Everything Educators Need to Know About the Tax Implications of HECS Changes

In the May 2024 Budget, the Government announced changes to HELP indexation to be based on the lower of Consumer Price Index (CPI) or Wage Price Index (WPI), with effect from 1 June 2024. 

Indexation was applied on 1 June 2024 at the rate of 4.7 per cent. This will now be retrospectively changed to 4 per cent.

These changes have implications for those who have a HELP debt, including those working in early childhood education and care (ECEC). 

Mark Chapman, Director of Tax Communications at H&R Block Australia, explains these changes and how they may impact those working in ECEC. 

What is indexation?

Indexation is applied to HELP debts on 1 June each year. It maintains the real value of the loan and it does this by adjusting the loan upwards to reflect the changes in the cost of living. 

This means each HELP debt will grow each year by the amount of indexation.

What were the changes and when did they come into effect?

Indexation was originally applied on 1 June 2023 at the Consumer Price Index (CPI) rate of 7.1 per cent. This will be retrospectively changed to the Wages Price Index (WPI) rate of 3.2 per cent.

Indexation was applied on 1 June 2024 at the CPI rate of 4.7 per cent. This will be retrospectively changed to the WPI rate of 4 per cent. 

Going forward, student loans (which were indexed by the CPI rate) will instead be indexed at the lower of the CPI and WPI rate.

If a HECS debt was indexed in 2023 or 2024, this means the debt holder will receive a credit for the difference between the current indexation rate and the new indexation rate. 

HECS loan holders do not need to apply for this credit. The ATO will automatically apply an indexation credit for those individuals with an outstanding HELP debt that was indexed on 1 June 2023 and/or 1 June 2024. 

For those who repaid their HELP debt after 2023 or 2024 indexation was applied, the credit would be via a refund to their nominated bank account (assuming there are no outstanding tax debts).

A person with an average HELP debt of $26,500 in 2023 will receive a credit of up to $1,190. This is the difference between the 2023 CPI rate of 7.1 per cent and the WPI rate of 3.2 per cent, and the 2024 CPI rate of 4.7 per cent and the WPI rate of 4.0 per cent.

How do I receive my indexation credit?

HECS loan holders will not need to wait until they lodge their next tax return to receive the indexation credit. 

If the ‘HELP debt account’ balance is less than zero because of the reduction, and if the loan holder does not have other primary tax or Commonwealth debts, the credit will be refunded via the usual ATO refund mechanisms which is to their nominated financial institution account as recorded by the ATO. They may have to wait until they lodge their 2025 tax return to get the refund. 

Any other changes I need to know about?

As well as the already legislated reduction in indexation, the government announced some major changes to the system of debt repayments. These changes are not yet legislated (and may be dependent on Labor winning the next election) but if they do become law, they will lead to a potentially huge reduction in the debt burden on students as follows:

• the threshold that people can earn before they start having to pay off their loans is to be increased to $67,000 (currently $54,435)
• changing the way these mandatory payments are calculated so that repayments are based only on the portion of a person’s income above the new $67,000 threshold (currently, once you reach the repayment threshold, repayments are calculated from the first dollar of income)
• Lowering student debts by 20 per cent. Under these changes, someone with the average HELP debt of $27,600 would see about $5,520 wiped from their outstanding HELP loans in 2025.

Learn more about the changes here.