Chapter 1 - Introduction
1.1 The New Zealand child support scheme helps to provide financial support for over 210,000 children. It is therefore essential that the scheme operates as effectively as possible, and in the best interests of the children involved.
1.2 The child support scheme is intended to be a simple, efficient, equitable and transparent method of establishing the amount of financial support that parents living apart may have to pay towards raising their children. Not all parents involved with the scheme, however, perceive it to be so and over the years, since its introduction in 1992, there have been numerous calls to make changes to the scheme.
1.3 Everyone has a different view about what a fairer scheme might look like and how to achieve it, and it will never be possible to design rules to satisfy all concerned. Nevertheless, many people consider that the scheme is now out of date, which if true, could undermine parents’ incentives to meet their child support obligations. This could be detrimental to the wellbeing of their children. This discussion document considers these issues and suggests changes to the way that child support is calculated and enforced.
1.4 Some paying parents have raised concerns that the scheme does not take account of their particular circumstances. For example, they may share the care and costs of their children but have arrangements that do not qualify as “shared care” for the purposes of the child support formula. Or they might be in a situation where their income, on which child support liability is calculated, is substantially less than that of the receiving parent’s.
1.5 Some receiving parents may be concerned about non-payment of child support on the part of the paying parent or the instability of payments. Some may consider the payments to be insufficient to meet the costs of caring for their children.
1.6 These perceptions can make some parents less willing to meet their payment obligations or increase their desire to have the amount of their contributions reviewed. Because children are disadvantaged when child support is not paid, any improvements to the current scheme will be based on the need to increase incentives to meet child support obligations. This is most likely to occur if the scheme is seen as a fair reflection of the expenditure for raising children, the parents’ contributions to care and their capacity to pay, as well as being well administered through appropriate sanctions for non-payment.
1.7 The primary assumption under the current scheme is that the paying parent is the sole income earner and that the receiving parent is the main care provider. However, when parents live apart, there is now a greatly increased emphasis on shared parental responsibility and the importance of both parents remaining actively involved in their children’s lives.
1.8 Participation of women in the workforce, particularly in part-time work, has also increased since the scheme was introduced, resulting in the principal carer of the children now being more likely to be in paid work.
1.9 These issues form part of this review.
1.10 Ways of dealing with the ever escalating levels of accumulated debt relating, in the main, to child support penalties, also need to be considered. Options to encourage the prompt payment of child support and increased compliance by paying parents are therefore discussed in this document. Conversely, paying parents may consider the penalties for late payment to be excessive and may question whether the penalties provide the right incentives to pay.
1.11 Tax credits that assist families in raising their children have changed substantially since the scheme was established, and the child support scheme needs to be evaluated against this.
1.12 Developments in other countries need to be considered too. Australia undertook a substantial review of its child support scheme in 2005. The result was a fundamental change in the way that child support contributions have been calculated in Australia since 1 July 2008. Given our cultural and economic similarities, and the co-operation that exists between Australia and New Zealand in relation to child support enforcement, there are advantages in our schemes being compatible.
What this discussion document aims to do
1.13 Improvement to the child support scheme is an ongoing process that will continue to happen on a variety of fronts. The suggestions in this document follow a number of recent changes made to improve the effectiveness of the scheme, such as:
- The introduction in 2008 of child support information-matching with the Customs Service that allows Inland Revenue to know when parents who are significantly behind paying child support enter or leave the country. This has proved to be a very effective enforcement measure that has resulted, in the year to 30 June 2010, in these parents agreeing to make over $77 million in back-payments of child support.
- In 2006, the ability for Inland Revenue to review a child support assessment if an investigation into a paying parent’s financial affairs shows the assessment does not reflect the parent’s true ability to provide financial support. This is a very useful tool that enables Inland Revenue to counter the use of vehicles such as trusts to shelter parental income for child support purposes.
1.14 This document includes options for revising the child support formula to take account of the important issues of better recognition of shared care, the income of both parents, and the current expenditure for raising children in New Zealand.
1.15 The Government needs to ensure that the best incentives to pay are in place so that child support payments are made on time, as timely payment is critical. The document therefore analyses these issues, and makes various suggestions, including that child support payments be compulsorily deducted from salaries or wages.
1.16 The desirability of parents reaching private agreements on their financial contributions and care arrangements for their children, without having these arrangements imposed upon them cannot, however, be emphasised too strongly. The Government supports the conclusions of the issues paper published last year by the Families Commission in this regard.
SUMMARY OF MAIN OPTIONS
Child support formula
Option 1 – comprehensive change
Under this option, the child support formula would be revised to incorporate:
- Lower levels of regular and shared care, by way of tiered thresholds (in which case care at levels from 14 percent of nights could be recognised).
- The income of each parent. For the purposes of the calculation, each parent’s income would be reduced by a fixed living allowance, equivalent to one-third of average earnings.
- Up-to-date information on the expenditure for raising children. This information would result in the amount of child support payable being variable, depending on:
- the number of children;
- the age of the children (costs being higher for children over 12 years); and
- parents’ combined income (taking into account that expenditure on children rises in absolute terms as income rises, but declines in percentage terms).
Payments would still be subject to an income cap to reflect that, even though there is no obvious cut-off point for expenditure on children, the expenditure becomes increasingly discretionary as household income rises.
Option 2 – component changes
Elements of option 1 would be incorporated into the existing child support formula. For example, the existing formula could be extended to include recognition of a wider range of regular care situations (including a simple reduction to the minimum shared care percentage) or just incorporate the up-to-date expenditure for raising children in New Zealand.
Option 3 – status quo
Retaining the current child support formula, particularly having regard to the impact and complexity of more radical change, is also an option.
Payment, penalties and debt
The compulsory deduction of child support payments from salary and wages for all employees with child support obligations is proposed. Other suggestions include Inland Revenue being able to place greater reliance on the terms of parenting orders and agreements to determine a parent’s level of care.
Options for reducing debt, mainly through the penalties system, include reducing penalties in later years or capping them and, instead, increasing non-financial enforcement measures, are also considered.
Timing of reform
1.17 The Government will be guided by the feedback on this discussion document. If feedback supports change, the Government will consider the detail of any such change and when it would be most appropriate to implement it.
How to make a submission
1.18 Readers who wish to express their views through a brief online survey may do so at www-supportingchildren.ird.govt.nz [site no longer available]. That website summarises the main suggestions set out in this discussion document and gives visitors the opportunity to answer questions and provide comments on the main options considered.
1.19 The Government welcomes more detailed written submissions on the whole range of options discussed in this document. Submissions should be made by 29 October 2010 and can be addressed to:
Supporting Children Project
C/- Deputy Commissioner
Policy Advice Division
Inland Revenue Department
P O Box 2198
Or email: [email protected] with “Supporting Children” in the subject line.
1.20 Those making written submissions should include a brief summary of major points and recommendations.
1.21 Submissions may be the subject of a request under the Official Information Act 1982, which may result in their publication. The withholding of particular submissions on the grounds of privacy, or for any other reason, will be determined in accordance with that Act. Those making submissions who feel there is any part of it that should be properly withheld under the Act should indicate this clearly.
1 In this document the terms “receiving parent” and “paying parent” are generally used to distinguish between the two parents, rather than “custodial parent” and “liable parent”. There are some relatively rare situations when both parents are paying and receiving child support.
2 Department of Labour statistics show that the female labour force participation rate was at a record high of 62.5 percent in the year ending March 2009, compared with 54.3 percent for the same period in 1992. Over the same period there was little change in the male labour force participation rate.