Obligations & Opportunities for Australian Expats with Student Debt – Each year we see an increasing number of Australian professionals with a tertiary education, such as a bachelor’s degree, move overseas due to the allure of greater business and employment opportunities, that may not be available locally.
Most Australian expats would be aware by now, that since 1 July 2017, where they have an outstanding Higher Education Loan Program (HELP) student debt, they are required to report their worldwide income (converted AUD) to the Australian Tax Office (ATO) at the end of each Australian financial year (1 July to 30 June).
This is so long as their worldwide income exceeds the relevant threshold (AUD $11,754 for the 2021-22 financial year). Where their worldwide income is below the threshold, there remains the requirement to lodge a ‘non-lodgment advice’ form with the ATO.
This also applies to Australian Expats with other types of student debt including a VET Student Loan (VSL) or Trade Support Loan (TSL). It’s important to note that reporting your worldwide income is separate to any requirement to lodge an Australian tax return.
What amount does a Australian expat need to repay?
The amount you need to repay each year is based on the repayment thresholds and rates for the financial year in question, and these figures are updated annually. For the current 2021-22 financial year, the minimum Repayment income bracket is $47,014 to $54,282, which requires a repayment rate of 1%.
For example, if your reported worldwide was less than $47,014, there is no repayment required. A reported income between $47,014 and $54,282 would require 1% to be paid to the ATO. The repayment rate increases according with your reported worldwide income.
You can view the schedule here: https://www.ato.gov.au/Rates/HELP,-TSL-and-SFSS-repayment-thresholds-and-rates/
Repayments may be in the form of a compulsory repayment or an overseas levy, depending on how your worldwide income is made up.
Your compulsory repayment is calculated on your Australian-sourced income, whereas an overseas levy is calculated on your non-resident foreign-sourced income. The two components equate to your Total repayment obligation.
Assessment methods for determining your Non-resident foreign-sourced income (for Overseas Levy)
For an Australian Expat, when declaring your foreign-sourced income earned as a non-resident, you will have the option of choosing between one of three assessment methods.
You can only choose one method to assess your foreign income for the income year. However, you may choose another assessment method in a later year.
Simple self-assessment method
This method requires you to provide your gross amount of non-resident foreign income for the income year and confirm the occupation from which you derived most of your foreign-sourced income. Based on your occupation, a standard deduction will automatically be applied to reduce your foreign income.
Overseas assessed method
This method allows you to provide the foreign income amount you were assessed for on your most recent income assessment from your foreign country of residence. The assessment must cover a 12-month period, even if you did not earn income for the whole 12 months.
Comprehensive tax-based assessment method
This method will require you to declare your gross foreign income and allowable deductions, similar to how you would complete an Australian income tax return. You must provide the gross amount (pre-tax) of your foreign income. You must do this even if tax was taken out in the country where you earned the income.
For all 3 methods, you must convert all foreign income, deductions and foreign tax paid into Australian dollars before you include this in your tax return. The rate of conversion will be the average exchange rate for the Australian income year.
The ATO makes available a foreign currency conversion tool to determine the average exchange rate for the income year.
What happens if a Australian expats doesn’t report their worldwide income?
The deadline for you to report your worldwide income for the Australian financial year is 31 October. This may be later if filing through an Australian registered Accountant. It’s important you lodge on time, even if you can’t pay straight away, as you’ll avoid a penalty for lodging late.
Penalties could extend to being charged interest at the prevailing General Interest Charge rate.
In terms of how the ATO monitors non-compliance with the reporting requirements; on 5 July 2019, the ATO published a Gazette Notice titled “Notice of a Data Matching Program”.
This notice advised that the ATO will be acquiring overseas movement data from the Department of Home Affairs (DHA) on individuals with an existing Higher Education Loan Program (HELP), Vocational Education and training Student Loan (VSL) and/or Trade Support Loans (TSL) debt.
The program will identify HELP, VSL and TSL debtors to whom the overseas obligations apply, and then assess their status against ATO records. The ATO can then pinpoint those individuals that may not be meeting their registration, lodgment and/or payment obligations.
The purpose for the data matching program being introduced was to increase awareness of the obligations required of Australian expats and strengthen community confidence in the integrity of the tax system.
It’s safe to say the program has made it incredibly difficult for anyone looking to fly under the ATO’s radar.
Should an Australian expat make a full/partial voluntary payment on their student debt?
Everyone’s situation will be different, and the decision to make a voluntary payment on your HELP loan will be based on a number of financial factors.
For this reason, we suggest seeking financial advice beforehand. It’s important to note also that voluntary repayments will not reduce any compulsory repayment or overseas levy obligations you may have at the end of the income year, unless you pay off your total loan balance.
We consider some of the pros and cons of making a voluntary payment on your HELP loan below:
- HELP loan balance will no longer be subject to Consumer Price Index (CPI) indexation on the 1st of June each year.
- Increase in take-home pay for Australian PAYG employees, as there will no longer be an amount withheld.
- For Australian expats paying off their total loan balance, where you have no other reportable income in Australia, there may be no requirement to lodge a tax return in Australia, reducing your tax administration burden as well as tax agent fees to prepare your tax return.
- There may be alternative investment opportunities that could yield a better return.
- Voluntary repayments are not tax deductible.
- You may still have a compulsory repayment or overseas levy at the end of the financial year if the student debt is not paid off in full.
Inflation and opportunities for Australian expats this financial year
With each outstanding student debt loan being indexed in line with the Consumer Price Index (CPI) each year on the 1st of June, it’s more beneficial to make a voluntary payment before indexation occurs on the 1st of June, as the amount you contribute will reduce the loan amount that will be indexed.
With inflation in Australia right now at its highest level since 2014, we will likely see a CPI indexation rate of about 3.5% apply to outstanding HELP loans this year.
The exact rate will be determined once the March 2022 CPI number is released. If you consider a voluntary repayment as an investment with CPI as the return (albeit noting your repayment is not refundable), it presents an opportunity to save a material amount in indexation.
For example, if you made a voluntary repayment of A$15,000 on a $30,000 HELP loan prior to 1 June 2022, you would save $525 ($15,000 x 3.5%) being applied to your HELP loan.
You can make additional voluntary repayments on your student debt from overseas at any time using the ATO myGov service.
For those reading who are about to expatriate, we suggest turning off the SMS code as your two-factor authentication method, due to your mobile number likely changing once you move overseas.
In summary, it’s important to remember that where you may be moving overseas, or are already living overseas, and you have an outstanding student debt, you will continue to have an obligation to report your worldwide income to the ATO, and likely need to make a repayment.
We believe it’s important that Australian expats understand their repayment obligations to avoid any complications or possible penalties for being non-compliant.
Also, with the higher-than-normal inflationary environment in Australia right now, this may present an opportunity to pay down part of your HELP loan to save on the CPI Indexation amount that will apply on 1 June.
If you would like to discuss whether making a voluntary payment on your HELP loan makes sense for your personal situation, we welcome you to reach out to speak with an Atlas Financial Adviser.