Government assistance for students in the form of HECS-HELP debts are indexed to CPI each year on 1 June. Over the past 10 years the indexation of these balances has not caused concern as the CPI has mostly been under 2%.
However, in 2023 the rate is set to skyrocket to around 7% (the exact rate is yet to be determined). So whilst interest is not applied to these debts, the rate of inflation will see these debts increase significantly to keep pace with this rate, and for the first time in quite a while, Taxpayers will be considering HELP debts as more than an afterthought when it comes to their planning.
Compulsory Repayments
Compulsory amounts of HELP debts are repaid on lodgement of the individual’s tax return.
The amount applied is a percentage (the “Repayment Rate”) multiplied by “Repayment Income” (RI). A full table of 2023 repayment thresholds and rates can be found on the ATO website, but as a guide, if an individual has repayment income below 48,361, their rate is Nil.
For someone on $65,000 it is 3%, and for $120,000 it is 8.5%. As such, someone with a $120,000 salary would repay an amount of 0.085 * 120,000 = $10,200 on lodgement of their tax return, or the balance of the loan if it was below this amount.
Consideration to Voluntary Repayments
Scope exists for voluntary repayments of HECS-HELP debts. Whilst there is no discount for early repayment, if the amount is paid prior to indexation on 1 June, the debt will avoid the CPI increase. This payment may be particularly attractive to those approaching the final payments of their debt and may have effectively remitted sufficient to the ATO through their PAYG Withholding payments in their payroll.
PAYG Withholding relating to HELP debts effectively means repayments are paid in advance of the indexation, with the credit not appearing on the loan until the lodgement of the tax return. This means that if a HELP debt is fully repaid by way of voluntary repayment in May 2023, then any additional withholding will be refunded on lodgement of the 2023 tax return.
For Example
Take our example above of an individual with a $120,000 income.
If their remaining HELP debt at 1 June 2023 was $10,200, the indexation applied at 7% would be $714.
If the balance was paid off completely in May, the indexation would be nil and the Taxpayer could advise their payroll to cease PAYG Withholding relating to HELP, immediately starting to make up for the cash payment brought forward to make the voluntary repayment.
Lodge in July, and ceteris paribus, a refund would be received of $10,200 (the amount remitted in payroll) which offsets the $10,200 paid voluntarily. The end result being a cash neutral position and no HELP debt.
Don’t make the payment and the debt increases to $10,914. After the return is lodged, a nil cash position is still obtained, but with a remaining debt of $714.
Political Pressure on Indexation & Other Considerations
Such a high level of indexation is attracting considerable media attention, however, given the state of the budget and the fact the increase is written into law already, it is not something that is expected to be addressed in the upcoming budget or for relief to be provided.
While the level of indexation is high this year, there is no way to know where CPI will be over the coming years and HELP debt may, once again, be one of the cheapest sources of debt to have.
Not Financial Advice
Harris Black do not offer financial advice and can only offer factual information on this topic.
Please do not hesitate to contact your Harris Black team member should you require any assistance or further clarification.
