Hon David Cunliffe
Minister of Communications
Minister for Information Technology
Associate Minister of Finance, Revenue and State-Owned Enterprises
MEDIA STATEMENT
Child Support Bill to benefit Kiwi Kids
Associate Revenue Minister David Cunliffe today introduced the Child Support Amendment Bill into Parliament.
"This bill will improve the flow of money to the children who need it," said David Cunliffe.
"The bill is part of a balanced package of sticks and carrots that will ensure that liable parents better meet their obligations to their children," said David Cunliffe.
"Getting child support debt down will take a combination of legislative and administrative measures. The changes introduced in the bill offer an incentive for liable parents who have defaulted to get back into the system before it's too late.
"Penalties for late payment can grow quickly, creating a disincentive for some parents who fall far behind to front up to Inland Revenue and meet their obligations. In some cases debt and penalties rise to the point where defaulting parents feel repayment is impossible.
"Much of the increase in child support debt is the result of penalties compounding rather than core debt itself increasing dramatically. The latest figures put core debt of liable parents who default at about $416 million, with unpaid penalties mounting to another $558 million.
"The bill will enable Inland Revenue to work more flexibly with debtors and to remit some of their penalties if they enter into a binding payment arrangement and stick to it.
"Only penalty debt, which goes to the Crown, never the core debt that is owed to the custodial parent, can be remitted." David Cunliffe said.
The bill also gives Inland Revenue greater powers to review the total financial affairs of parents when it suspects they are paying less child support than they should – for example, if it suspects a liable parent is using business structures to mask income.
"Other changes will allow respondents to a child support administrative review the right to appeal to the family court if they are dissatisfied with the outcome, and allow Inland Revenue to accept documentation from other countries as proof of parentage.
"The changes proposed in the bill will work alongside administrative changes designed to tighten the collection system, such as increased border enforcement. The government has increased funding by $14 million for these activities.
"The changes recognize that any approach to reducing debt needs to be a balance between providing incentives for parents to get into the system and meet their obligations, and taking firm action against them if they don't take that opportunity.
"My approach is to do what is needed to get the child support to those families who need it, I am confident this bill will help achieve that," David Cunliffe said.
For details of the legislative changes see the commentary on the Child Support Amendment Bill, available at www.taxpolicy.ird.govt.nz.
Contact: Julian Kersey, Advisor, 04 471 9116, 021 811 999
Questions and Answers: Child Support Amendment Bill
What does the bill do to encourage people to pay child support?
It offers an incentive to liable parents who have stopped paying child support to start making regular payments again. If they front up and agree to keep up their payments – and stick to the agreement, some of the late payment penalties they owe will be written off. They will still have to pay all the child support they owe, however.
The idea is that the state gives up some of the penalties to get lapsed parents back into the system so they can begin to make regular child support payments in full and on time.
Example – when penalties are written off
As at 1 April 2006 Jane has child support debt totalling $1,191. This is made up of:
- child support assessment $1,000
- initial late payment (10%) penalties $100
- incremental penalties (2% of total unpaid amount) $91.
Jane enters into an arrangement with Inland Revenue to pay regular child support plus $21.15 per week towards her total assessment and initial late payment penalties. Six months later Jane has kept to the arrangement and has paid Inland Revenue $550 towards her debt, which is half of the debt. Inland Revenue can write off $45.50 (half) of her incremental penalties. Her total debt will be reduced to $595.50. In a further six months Jane has paid an additional $550 towards her debt and receives another write-off of incremental penalties of $45.50, which clears her child support debt in full.
Example – if someone breaks a payment arrangement
As at 1 April 2006 Tony has child support debt totalling $1,191. This is made up of:
- child support assessment $1,000
- initial late payment penalties $100
- incremental penalties $91.
Tony enters into an arrangement with Inland Revenue to make regular child support payments plus pay $21.15 per week towards his debt. Six months later Tony has kept to the arrangement and has paid Inland Revenue $550 towards his total assessment and initial late payment penalties, which is half of the debt. Inland Revenue can write off $45.50 (half) of his incremental penalties. His total debt is reduced to $595.50. Three months later Tony defaults on his arrangement and stops making payments. Even though he has complied with the arrangement for a further three months he receives no further write-off until he enters into a new agreement and complies with it for at least six months.
Who can initiate a review of a liable parent’s financial affairs?
The bill also allows Inland Revenue itself, not just custodial parents, to initiate reviews of liable parents’ financial affairs when it suspects they are deliberately paying less child support than they should. The change is intended to counter the practice of some parents to structure their financial affairs so as to minimise their child support payments.
Example –when Inland Revenue might initiate a review
Eric is the director of a profitable company and is paying the minimum amount of child support. Inland Revenue records show that Eric is paying himself an annual income of $25,000, although he also has the use of a house and car owned by the company.
If further Inland Revenue investigations establish that Eric’s liability does not accurately reflect his ability to provide financial support to his children because of his income, earning capacity, property and financial resources, Inland Revenue may initiate a review process by an independent person, a review officer, who is contracted to Inland Revenue. The review officer will consider whether there are special circumstances and whether a change would be fair to both parties and the children. The review officer may then amend Eric’s child support liability to reflect his actual financial resources.
How much child support debt is owed at present?
Total child support debt owed was $987 million as at 30 June 2005. Paying parent core debt was $416 million owing, with unpaid penalties amounting to another $558 million. Penalties compound and grow very quickly, so much of the increase in child support debt over recent years is the result of unpaid penalties rather than a dramatic increase in liable parents not paying.
How do penalties work?
The bill does not change the way that late payment penalties are imposed.
If the full child support amount is not paid on time, liable parents are charged a penalty of either $5 or 10% of the unpaid amount, whichever is the greater.
A further penalty of 2% (or $1, whichever is the greater) of the total overdue amount, including penalties that have already been incurred, will be added for each month that the amount remains unpaid.
Example – how penalties are charged
Chris did not pay his monthly assessment for May of $100. He received a $10 penalty (which was 10% of the amount due) on the 20th of June. He now owes $110. If he does not pay this amount in full by 20 July, he will be charged a penalty of 2% of the total overdue amount of $110, making his total amount owed for May $112. (He will probably also owe $100 for June plus 10% penalty $10.)
If he continues not to pay, within three years the penalties on that late May payment will be greater than the amount of child support itself for the month.
More information on penalties is available from www.ird.govt.nz/childsupport.
Isn't the bill just letting defaulting payers off the hook?
No, the bill requires parents to pay all the child support that is owed to their families, or to the government if the custodian is on a sole parent benefit. Only some of the penalties that have built up on the unpaid amount can be written off. The criteria for write off are strict – defaulting parents must enter into an arrangement to pay off their debt and keep to that arrangement for six months. After that time, penalties can be written off in proportion to the amount paid by the parent. This acts as an incentive for parents to pay off as much as possible in the period – which means more money can be passed on to their families.
Isn't letting the non-payers off their penalties unfair to parents who have paid their child support regularly?
Parents who have paid their child support debts have ensured their financial support has already been passed on to their families. The families of parents who do not meet their child support responsibilities are in many cases missing out. The bill aims to bring that group of parents into the child support system so that more families receive the money they are entitled to on a continuing basis. Liable parents who pay in full on time are still better off because they do not incur any penalties.
Only some of the penalties owed can be written off.
These measures, together with improved collection measures (see below), will ensure that those who choose not to pay will not get away with avoiding their responsibilities.
Will the changes apply to liable parents who are already paying off their arrears?
Yes, if they keep up their regular payments and repayment of arrears for six months after the changes come into force they will qualify for some write-off of penalties as well.
Isn't it unfair to custodians if liable parents have some of their late payment penalties written off?
No, any penalties that are written off will be owed to the state. To qualify for a write-off of some of their late payment penalties, liable parents will have to pay what they owe to custodians for six months.
What else is being done to reduce child support debt?
Reducing debt will take two things: giving parents who do not pay incentives to re-enter the child support system, and taking firm action against those who don’t take up that opportunity.
The changes introduced in the bill are being complemented by changes that tighten up the collection system, such as increased border enforcement. For example, Inland Revenue is working with the New Zealand Customs Service and the Police to enforce arrest warrants for parents leaving the country to avoid paying child support, including those who come back to New Zealand for a visit.
Collections of child support resulting from enforcement actions taken through the courts are increasing. Inland Revenue has also received a number of reports of liable parents who are clearing debts or making instalment arrangements to avoid legal action.
What about non-paying parents who live overseas?
Inland Revenue works to collect child support from liable parents who live in Australia and who owe money to families in New Zealand, an arrangement managed under the Reciprocal Agreement between Australia and New Zealand. Australian authorities collect from parents living in Australia and pass the money to Inland Revenue for distribution to custodians. Inland Revenue is transferring increasing numbers of cases to Australia – as at 31st March 2005, cases worth $104.6 million had been transferred, and further improvements to the administration are planned.
Work is under way on developing other international agreements to enforce payment of child support by New Zealanders living abroad.
What other changes does the bill introduce?
The bill introduces several changes to improve the operation of the child support scheme and, in some cases, increase fairness.
It exempts victims of sex offences from paying child support, on the grounds that they should not be further victimised by having to pay child support for children conceived as a result of the crime.
It also introduces a temporary exemption for liable parents under the age of 16 who are still at school, since they are not usually in a position to earn enough money to meet even the minimum payment. The exemption is only for a limited period and is in the long-term interest of both parents and children.
What about young fathers who want to pay child support?
Liable parents under 16 will have to apply for an exemption, so they may continue to pay if they want to. Also, if they get part-time or holiday work they will have to pay at least the minimum amount.
Further information on the proposed changes is available in the commentary on the bill at www.taxpolicy.ird.govt.nz.