Updated 15 July 2023.
Often, we are asked by clients "Why do I pay HECS in my tax return when my employer withholds HECS and pays it for me?"
Your Employer Doesn't Directly Pay Your HECS-HELP
The simple answer to this is that your employer actually doesn't pay anything off your HECS-HELP debt. Never mind what is shown on your payslip! When your employer takes extra tax from your wages for your HECS-HELP debt, it is nothing more than extra tax. It is not split between tax, HECS-HELP or any other tax. It is not paid into a special account at the ATO or applied to your debt. The extra tax is merely deducted to make sure you're covered when it comes time to prepare your tax return.
The amount HECS-HELP withheld through PAYG withholding system isn't credited toward the loan until after the annual tax return is processed. So, even though approximately 90% of the required repayment for the financial year is likely to be withheld before June 1st, none of it is officially credited to your debt until after inflation adjustments, discussed later in this article.
Calculating HECS-HELP Repayment
If your income for the financial year exceeds the minimum income threshold for compulsory HECS-HELP repayments, you will be required to make repayments on your student loan. That is, the ATO will calculate your actual HECS-HELP liability based on your total income for the year, per the data reported in your individual tax return.
The ATO then compares the HECS withholding amount - the additional tax - your employer deducted from your pay with your calculated HECS liability based on your total income.
Depending on the result of this comparison, you may encounter two scenarios:
- Overpayment: If your employer withheld more than your actual HECS liability, you will be entitled to a refund. The excess amount will be returned to you as part of your tax refund.
- Underpayment: If your employer withheld less than your actual HECS liability, you will have to pay the difference. This additional amount will be added to your overall tax bill.
The repayment threshold varies each year, so it's essential to check the current threshold.
Factors Affecting HECS-HELP
Situations can arise where not enough tax has been withheld from your income to adequately cover your HECS HELP repayment. This can happen when:
Your employer was not made aware of your HECS-HELP debt.
If your employer withholds tax based on the standard tax tables but doesn't consider your HECS-HELP repayment obligations, you might find that the tax withheld is insufficient to cover your total tax liability, including HECS-HELP repayments.
It is important to advise your employer of your HECS-HELP debt. This is done through your TFN Declaration form. Your employer will not be aware of your debt unless you advise them.
Your employer has failed to withhold additional tax to cover HECS-HELP
Unfortunately, some employers will fail to withhold the correct amount of tax to cover your student loan repayment obligations, despite being informed through your TFN Declaration. This will usually be an oversight on their part but the shortfall in tax withheld is still your responsibility, That is, you cannot ask your employer to retrospectively fix the problem, the repayment of the student loan has to be taken care of by you.
You have multiple income sources
Having multiple sources of income, such as multiple jobs or additional income from investments, employee share schemes, business income etc can push your total income above the repayment threshold.
If the extra income isn't considered when your PAYG (Pay As You Go) tax is withheld, you might owe more than expected at tax time.
It is not your employer’s responsibility to withhold enough tax to cover you for all of your income sources. They are only required to withhold additional tax on the income that they pay you.
You have Self-Employment or Business Income
If you are a self-employed individual, subcontractor or business owner (particularly a sole trader) you may not have tax withheld from your income to cover your HECS HELP payment obligations.
If your sole trader or ABN business income pushes you above the repayment threshold, you must make additional payments towards their HECS-HELP debt upon filing your tax return.
Your income changes during the year
Significant changes in your income during the financial year, such as a substantial salary increase or a decrease in work-related deductions, can affect the amount of tax withheld. If this isn't accurately reflected in your withholding, it can lead to a tax bill when you reconcile your tax return.
You earn overseas income
If you work overseas but are still an Australian resident for tax purposes, you might still be subject to HECS-HELP repayments if your worldwide income exceeds the threshold. Failure to account for overseas income can result in a tax bill when you file your Australian tax return.
You have Salary Packaging or Fringe Benefits
Fringe benefits can indeed impact your tax position, especially when you have a HECS-HELP debt.
Fringe benefits are non-cash benefits that an employer provides to an employee in addition to their ‘cash’ salary or wages. Common examples include company cars, health insurance, or salary packing for NFP’s. Employers are generally liable to pay Fringe Benefits Tax (FBT) on the value of these benefits.
While salary packaging is a great strategy for reducing your income tax, the value of fringe benefits provided to you is added back to your taxable income for the purposes of calculating the HECS-HELP threshold. This means that your total income, including the value of fringe benefits, is considered when calculating HECS-HELP repayments in your tax return.
Quite often, due to the salary packaging and fringe benefits, insufficient tax has been withheld from the ‘cash’ salary or wages, resulting in a tax debt for the taxpayer at year end. Taxpayers with fringe benefits may need to engage in tax planning to manage their overall tax position effectively and request their employer to withhold extra tax from their ‘cash’ salary or wages.
Higher HECS-HELP repayments resulting from the inclusion of fringe benefits in taxable income can reduce a taxpayer's take-home pay. It's important to budget for these repayments to ensure financial stability.
You salary sacrifice into super or claim a tax deduction for personal super contributions
Don't forget that HECS-HELP repayments are also affected by things like fringe benefits received, super payments made through salary sacrifice, exempt foreign employment income and any investment losses, such as rental properties that have been used to reduce your taxable income.
You have investment losses
Investment losses, such as rental properties that have been used to reduce your taxable income, are added back for the purposes of determining your income for HECS-HELP repayment liability.
You have exempt foreign employment income
If you earn foreign income that is ordinarily classed as exempt foreign employment income, such as income earned by Australian defence force members performing overseas duty, this income will be added back to calculate your liability for HECS-HELP.
Minimum Repayment Threshold
The minimum repayment income threshold to make a HECS-HELP loan repayment changes each year and will depend on whether you are an Australian resident for tax purposes, or a non-resident.
If you are an Australian resident for tax purposes:
For 2023-2024 is $51,550 (in 2022-2023 it was $48,361). Where your income for HECS-HELP purposes exceeds this threshold, a compulsory repayment of 1% through to 10 is calculated in your tax assessment.
If you are an non-resident for tax purposes:
If you live outside Australia for 183 days or more in any 12-month period you are still required to pay your HECS HELD debt if your worldwide income is 25% of the minimum repayment threshold.
For the 2022–23 year, 25% of the minimum repayment threshold means an income at or below $12,090 (AUD).
Indexation of HECS-HELP Debts
Per the Higher Education Support Act 2003 (HESA), all outstanding debt is indexed each year on 1 June by the sum of the CPI index for each of the 4 quarters to March, over the sum of the 4 quarters to March the previous year. On 1 June 2023, the indexation was 7.1% which had many taxpayers considering paying down their debt.
Voluntary HECS-HELP Repayments
When taxpayers with HECS-HELP debts choose to make voluntary loan repayments before June 1st each year, this amount is subtracted from their outstanding balance before any adjustments for inflation are applied.
This means that any outstanding balance as of June 1st will be subject to inflation adjustments. When you submit your tax return, your mandatory loan repayments will still be calculated on the outstanding balance as part of the tax reconciliation process. It's important to note that making voluntary payments doesn't exempt you from fulfilling your compulsory HECS-HELP repayments, unless, of course, you've entirely paid off your debt before filing your tax return.
In summary, the HECS withholding from your pay is essentially a prepayment towards your HECS debt. It is withheld from your wages, but not immediately applied to your debt. It's reconciled at the end of the financial year when you file your annual tax return - and after the annual indexation has been applied to the balance on June 1st, which many taxpayers consider to be very unfair.
The ATO calculates your actual HECS liability based on your total income, compares it to the amount withheld, and either issues a refund or requires you to pay any outstanding amount. It's important to complete your tax return accurately to ensure you meet your HECS obligations correctly.