Ask LH: How Can I Minimise My HECS-HELP Repayments?

Hi Lifehacker, As an IT pro with a large HECS debt, what's the best way to maximise your tax return? Is it better to splurge out on a laptop plus other claimable tech stuff yearly? Thanks, Taxed Tech

Laptop picture from Shutterstock

Dear TT,

For those not across this: a HECS debt (more properly a HECS-HELP debt these days) is the sum you have to pay back for university tuition. Once you have earned more than a fixed amount in taxable income ($51,309 in 2013-2014), you'll pay back a percentage of that income (between 4 per cent and 8 per cent in 2013-2014). Each year, your unpaid debt is indexed by a fixed amount (2 per cent for 2013-2014) on 1 June.

Our general advice on these debts is always this: you have to pay off the minimum amount each year (and your employer should automatically deduct that amount), but there's rarely any sense in paying more than that. If you have other debts such as credit card debits (which often have a 15 per cent or more interest rate), it makes more sense to pay those off first. Very few commercial debts have anywhere near as low a rate of interest as the 2-4 per cent range which typifies HECS-HELP indexation, so our usual advice is to lower the highest-interest debts and let HECS-HELP take care of itself over time. Pay off the minimum (because you have to), but only pay off the excess HECS-HELP if you have no other debts.

The one exception (as some readers pointed out back in 2012) is when you are in the final year where you are paying off that debt. At that point, paying it prior to tax assessment can make sense because you can take advantage of the 5 per cent discount offered for advance repayments, which won't apply if you don't pay out the debt and rely on the tax system to do it for you.

That makes sense in your final year, but is arguably of less use in prior years. Again, it definitely isn't a sensible choice if you have higher interest rate debts such as credit cards or car repayments. (It's not clear whether the 5 per cent discount will be maintained after the next Federal budget; time will tell.)

With all that background set, the question becomes: is it worth making deductible purchases solely to lower the amount of HECS-HELP you have to repay in the first place? The exact answer will vary depending on your circumstances, but the big picture version is this: it only makes a big difference if you can dramatically change the percentage rate that applies, and to be honest that's often unlikely.

We'd point out first that laptop deductions are complex anyway: you can only salary sacrifice a laptop if it's your sole working machine, and it has to be paid for from your pre-tax income. But the issue here is really whether that sacrifice takes you down to a different repayment level. If it doesn't, it makes no special difference to your repayments. Even if it does, the advantage might not be worth the effort.

Here are the threshold amounts for the 2013-2014 financial year:

Income Repayment %
Below $51,309 Nil
$51,309 - $57,153 4.0%
$57,154 - $62,997 4.5%
$62,998 - $66,308 5.0%
$66,309 - $71,277 5.5%
$71,278 - $77,194 6.0%
$77,195 - $81,256 6.5%
$81,257 - $89,421 7.0%
$89,422 - $95,287 7.5%
$95,288 and above 8.0%

If you're earning $52,000 a year and you can legitimately deduct your $1000 laptop, then you will fall back into the 'Nil' bracket and you won't have a HECS-HELP repayment that year. But if you're earning $56,000 a year, that deduction won't change your HECS-HELP percentage. You'll still pay a little less HECS-HELP and tax overall (because your income is smaller), but choosing to purchase a laptop purely to lower that debt wouldn't make a lot of sense. The same applies across the other brackets.

You also have to remember that if you don't pay the debt, it will be indexed. Let's use the $52,000 income and $1000 laptop example again. You won't pay 4 per cent of your $52,000 income, which amounts to $2080 -- but you will have spent $1000 to do that. As well, your debt will be indexed by 2 per cent this year (and potentially more in the future).

Whether that adds up depends on the level of your debt. Here's how it works out for a range of debt figures in a simple sense. The lesson here? If your HECS-HELP debt is small, it makes sense, but if you have a large debt, indexation may offset the benefits of a cheap laptop:

HECS-HELPsize Index amount Cost including $1000 laptop HECS at $52000 Saving
$10,000.00 $200.00 $1,200.00 $2080.00 $880.00
$15,000.00 $300.00 $1,300.00 $2080.00 $780.00
$20,000.00 $400.00 $1,400.00 $2080.00 $680.00
$25,000.00 $500.00 $1,500.00 $2080.00 $580.00
$30,000.00 $600.00 $1,600.00 $2080.00 $480.00
$35,000.00 $700.00 $1,700.00 $2080.00 $380.00
$40,000.00 $800.00 $1,800.00 $2080.00 $280.00
$45,000.00 $900.00 $1,900.00 $2080.00 $180.00
$50,000.00 $1000.00 $2000.00 $2080.00 $80.00
$55,000.00 $1100.00 $2,100.00 $2080.00 -$20.00
$60,000.00 $1200.00 $2,200.00 $2080.00 -$120.00

Obviously, you'll also pay less tax if your income is slightly lower, but that's an assessment that's a little too individual to address here.

Let's reinforce the key point: the relevant extra savings here only happen if your HECS-HELP level changes as a result of the deduction. At figures close to that level, a deduction might help. In the mid-range, they won't. And that's without considering that money you have to spend on HECS-HELP is money you can't spend on other investments. From that perspective, eliminating any debt, even one indexing at less than market rates, might be the sensible option. That becomes truer the higher your income is, given how rapidly HECS-HELP repayments increase.

Ultimately, your tax decisions are yours to choose and defend, and we're only providing background here: if you want individual, specific advice, consult a professional. You might have to buy a laptop for work anyway, in which case any saving is an added benefit, not a goal. But I find it hard to imagine too many contexts where spending money on a laptop purely to avoid paying off HECS-HELP in a given year will be very helpful in the long run. By all means claim legitimate deductions, but HECS-HELP is something you will have to pay off sooner or later.

Cheers Lifehacker

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Comments

    Move overseas and never come back, although that's a little drastic!

    An additional fact to note with HECS is that any salary sacrifice/salary packaging programs that give you fringe benefits are also included in your income for HECS calculations. This can drastically increase how much you will have to pay come tax time if you weren't aware.

    deleted

    Last edited 18/06/15 9:24 am

      Not really, since they dropped the bonus for repaying early. Unless you are on the top tax tier, you are better off having your money in an esaver than in the Government's pocket.

      Last edited 10/02/14 11:17 am

    Mines still hanging around, but its going down slowly. I have looked and look to try and wriggle out of it, or reduce it. but there's just no way - without shooting through and leaving the country.

    I cant see how any discounts (esp 10%) make you better off.. yeah its good to reduce the debt, but its the best debt you will ever have, you pay it off before tax! If you pay it off after tax (extra payments) you are paying probably 30% more for the privilege.

      You're better off from the discounts (even 5%) because HECS-HELP repayments aren't paid before tax, they are paid alongside it. Your repayments aren't reducing your taxable income, so you are being taxed at the same rate -- the government is only taking money you would otherwise have in your hands. Best to keep 5% of that, if you can.

        hmm, I still dont follow....

        I understand that its not reducing my overall tax bill, but if the payments are taken from my gross pay, how am i better off paying it off with my net pay to gain a discount of 5%). the effort required to earn $1000 post tax is 30% more than the effort required to earn $1000 pre tax.

        because any voluntary payments made will be made from your net pay, a 5% discount doesn't cut it.

        I have always struggled with this argument and i am still confused.

    Incorrect, you can't just claim a $1000 deduction for a $1000 laptop, even if it's used 100% for work. Also the calculations above are totally wrong: deductions don't reduce your taxable income, they reduce the amount of tax you owe.

    - You can only claim up to $300 for items (around $300, pretty sure it is..)
    - Anything more, you can only claim the depreciation value. That is, calculate how much the laptop depreciated (2-3 years expected lifetime), deduct depreciation only.
    - If it's used for 100% work, will need proof if you're audited.
    - If it's not used 100% for work, will need a logbook showing exactly when it was used for work/personal - if you're audited.

    I did the research hours into this, as I am I.T. and I heard miracle stories of people claiming their $3000 rigs, laptops, phones, etc all on tax.

    The bottom line is - you can't claim much, and if you do (or your tax agent) you're probably lying.

      You're quite wrong about deductions -- those reduce your taxable income, not your tax itself. (Rebates reduce your payable tax.) And the depreciation rules were changed and simplified to allow anything valued under $6500 to be instantly written off last year. Tax rules change (yet another reason to seek professional advice).

        I did tax return for the last year and looked at the IT-specific rules and it still had the depreciation-only thing. Your linked article refers to businesses earning under $2M, so it doesn't apply to personal tax returns.

        Thanks for correcting me on the 'reduce taxable income' vs 'tax itself' point. Proof in first sentence here: http://www.ato.gov.au/Individuals/Income-and-deductions/Deductions-you-can-claim/

        Here's the $300 deduction limit explained in more detail, for individuals: http://www.ato.gov.au/Individuals/Income-and-deductions/Deductions-you-can-claim/Tools,-equipment-and-other-assets/

        Last edited 10/02/14 3:28 pm

          But the rules are slightly different again if you're salary-sacrificing purchases rather than just buying tools outright (and again if you have non-salary income). With all that said, we agree on the main point: trying to run up deductions purely to avoid HECS does not make sense.

    A novated lease (ECM) has reduced my taxable income (FBT is $0 under the Employee Contribution Method) and thus my hecs repayments (hecs is taxable income + fbt liability).

    So if you are in the market for a car..

      If that is the case that's great news because I briefly looked into this but couldn't get my head around what my fringe liability would be and whether it would blow out my HECS liabilities.

      ...it's been many many years since I did tax law at uni.

      I think I might look into this again and get some professional advice.

    There is one way to reduce taxable income and hecs repayments if you're employed and looking to study on the side. Ironically it increases your overall hecs but hear me out.

    Under tax law, if you are self studying to attain a better position in your current employment or.a higher paying role your study fees can be tax deductible. For example, a post grad cert in business administration is roughly 8 grand. The 8 grand goes to hecs, but is deductible from taxable income as a whole

    So if you're earning 59k in the financial year, it reduces taxable income below the threshold, plus bonus qualifications. Also gives a nice bit of tax back as well (roughly 32% of costs dependent on tax paid).

    Eliminates repayments and furthers your education. What's not to love?

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