In the news as tax season starts again, is the controversial HECS or FEE-HELP programs introduced by the federal government to assist students in the funding of tertiary study.
The average debt owed in HECS or Fee Help is $23,000. However there are many who owe much more. I see HECS debts well over $100,000. It depends on the degree(s) studied and the number of years taken to complete the degree.
So what is HECS and can we avoid or delay the repayment of HECS debt?
HECS -HELP loans are provided to students enrolled in a Commonwealth Supported Place (CSP). FEE-HELP loans are similar and are available to students enrolled in courses available from an approved provider. When your income exceeds a threshold you will have to start repaying your HECS debt. This applies even if you are still studying. The amount of the repayment depends on your income.
The threshold percentage goes up to 10% for incomes of $150,201 and above.
Example . Your salary is $90,000, you have no available deductions, and your HECS Loan balance is $55,000 as at June 30, 2024. When your return is lodged, the ATO will calculate a HECS repayment amount of $3,025 (55,000 * 5.5%). If you had salary repackaging that provided fringe benefits of $5,000, this will be added to your adjusted taxable income and you will be assessed for HECS loan repayment at $3,300 (55,000 6%).
Thats how it works. But there is more hurt!
The government does not charge you interest on the loan. However the loan is indexed upwards each year based on inflation. In the 2023 tax year that was 7.1%. This means that your $55,000 HECS debt has just risen to $58,905 and your compulsory repayment to $3,534 and you are going backwards!
So what can you do about it?
Firstly, the debt will not go away, even if you go away overseas. It will get higher every year that you don’t repay the loan.
Secondly, if you are on a salary, or you have tax witheld from your income, there is very little that you can do to reduce your liability to repay the HECS loan, other than to earn less than $51,550
Thirdly, HECS repayment is assessed on taxable income. It is legal to minimise your personal taxable income by implementing approved tax structures. The most common is the formation of a company that pays you a salary. i.e. the company bills the employer for services provided.
The Rules
There must be a business administered by the company. The business can employ people to deliver the services provided by the business. It can be just you as a sole director. There are rules that determine a business.
You cannot ‘overnight’, change from a salaried employee, to a company providing the same service to an employer. You would have to leave your current job and start afresh. You could subsequently re-engage with the employer as company, and also provide services to other businesses. Alternatively, you could supplement your income by starting a business e.g. part time contracting, and continue to be employed on salary in your current job.
A company has set up and ongoing costs that need to be factored into a decision to incorporate or not.
Why would you do this?
You will pay less tax, and/or you will delay the repayment of HECS, and/or you establish a business that compliments your field of study.
I would suggest that those who are having difficulty in meeting their HECS commitments, should caculate their liability for HECS repayment each year, and increase the amount witheld as tax each pay period to cover the tax bill at years end.
The ATO is offering payment plans to those who have tax bills that they cannot pay. Call the ATO or talk with your accountant.
Contact an accountant if you are unsure of your options.
Who would do this?
Individuals who are business oriented and who are not afraid to pay a little to save plenty
Sole traders, people offering services like lawn mowing, dog walking, consulting in any industry, are all instances of individuals who may benefit from the formation of a company.
How would you make it happen
Talk to me, or your accountant. The rules of what constitutes a business are well defined in tax law. You need to get it right from the start.
Well thats it for this post
All the best
Peter