How it Works
- Compulsory Repayments: PAYG HECS
- Voluntary Repayments & Additional Loans
- HECS Indexation
- HECS Adjustment
Compulsory Payments: PAYG HECS at Marginal Rates
Your HECS Repayment Income (HRI) is a broad measure of income which included your taxable income, any reportable fringe benefits (non-cash benefits) and exempt foreign income to determine whether you need to make compulsory repayments on your student loan each year.
If your HRI exceeds the minimum threshold of $54,435, a percentage of your income is payable. This percentage increases as your HRI increases. (See FY2024-25 rates here).
When you start a job, you inform your employer you have a HELP debt (there’s a tick-box on the tax file number declaration form) and they will subsequently withhold a portion of your monthly income (like your PAYG tax) if you are projected to earn over the threshold. These are basically credits to help cover your eventual calculated repayment at the end of the tax year.
Example
If you earn $70,000 a year, your employer will withhold 2.5% of your pay (on top of normal PAYG tax) throughout the year. However, this withholding is not the final payment – it’s a precaution to cover your future compulsory repayment. The actual compulsory repayment is determined when you lodge your tax return, using your actual income for the year. At that point, the ATO calculates, say, 2.5% of your $70k = $1,750. The amounts your employer sent in are applied to your HELP debt.
- If they withheld too much (perhaps your income ended up lower), you’ll get a refund.
- If they withheld too little, you might have to pay a bit extra.
Direct Adjustments: Voluntary Repayments & Additional Loans
In addition to compulsory repayments, you can make voluntary repayments to your HELP debt at any time. These have a few important characteristics:
In addition to compulsory repayments, you can make voluntary repayments to your HELP debt at any time. These have a few important characteristics:
Immediate Effect on Balance:
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A voluntary repayment is applied to your account as soon as it’s processed by the ATO, reducing your HELP debt straight away. If you make a voluntary payment before the indexation date (1 June), it directly lowers the principal on which indexation is calculated. In simple terms, paying early means a smaller balance will be multiplied by that year’s indexation rate, so less indexation is added.
Voluntary vs. Compulsory:
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Any voluntary payments you make are in addition to compulsory amounts. Voluntary payments do not count toward meeting your compulsory repayment for the year.
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Essentially, voluntary payments are extra and cannot be refunded or used to offset your compulsory obligation. So you generally wouldn’t make a large voluntary payment during the year and also let your employer keep withholding – otherwise you might temporarily overpay (though any surplus would come back as a refund after tax return if you overshoot what was owed). If you plan a big voluntary payment, you might adjust your withholding (through withholding variations) to avoid that double-up.
Example: Voluntary vs. Compulsory Repayments
If you are required to make a $3,000 compulsory repayment. If you voluntarily paid $3,000 earlier in the year, you will still have $3,000 calculated as due in your tax return (you don’t get to skip it). What happens is your voluntary $3,000 would have already reduced the balance (and perhaps saved you some indexation), and then the $3,000 via tax return will further reduce or pay off remaining debt.
HECS Indexation
Indexation is the process of increasing your HELP debt in line with inflation (to maintain its real value over time).
Unlike a bank loan, HELP debts don’t charge interest, but they are adjusted once a year for inflation. On 1 June each year, the government applies indexation to any part of your debt that has been unpaid for more than 11 months. Historically, indexation was based on the Consumer Price Index (CPI).
In 2022 and 2023, high inflation led to large indexation increases (e.g. 3.9% in 2022 and 7.1% in 2023, a record high). However, from 1 June 2023 onward, the indexation formula has changed – it now uses the lower of CPI or the Wage Price Index (WPI). WPI measures wage growth and has been lower than CPI recently. This change drastically reduced the 2023 indexation from 7.1% down to 3.2%, and the 2024 indexation from 4.7% down to 4.0%.
Timing of Indexation vs. PAYG Deductions:
A critical detail is the timing of when indexation is applied versus when your payments are credited.
Indexation happens on 1 June each year automatically. But your compulsory repayments (via PAYG withholding) aren’t actually credited to your HELP account until your tax return is processed (which is after 30 June, typically between July and Oct).
This timing gap means that any amounts withheld during the year don’t reduce your balance in time to stop it from being indexed on 1 June. As mentioned above, the only way to reduce your HECS loan before it is indexed is to make a voluntary repayment before 1 June.
Example:
Suppose over the course of the year your employer withheld $2,000 for HELP. If by 1 June that $2,000 hasn’t been credited (because you haven’t lodged your return yet), your debt will be indexed as if that $2,000 is still owed – essentially, the indexation is applied to the pre-repayment balance.
The ATO acknowledges this issue: the exact compulsory repayment amount isn’t known until after the financial year, and current systems don’t adjust for it prior to indexation. In fact, the ATO does not separately track “HELP withheld” amounts in real time that could be deducted from your balance early. Only once you file your tax return will the withheld amount officially go toward reducing your debt. As a result, many people see their HELP debt increase on 1 June, and then decrease when their tax return payment is applied later. It can feel like one step forward, one step back – you made payments all year, but the debt still grew before those payments took effect.
There are discussions about changing the indexation date to after tax returns (e.g. 30 November) to align these better, but for now, indexation comes first. The practical takeaway: if you have a HELP debt and your income is above the threshold, expect your balance to go up on 1 June, then go down once your compulsory repayment for that year is processed later.
EOFY HECS Adjustment
To bring all of the above concepts together, the ATO calculate your EOFY HECS Adjustment in the following steps:
1. Starting Balance: The process begins with your outstanding HECS/HELP balance at the start of the financial year.
2. Indexation on 1 June:
- On 1 June, the ATO applies indexation to your outstanding balance to adjust for inflation (using the lower of CPI or WPI, as applicable).
- This means your balance increases by a percentage (e.g., 4%) on that date, based on the balance at that moment.
3. Application of Voluntary Repayments:
- Any voluntary repayments you make before the indexation date reduce the balance subject to indexation.
- Voluntary repayments made after indexation will reduce the balance later when your tax return is processed.
4. Compulsory HELP Repayments via PAYG:
- Throughout the financial year, your employer withholds amounts from your salary as estimated compulsory HELP repayments.
- These amounts are collected based on your income and the HELP repayment scale but are only formally applied once you lodge your tax return.
5. Tax Return Reconciliation:
- When you lodge your tax return, the ATO recalculates your compulsory repayment based on your actual annual income.
- The withheld amounts (and any adjustments) are applied to the indexed balance.
- If you have underpaid, you’ll need to pay the difference; if you have overpaid, you may receive a refund (although extra voluntary repayments generally aren’t refunded—they simply reduce your balance).
6. Final HECS/HELP Balance:
- After the indexation and the application of both compulsory and voluntary repayments, your final HECS/HELP balance is determined. This balance is then carried forward into the next financial year.
Example
Suppose you start the financial year with a HECS balance of $20,000.
Voluntary Repayments : You make a voluntary repayment of $2,000 before 1 June.
- New balance before indexation: $20,000 - $2,000 = $18,000.
Indexation : On 1 June, the ATO applies a 4% indexation rate:
- Indexed Balance = $18,000 × 1.04 = $18,720.
Compulsory PAYG Withholding : Throughout the year, your employer withholds an estimated $1,000 in compulsory HELP repayments.
Tax Return Reconciliation : When you lodge your tax return, the ATO determines that based on your actual income, your compulsory repayment should be $1,200.
- This means an additional $200 is required (or if your employer withheld more than needed, the excess would be refunded).
Final Balance Calculation : Your final HECS/HELP balance becomes:
Final Balance = indexed balance - Total compulsory repayments
Final Balance = $18,720 - $1,200 = $17,520
In this scenario, by making a voluntary repayment before indexation, you reduced the amount subject to indexation and, ultimately, the total debt carried forward.
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We do not provide tax agent services. The information provided in this article should not be relied upon to satisfy liabilities or obligations that arise, or could arise, under a taxation law or to claim entitlements that arise, or could arise, under a taxation law. You should seek professional tax advice to understand your tax liabilities, obligations and entitlements.
