Most graduates leaving university today do so with a massive debt hanging over their heads. They will take many years to repay their accrued HECS-HELP debt through the taxation system. There will be little relief for these graduates as the government has slammed the door shut on the tax deductibility of their tuition costs against the income they earn as a result.
The government also intends, for new students from 2021, to increase the amount many students pay towards their education. Popular courses such as humanities, commerce and law will cost them A$14,500 a year. A combined commerce/law or arts/law course, which are the most popular study choices for aspiring lawyers, will cost them over A$70,000.
The government constantly reminds us government-supported students’ HECS-HELP debts are deferred. Only when they reach the annual income threshold (A$45,881 for 2019-20) do they start repaying their debt.
The underlying rationale is that students are receiving an interest-free loan, as the HECS-HELP debt is only indexed to inflation (CPI, which measures cost-of-living increases). HECS-HELP provides eligible students with a loan to pay their student contribution for a Commonwealth-supported place in their chosen course.
Another scheme exists for those students not eligible for a Commonwealth-supported place. This is called FEE-HELP. These students receive a loan to pay tuition fees for units of study in their chosen course. A FEE-HELP debt is also indexed each year.
Graduates repay these HELP debts if and when their earnings rise above the threshold.
However, as explained below, postgraduate students with a FEE-HELP loan can claim a tax deduction for their tuition fees.
Two student loan schemes, two different rules
The usual rule for taxpayers is that expenses incurred in earning assessable income are deductible. Taxpayers can claim self-education expenses, which includes undertaking university courses, where they are able to show the study is connected with their income-earning activity. These deductible expenses include tuition fees which can be paid through the FEE-HELP scheme.
In contrast to FEE-HELP tuition costs being deductible, student debt under the HECS-HELP scheme has specifically been rejected as a tax deduction under section 26-20 of the Income Tax Assessment Act 1997. These students are unable to claim a tax deduction for their university fees regardless of whether they are earning relevant income during their course or when they get a job as a graduate after completing their course.
Graduates start paying income tax on amounts above the normal tax-free threshold of A$18,200 but may not actually earn above the HECS-HELP threshold amount. On this basis graduates may be paying their fair share of tax on their income, but their HECS-HELP debt continues to grow over time. When graduates reach the threshold, they start paying both income tax and repayments of their HECS-HELP debt. In short, there is no tax relief for graduates.
The inequity between graduates and other taxpayers becomes clearer when you consider the additional self-education expenses these other taxpayers can claim. If already working within their chosen job and studying part-time, but not confined by the HECS-HELP tag, they can claim for textbooks, student union fees, computer expenses, internet costs for online learning and stationery.
Crucially, FEE-HELP recipients can also claim for the cost of their tuition fees. Once they reach an income threshold, their debt is also repaid through the taxation system.Shutterstock
Treat all self-education expenses equally
It is time to revisit the tax deductibility of HECS-HELP repayments. The current regime is complex, difficult to comprehend and has inbuilt inequities. The basic rule of tax deductibility should apply across the board, regardless of what type of support the government is providing to university students.
If we accept the arguments from the government that full-time students are receiving interest-free loans for their education and that the debt is deferred until they earn above the threshold, then there is an equally strong argument that graduates should then be able to defer, until that time, a tax deduction for the payment.
The general rule that a tax deduction is allowed to a taxpayer for expenses directly incurred in deriving income should apply to all relevant taxpayers. All taxpayers should be treated equally when spending on self-education. There should be no distinction between students receiving different types of HELP from the government.
At the moment undergraduate students tend to receive HECS-HELP while postgraduate students tend to receive FEE-HELP. These postgraduate students can immediately claim the cost of their tuition fees as a tax deduction even when this is funded through the FEE-HELP loan. This is because postgraduates are normally working in their chosen field and satisfy the necessary link between expense and income earned.
Undergraduate students tend to be studying full-time and working in casual jobs, which are not relevant to their studies. Students in this situation would not be able to claim their fees as a tax deduction regardless of the HECS-HELP tag. It would be equitable to amend the Tax Act to allow graduates to claim deductions for their tuition costs later when they are working in their chosen field.
Correction: This article has been corrected to clarify that FEE-HELP recipients can claim a tax deduction on tuition fees even when this cost is funded through FEE-HELP, but not on repayments of the loan.
Authors: Michael William Blissenden, Professor of Law, University of New England