for the Finance and Expenditure Committee

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1 Student Loan Scheme Amendment Bill (No 2) A briefing note prepared for the Finance and Expenditure Committee Policy Advice Division, Inland Revenue 13 November 2012

2 Student Loan Scheme Amendment Bill (No 2) The purpose of this note is to respond to requests made by the Finance and Expenditure Committee at the first hearing of evidence for the Student Loan Scheme Amendment Bill (No 2) on 7 November The committee requested further information on a number of areas; the responses are outlined below. This note also provides information on the student loan scheme valuation in response to the NZUSA submission and presentation. In relation to overseas based borrower debt how much would be collected if there was 100% compliance, 96% compliance (ie based on NZ based compliance, and 70% compliance (with a breakdown by country). For March 2012 tax year 100% compliance $110 m 96% compliance $106 m 70% compliance $77 m Notes: The above figures assume that all borrowers only paid the correct amount that was due and made no: extra payments repayments while they were on a repayment holiday as during that period borrowers have no repayments due payments towards previous amounts that were overdue. Percentage of payments by overseas-based borrower location Country % of those making payments Unknown 50% Australia 32% United Kingdom 12% Other countries 6% Note: Unknown is where there is no address recorded for the overseas based borrower. Information in relation to situations raised by a Committee member about a number of constituents who have contacted Inland Revenue to pay off or pay large amounts off their child s student loan and have had difficulty doing so. A borrower can pay their loan off via a lump sum at any time. They can confirm their loan balance through: looking up their balance via their myir online account or

3 contacting IR either via phone, through their myir online account or in writing. Common ways resident borrowers make lump sum payments is through online banking, credit card payments, payments at Westpac branches, or via cheque. Borrowers can also choose to pay more off their loan through their salary and wages by using a special repayment code (SLBOR). Overseas based borrowers also have easy ways of repaying by using their credit card or if in Australia or the UK using a global online payment facility such as Orbit Remit. A family member or any other person may, if they so wish, make lump sum payments on the borrower s behalf. However, for Inland Revenue to be able to advise the person of the borrower s loan balance that person must have been made a nominated person by the borrower. That is the borrower has advised Inland Revenue (either on the phone or by filling in the nominated persons form) that they have authorised Inland Revenue to be able to share specified information with that person. If a borrower has not nominated that person Inland Revenue cannot share the information as it would breach the tax secrecy provisions of the Tax Administration Act Copies of the nominated person form are available on our website, key word: Nominated person. Use of collection powers under section 157 of the Tax Administration Act 1994 information on how those powers are used and how far its use can extend to collect overseas based student loan debt in relation to income and assets from trusts in NZ that a borrower is a beneficiary. What is a section 157 (s.157) notice? Where a borrower has unpaid amounts for their student loan, a deduction notice can be issued to a third party under s.157 of the Tax Administration Act. The notice will require the third party to make a deduction out of any amounts they are to pay to the borrower. The deducted amount is paid by the third party to the Commissioner instead, to cover the borrower s student loan debt. A wide variety of sources of funds could fall under a s.157 notice, for example - wages, bank balances or rental/lease payments due to someone who owes the Commissioner the debt covered by the notice. S.157 covers income tax debt, interest and penalties and student loan debt. In the financial year, Inland Revenue placed successful deduction notices on 23,189 Student Loan borrowers who were in default and collected $14m in deductions. For this population, at 30 June 2012: the overdue obligations associated with 13,021 borrowers had been resolved and 7,307 borrowers owing a total of $21m in default still had a deduction notices in place. The balance of 2,861 borrowers (total of $13m in default) is being managed through a range of other debt collection interventions (eg active negotiations and manual review by case officers).

4 In the time available to respond Inland Revenue has been unable to identify the proportion of New Zealand-based borrowers and overseas-based borrowers. Inland Revenue can provide this information to the committee if requested. Will a s.157 notice work against a trustee of an NZ trust for a beneficiary of the trust, where the beneficiary is an overseas based borrower owing student loan debt? In short, yes (depending on the specific terms of the trust) the Commissioner can issue a s.157 notice to a trustee. This is because the meaning of amount payable under s.157(10) covers the possibility that the third party may be the trustee of a trust, of which the borrower is a beneficiary. A payment of money under a trust from the trustee to the beneficiary could be an amount payable under s.157(10). So the s.157 notice could apply to a trustee and cover a payment that the trustee was required to, or had a discretion to, make, to the beneficiary. Use of assets to recover student loan debt The Commissioner can also take the borrower to court to claim the student loan debt. If her claim succeeds, she will obtain a court judgment for the debt. The Commissioner can then ask for orders to enforce against the borrower s assets to help pay off the debt. These orders can include a charging order against the borrower s land, which can stop the borrower from selling the land without paying the student loan debt first as well as warrants that allow bailiffs to seize items of the borrower s property. It might be possible to enforce a judgment against trust property, for example where the borrower was a beneficiary of a trust, but because trust property is held by a trustee on a beneficiary s behalf, much would depend on the circumstances of the case and the terms of the trust itself. Consult Customs as to why it is not compulsory for people to provide contact details in the arrivals form, and whether there is any good reason not to make it compulsory. Customs have confirmed that all information on the arrival card, which includes contact details while in New Zealand, is required to be completed and that Customs Officers ensure that this is done at the point of entry to NZ as per Customs internal procedures extract below: Checking arrival cards for all passengers: 1. Check the flight number or vessel name is recorded. 2. Check the arrival card matches the person that is being processed. 3. Check to ensure the card looks completed; in particular ensure that all the Customs questions have been answered. 4. Check the arrival card has been signed as this is a declaration for both Customs and Ministry of Agriculture and Forestry. 5. All answers should be skimmed to identify any potential Customs risk. 6. If the passenger hasn t completed the Ministry of Agriculture and Forestry questions ask the passenger to complete them before queuing for the exit.

5 7. Any changes or additions made to the arrival card must be completed by the passenger or their representative and not by a Customs officer. If a person does not fill in all of the information required on the arrival card the individual is requested to add the information to the arrival card at the point where the passport check is done before letting them through to the biosecurity/customs checks. Note: action of the above process has to be balanced against processing times for each passenger. The valuation of the Student Loan Scheme In its submission to the Finance and Expenditure select committee on the Student Loan Scheme Amendment Bill (No.2), NZUSA claims that the Government overstates the cost of lending and that the true cost of lending is around about 8 cents in the dollar for the average graduate. It argues: the Crown s discount rate is too high and this overstates the cost (it suggested a discount rate of 3.5% is more appropriate for new lending). the cost of lending, that is the initial fair value write down, neglects the positive impact of the interest unwind (the partial reversal of the loss in value that occurs as repayments are received); that is, the Crown books the cost of the policy changes at its upfront value and does not account for the positive financial flow from the interest unwind. The Government responds to these issues as follows: Accuracy and scrutiny of the valuation of the Student Loan Scheme The Government is confident that it is accurately reflecting the cost of the Student Loan Scheme for Crown accounting and policy purposes, and in its public reporting of the Student Loan Scheme. Since July 2005, the Government has valued the scheme in accordance with the New Zealand equivalents to International Financial reporting Standards (NZ IFRS). The initial fair value write-down applied to the lending takes account of the time value of money that is the loss of value that occurs over time with inflation and the fact that the lender loses the use of the money for the period of the loan. The way the accounting standards were applied to the valuation of the scheme was determined by leading accounting experts in The approach has been agreed by the scheme s auditors and by Australian experts who advise the auditors. The NZ IFRS valuation has been independently undertaken by PricewaterhouseCoopers; and audited by Audit New Zealand advised by a second independent actuarial firm. The UK Government values the English student loan scheme on the same basis as the New Zealand scheme.

6 Why the Student Loan Scheme uses a discount rate that is currently higher than the banks use All Government reporting entities submitting valuations to Treasury must use Treasury s table of risk-free discount rates. The scheme valuers then add an appropriate risk premium (currently 2.5%) on top of this discount rate. The current risk-free discount rate ranges from 2.44% for the year ending 30 June 2013 to 6% for the year ending 30 June Because the loan scheme generates repayments for some time into the future the single risk-free rate appropriate for lending is considerably higher than 2.44%. The repayment weighted discount rate for new lending is 3.76%. Adding the 2.5% risk margin gives 6.26% - which is the average discount rate used for valuing the new lending. Why the Government books the costs of new lending upfront and why the value of lending changes over time Under NZ IFRS, the cost of new lending is recognised at the time that it is lent. Therefore the Government is complying with the standard. Under IFRS, and NZ IFRS, changes in value must be recognised in the scheme valuation as soon as practicable. These are seen either as impairment or as interest unwind.