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Base Child Support on recent income

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A key proposal in the discussion document is to improve Child Support by basing assessments on both parents’ income in a recent time period, rather than on old information.  

Inland Revenue would use the up-to-date information about the income of salary or wage earners, and information about a person’s earnings from investment income.  Inland Revenue calls this “observable income” because it can observe the information about this income during the year.

Child Support payments would better reflect each parent’s ability to contribute financially.  Inland Revenue would be able to respond when a person’s income changed so the payments would still reflect their current situation.  

 “Non-observable income” is when Inland Revenue cannot see what a person’s income is until that person tells Inland Revenue at the end of the tax year, for example, when a person runs a business, has a rental property or earns income from overseas.    

If a person has non-observable income, their Child Support assessment would be based on estimates of income or on past income information from previous years.  A proposal for change is to allow self-employed or business people to provide information during the year about their recent income, rather than waiting until the end of the year. 

People would still have to tell Inland Revenue when family circumstances change, for example, if a child leaves school and starts working full time.  

Change the Child Support “year” so as to use more up-to-date information

One option to ensure more up-to-date information is used in Child Support assessments is to move the start of the Child Support year to after people’s income tax obligations are finalised for the year, for example, July.  Child support assessments could then be made using confirmed income from the tax year that’s just finished, instead of the previous calendar year or two years ago.  All income, including interest income would be used.

This proposal would help to ensure that more up-to-date information was being used than currently, but it ties Child Support assessments to annual income information, and payments would not automatically change if a parent’s income changed during the year.

Use a shorter “recent” income period for observable income

Another option is that Child Support assessments would be based on a period of “recent” income.  If the income information is more recent it is more likely to reflect the parent’s ability to pay and the level of support needed by the other parent or carer.

The Government wants feedback on what the period of “recent” income should be for observable income, for example, the previous month or the previous three months.

If Inland Revenue looks back more often, for example, every month, payments would be based on more up-to-date information, but they might go up and down more frequently. Some people might like having their payments quickly adjust to changes in income.

Some people might prefer that Inland Revenue looks back less often, for example over the past three months, because the amount of the payment wouldn’t change so quickly.  Payments would be more predictable with this longer “period of assessment”.

Reassess payments whenever a parent has a change in income

Another option is to use past income information but to do a reassessment whenever a parent’s income changes.  For those customers whose income fluctuates a lot, this could mean their payments change frequently.  For people with a fairly steady income there may not be many changes to payments.

Balancing timeliness and consistency

There would need to be trade-offs between the different objectives for the proposals (certainty, timeliness and consistency). This table outlines the differences between a shorter period of assessment, when Inland Revenue looks back more often at recent income, for example weekly, or a longer period of assessment, when Inland Revenue looks back less often, for example quarterly.

A longer period of assessment means: A shorter period of assessment means:

payments don’t change as quickly, so they are more consistent and reliable, making it easier to budget

payments change more quickly, so customers may not know as far in advance what their payments will be in the future

payments are less responsive to changes in income, so a change in payments will always be slightly behind a change in income

payments would respond more quickly to changes in income, so they more closely reflect current income and needs

New options for people with non-observable income

Some people with non-observable income, such as income from a business, will only know at the end of the tax year what their total income was for that year.  For this group of people, assessments for Child Support could still be based on past annual income.

Customers who are using the new Accounting Income Method (AIM) for calculating and paying provisional tax (from 1 April 2018) would be providing information during the year to Inland Revenue about their income, so their Child Support assessments could then be based on actual recent income information. 

Customers who are not using AIM could provide Inland Revenue with information on their income more regularly throughout the year. For example, a customer could provide updated information about their business income every two months, and that information could be used to calculate Child Support for the next two months.

At the end of the year there would be a check to make sure income declared during the year matched the final income tax return, and that there wasn’t an over or underpayment. 

There would still be a small time delay between the “recent” period and the payment

At the end of each time period, for example a month, or a quarter, the customer’s income details for that period would be checked and used to calculate the Child Support for the next period.  As it takes time for Inland Revenue to process the information, the payment period would always be slightly behind the assessment period. 


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