On 19 May 2020, we changed the way the system calculated study and training support loans ("STSL") in a pay run. Where before, STSL was calculated on taxable earnings this was changed to being calculated on repayment income. Effective from 9 August 2021, we will be introducing another change to the method used to calculate an employee's STSL amount by giving users the choice between taxable earnings and repayment income.
You can continue reading the next section for background information as to why we have made this decision or proceed to the details of the changes.
Why are we providing two STSL calculation methods?
As part of ongoing consultation with the ATO, the following advice has been provided and specifically pertains to an employer's obligation to withholding STSL from an employee:
"Withholding, and by extension any additional components like study and training support loans, is calculated on the payment made to a payee. Therefore, if an amount has been effectively salary sacrificed, it must NOT be included in gross payments for the purposes of a withholding calculation.
The whole intent of a salary sacrifice arrangement between an employer and their employee is that an employee agrees to forgo part of their salary or wages in return for benefits of a similar value. Therefore, under an effective salary sacrifice arrangement the employee pays income tax on the reduced salary or wages, and the employer may be liable to pay fringe benefits tax on the benefits provided in lieu of salary.
You can refer to Taxation Ruling TR 2001/10 Income tax: fringe benefits tax and superannuation guarantee: salary sacrifice arrangements where it states at paragraph 32 “Benefits provided under an effective Salary Sacrifice Arrangement are not 'salary or wages' within the meaning of that term in subsection 136(1) of the FBTAA and, accordingly, the employer has no PAYG withholding liabilities in relation to the benefits.
You do NOT calculate withholding (including any additional withholding for a STSL component) on the salary sacrificed amount.”
The web link referred to https://www.ato.gov.au/Individuals/Study-and-training-support-loans/When-must-you-repay-your-loan/ provides information STSL repayment income that is calculated at the tax assessment stage. That is, when an individual lodges their income tax return it lists the factors that are taken into account to calculate repayment income for STSL upon the individual’s tax assessment."
In short:
- the employer's only obligation when processing an employee's pay is that they deduct STSL on the employee's taxable earnings;
- the reference to repayment income is only for individuals (employees) in regards to their personal repayment requirements of their STSL debt and has no impact on the employer's obligations.
Prior to our change back in May 2020, when the system was calculating STSL on taxable earnings, we had several clients requesting it be changed so that calculations were done on repayment income. Since the change, we have had clients ask we change it back to the previous method of calculating on taxable earnings. As such, although the ATO's advice is clear that it should be done on taxable earnings, we appreciate businesses may have their own interpretation and, with the confidence that neither method beaches any tax rulings, we will allow businesses to make the decision themselves.
If the ATO states STSL should be calculated on taxable earnings, why would people choose the repayment income method?
As stated in the ATO's advice above, when an employee lodges their tax return, all other income (outside of salary and wages) earned by the employee during the financial year will be taken into account when determining the total STSL amount that must be repaid by the employee. As it is often difficult to keep track of all other income during the financial year, an employee may choose to add a "buffer" to the STSL amount deducted from each pay with the intent of not being left with a tax bill at the end of the financial year.
Take note that choosing the repayment income method is still not a foolproof solution to avoiding an employee having to pay additional tax at year end time. There are a several factors of what is defined as reportable income, such as reportable fringe benefits, total net investment loss and even other taxable earnings (where the employee may have multiple concurrent jobs), that are managed outside of an employer's payroll and so employees should be aware of their obligations around these components and possibly consider withholding extra tax from their pay to cover any potential STSL debt incurred.
What are the exact changes being introduced on Monday 9 August?
New STSL calculation method setting
In short, for any employee that has declared they have an accumulated STSL debt on their tax file declaration, the employer will be able to set the STSL calculation method. This will be done on an individual employee basis via the employee's Tax File Declaration screen, as follows:
Alternatively, this setting can be configured in bulk by using the employee import/export file. A new column has been added "StslCalculationType" that is positioned after the existing column "StslDebt".
Default STSL calculation method
Any employee added to the platform or any previously incomplete employee that is completed from 9 August 2021, that has an STSL debt, will default to the 'Calculate STSL on taxable earnings' method. This method has been chosen as the default option to be in line with the ATO's advice.
In order to ensure the STSL calculation of existing employees is not affected by this change, these employees calculation method will be set to 'Calculate STSL on repayment income'. To be clear, this applies to any employees with the 'Has accumulated STSL debt' checkbox ticked prior to 9 August 2021 and also includes any terminated employees with an STSL debt that are subsequently reactivated. Employers can always change an existing employee's STSL calculation method when the new setting becomes available.
How can we configure or update an employee's STSL calculation method?
As stated above, the calculation method assigned by default to an employee will depend on the date they were added (as a completed employee) to the platform. Additionally, take note that the new STSL calculation method settings will not be made available when adding an employee with an STSL debt to the platform using any of the following methods:
- Add employee wizard
- Employee self setup - we have removed the ability for employees to make this decision in order to avoid confusion as to what option should be selected.
- EmployeeUnstructured API
In this instance, the employee's STSL calculation method will default to taxable earnings. If you want to apply the repayment income method instead, you can update this from the employee's Tax File Declaration screen or by using the employee import file.
If you choose to add employees to the platform using the employee import file, you can immediately override the default STSL calculation method, being taxable earnings for new employees, by selecting 'Repayment Income' from the dropdown list:
If an employee's "StslDebt" value = True and the "StslCalculationType" value is blank, the system will apply the default STSL calculation method.
If you want to update the STSL calculation method for any existing employees, simply export the employee file > select the desired calculation method in the "StslCalculationType" column and then import into the platform.
Special note on updating employees via the API: As stated above, you cannot select the STSL calculation method when adding an employee via the API. Instead, the default method will be set for any STSL debt employee. Similarly, any update to an employee via the API will not change the STSL calculation method configured for that employee. For example, let's say an existing employee has been employed since January 2020 and has an STSL debt. As the employee was added to the platform prior to 9 August 2021, the STSL calculation method will be repayment income. If, on the 11th of August, the employee's tax status is updated from claiming the tax free threshold to not claiming the tax free threshold, the employee's 'Claim tax free threshold' setting will be updated in the platform however the 'Calculate STSL on repayment income' setting will remain as is. Furthermore, if the employee's tax details were updated again on the 20th of August to remove the STSL debt, this will result in the 'Has accumulated STSL debt' checkbox being unticked in the platform thereby removing the STSL calculation method setting and no STSL amounts will be deducted in subsequent pay runs.
And lastly, final little tidbits..
We'd also like to draw to your attention to the following:
- Changing an employee's STSL calculation method from repayment income to taxable earnings, or vice versa, will not trigger a requirement to re-lodge the employee's tax details with the ATO. This is because it is not a question asked on the ATO tax file number declaration and as such, does not need to be communicated to the ATO.
- You can track any changes made to an employee's STSL calculation method via the Employee Details Audit Report, and filtered by the 'Pay Run Defaults' section. Take note that if you have records in the report that look like the below image, where the changes are made by the 'SYSTEM' and channel = 'JobHandler', this relates to updates we have made when releasing this feature where all existing employees with an STSL debt were setup on the repayment income method:
- To report on employees with an STSL debt and the calculation method applied to each of those employees, you can either:
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- export the employee file and refer to the columns "StslDebt" and "StslCalculationType"; or
- generate the Employee Details Report, querying the 'Tax dec: STSL debt' column to the filter.
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- In a pay run, you will easily be able to identify the STSL calculation method applied to an STSL debt employee by hovering over the tooltip in the STSL amount of that employee, as per the below image. If a pay run is open (ie unfinalised) at the time these changes are released, simply refresh the pay run (by clicking on Pay Run Actions > Recalculate pay run) for the tooltips to appear.