Hon Dr Michael Cullen
Minister of Finance

8 November 2005 Media Statement

Labour delivers on key election promises

Hundreds of thousands of New Zealanders will benefit from legislation tabled in Parliament today honouring Labour’s election promises to make student loans interest free and to expand the Working for Families package.

Finance Minister Michael Cullen said the pledges reflected the government’s commitment to a fair and inclusive society that offered its young people the opportunity to achieve their full potential.

“The family tax relief provisions raise the threshold at which family income assistance begins to abate from $27,500 to $35,000 and reduce the abatement rate from 30 per cent to 20 per cent.

“This will provide targeted tax relief to 160,000 working families. The size of the tax reduction will depend on family circumstances, including the number of children, but will average around $50 a week,” Dr Cullen said.

The bill will be fast-tracked through all its stages before the House rises in mid-December so that the changes can take effect in the year beginning 1 April.

Dr Cullen said the interest free student loan policy would apply to existing and new loans and had been designed both to cut the cost to students of tertiary study and to encourage skilled New Zealanders to invest their skills in the New Zealand economy.

“For this reason, with some important exceptions, people will have to be living in New Zealand to qualify for the interest free loans.

“Borrowers will be deemed to be non-resident when they have been out of the country for more than 183 consecutive days. Short visits [31 days or less] back to New Zealand will be counted as if the person had remained overseas.

“New Zealanders returning home will, after 183 days back in the country, have any interest charged on their loan from the first day of their return reversed. Trips overseas of 31 days or less will be counted as if the person had remained resident in New Zealand.

“As a further inducement to encourage people back, non-resident borrowers who are in default for non-repayment of their loans will have their penalties cancelled under a special amnesty if between 1 April next year and 31 March 2007 they agree to keep their current liability up to date for two years.
Inland Revenue will have the discretion to exempt from the residency rule people, and the partners of people, who are overseas:
- for postgraduate study;
- in a work posting for a New Zealand-based employer;
- working on a volunteer basis or for a token payment for a recognised charitable organisation, in which case the exemption will apply for up to two years;
- on an unplanned period of absence - for example, visiting a sick parent;
- unavoidably delayed from returning to New Zealand within 183 days due to unexpected circumstances such as illness.

Dr Cullen said that for reasons relating to Inland Revenue’s computer system, it would continue in the short term to charge interest during the year and write it off at the end of the year and that this would show on borrowers’ statements but that it would be an administrative entry only.

“I recognise that the policies provided for in this bill will create capacity pressures for the IRD. Additional funding will be provided through a special cash injection for the current year and through the budget process for subsequent years,” he said.

The bill also fixes the rates of income tax for the 2005-06 tax year. This is an annual requirement under the Income Tax Act and has been incorporated into this measure to ensure passage before 1 April.

Estimates are that the interest free regime will reduce the value of the student loans portfolio held by the Crown by around $1.5 billion. There will be a further impact of around $500 million due to a shift in accounting treatment from book to fair value. Both changes are one-off.

“Provision for this, and the money to fund the interest free loans scheme and the extensions to Working for Families, will be made through an imprest supply bill to be introduced into Parliament later this month,” Dr Cullen said.

ENDS

Attached: Information sheets on the family assistance and student loan changes.

Family assistance changes
From 1 April 2006, the level at which abatement of family assistance begins will rise from $27,500 to $35,000, and the rate at which assistance abates for income that is over the new threshold will be lowered from 30 per cent to 20 per cent.
Family assistance includes Family Support and the Child Tax Credit or In-work Payment, Parental Tax Credit and the Family Tax Credit. Family Support is available to all families with dependent children, while all the rest are available only to families in which the principal carer or the spouse or partner of the principal carer is working and not available to families receiving benefits.

Entitlement is based on the number and age of dependent children. The entitlement abates above a certain income level, based on the combined income of the principal carer and spouse or partner (if any).

The changes introduced in the bill add to those already on track to come into effect on 1 April 2006 as part of the Working for Families package – the introduction of a new In-work Payment for working families and increases to the Family Tax Credit (both of which are part of family assistance). The Working for Families package, which began to be implemented in October 2004, also includes changes to Accommodation Supplement and Childcare Assistance, which are delivered by the Ministry of Social Development.

Who gains?
The latest enhancements to the threshold for family assistance will result in some 160,000 families being better off by around $50 a week. The amount will vary depending on family circumstances.

For example:

A couple who have two children aged 4 and 16, work 60 hours a week between them and earn $37,440 gross per year could already be better off by $88 per week under the Working for Families package announced last year.

From 1 April 2006 they would have been expecting an additional $55 a week, when the $60 In-work Payment replaces their $30 Child Tax Credit and an additional $25 from the increase to the abatement threshold for family assistance.

The changes introduced in the bill will make the couple better off by an additional $48 per week on top of the $55 they were expecting. They will get a further $20 in Family Support from 1 April 2007, as announced last year.
Student loan changes
Changes to the student loan scheme are being introduced to encourage borrowers to contribute to New Zealand’s economy and society.

The first of these changes means that no borrower living in New Zealand will pay interest on their loan. The second change provides an amnesty period on penalties for borrowers living overseas who are in arrears with their payments.

No interest policy
From 1 April 2006:
- all borrowers who are studying part-time or full-time will continue to have the interest on their student loans written off; and
- all borrowers who are not studying, irrespective of whether they have graduated with a qualification, will pay no interest on their student loan provided they are living in New Zealand.

Interest will be charged on student loans when borrowers are away from New Zealand for more than 183 consecutive days. If the borrower has returned to New Zealand for less than 31 days, during a period of 183 consecutive days, the time in New Zealand will be counted as if the borrower had remained overseas.

When a borrower has been overseas for more than 183 consecutive days, interest charges will be backdated to the day after the borrower left New Zealand. Interest will cease to be charged once the borrower has been in New Zealand for more than 183 consecutive days. If the borrower goes overseas for 31 days or less during a period of 183 consecutive days, the time overseas will be counted as if the borrower had remained in New Zealand.

Inland Revenue will also have discretion to grant an exemption to the rules covering time spent overseas if borrowers:
- are studying full-time at postgraduate level overseas;
- are government employees;
- are volunteering or working for a token payment for a charitable organisation – borrowers will continue to be eligible for the no interest policy for up to two years;
- have an unexpected delay in returning to New Zealand or an unplanned absence overseas;
- are in employment that requires a significant amount of travel; or
- are partners of persons that would meet one of the exceptions to the 183-day rule.

Amnesty on penalties
The amnesty period for non-resident borrowers will apply from 1 April 2006 to 31 March 2007 and covers:
- borrowers who are non-resident for income tax purposes, and who have arrears and penalties at the start of the amnesty period (1 April 2006); and
- borrowers who are overseas at the start of the amnesty period, but who have not advised Inland Revenue of their absence, and who have non-resident arrears and penalties when their correct liability is established during the amnesty period.

The amnesty will not apply to:
- borrowers who have been non-resident, but who have regained their New Zealand resident status before the amnesty period begins; and
- borrowers who have always been New Zealand resident.

Only borrowers who are not resident in New Zealand for income tax purposes when the amnesty period begins on 1 April 2006 will be eligible, including those who are non-resident but have failed to advise Inland Revenue of their departure. Borrowers will be required to keep their payments up-to-date for a two-year period. Borrowers returning to New Zealand will have repayment deductions made from their salary and wages. Borrowers remaining overseas must make each quarterly instalment as it falls due. The provisions will include borrowers who have a combination of periods overseas and in New Zealand, provided the relevant liability is kept up-to-date.

The amnesty applies to penalties only. Interest will still be charged, at the rate(s) applying over the period of default, on the underlying debt. This is important to be fair to borrowers who have met their obligations.

Borrowers who do not come within the amnesty will still be able to negotiate a reduction in their compulsory annual repayment if payment would cause serious financial hardship. These borrowers can also be granted a reduction in the penalties charged if they enter into an acceptable repayment arrangement with Inland Revenue.

Amnesty conditions
The proposed changes will give amnesty to any borrower who is a non-resident for income tax purposes on 1 April 2006, and who has overdue student loan debt which has been subject to penalties. To qualify, borrowers will be required to meet their current student loan liability for two years as it arises. For borrowers returning to New Zealand this will mean meeting their income-contingent liability, including having repayment deductions made from their salary and wages. For borrowers remaining overseas it will mean making each quarterly instalment as it falls due. A combination of being overseas and in New Zealand will be allowed, provided the relevant liability is kept up-to-date.

Failure to meet amnesty conditions
Inland Revenue will monitor borrowers coming within the amnesty for two years. Borrowers will be contacted if any non-compliance is detected and given the opportunity to make the missing payment. Should the conditions continue not to be met, the original underlying debt and penalties suitable to the circumstances of the case may be reinstated.

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