Chapter 2 - Background

Objectives of a child support scheme

2.1 The purpose of a child support scheme is to deliver financial support to children to promote their ongoing wellbeing and healthy development following parental separation. This includes:

• maintaining as far as possible the level of care children could have expected had the parents remained together, by providing financial support to assist receiving parents to raise their children, thereby promoting stability for the children;
• ensuring the scheme does not discourage either parent from being actively engaged in their children’s lives and that they share care and financial responsibility where possible;
• encouraging parents to work together in the best interests of their children;
• reducing opportunities for conflict which will negatively impact on the children; and
• encouraging and facilitating parents to make timely payments.

2.2 Child support schemes may also be designed to ensure, where relevant, that contributions are made towards taxpayer-funded sole-parent benefits.

2.3 With these aims in mind, the current scheme was established by the Child Support Act 1991. That Act revised the rules relating to child maintenance when agreement between parents proves difficult, or when the receiving parent is a beneficiary.

2.4 One of the Government’s key social policy objectives is to ensure that New Zealanders have an equal opportunity to participate in and contribute to society. This includes providing a safety net through the benefit system for those who are unable, for various reasons, to financially support themselves.

2.5 In the context of child support, this means that child support payments are collected and delivered for the benefit of the children they are intended for, and that parents do not pass their financial responsibilities to maintain their children onto other members of society. This is why parents can be liable for child support even when the custodial parent receives a state-provided benefit.

2.6 The child support scheme is needed when parents cannot mutually agree on their relative financial contributions to support their children. Although many parents reach private agreement on their financial contributions and care arrangements, and outcomes may be more satisfactory if they do, many others cannot achieve agreement. A back-stop scheme is needed in these circumstances.

2.7 In the absence of an administratively based scheme family courts would need to determine levels of child support contributions when parents cannot reach agreement. This could place undue pressure on the court system. The administrative approach will, in any event, likely be more efficient because contributions can usually be determined quickly by reference to a formula.

2.8 The scheme is not, however, intended to provide full financial compensation to offset any decline in family members’ living standards as a result of the parents living apart. A decline in living standards is often inevitable in these circumstances. There is often a duplication of housing and related costs, such as utilities and household furnishings. There are also additional costs associated with the children visiting or staying with the paying parent, such as play and study space, toys and play equipment, and transport costs.

Does the scheme calculate contributions appropriately?

2.9 While an administratively based scheme is generally accepted internationally, child support schemes and how contributions under these schemes are calculated differ. The intention is that the payments should represent the expenditure for raising children but there are different views about how to measure the expenditure. There is no single “expenditure” that applies in all situations as parental income and values may influence how much parents would normally spend on their children. Further questions include to what degree regular care by paying parents should result in reduced payments and whether, if it is appropriate to link the payments to income, there should be an income cap. These are all difficult issues that other countries have had similar problems grappling with.

Perceptions

2.10 In the stressful circumstances of a relationship breakdown, or when parents are otherwise separated, a child support scheme that calculates and places an obligation upon parties can appear to one or both parties to be unreasonable and inflexible irrespective of its merits.

2.11 Many parents have said they would prefer the scheme to be more flexible to take account of their particular circumstances. For example, parents may genuinely 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 the paying parent’s income is substantially less than that of the receiving parent.

2.12 If the receiving parent is a sole-parent beneficiary, some paying parents may perceive that their payments are not being passed on to their children, given that the state generally retains the child support payments to help offset the cost of the benefit.

2.13 In these situations, child support obligations imposed on many paying parents can be a barrier to their willingness to pay.

2.14 In other cases, the scheme may simply fail to accommodate the discordant views about a child’s upbringing that may become apparent when parents separate. This too can reduce the willingness to pay.

2.15 Conversely, receiving parents want to ensure that the payments are received and are on time, that the paying parent is meeting his or her responsibilities, and that the children do not suffer the consequences of late or non-payment. Importantly, they want to ensure that the payments they receive are adequate for supporting the children. A survey commissioned by the Families Commission found that receiving parents often feel the payment is insufficient to cover both everyday expenses and “one-offs” throughout the year.[4]

2.16 This perceived lack of flexibility in the scheme may also mean that, for either parent, there is insufficient regard for:

• re-establishment costs that parents incur when they separate;
• private financial contributions parents make for the benefit of their children; and
• parenting agreements relating to the care of children for shared care purposes.

2.17 Are these perceptions about the scheme correct? To answer this question this chapter considers in more detail the advantages and disadvantages of the scheme. Before doing so, features of the scheme are first outlined. A more detailed outline is provided in appendix 1, along with some background on earlier child support legislation.

How child support works

2.18 The current child support scheme is administered by Inland Revenue, which is responsible for both assessing contributions and collecting payments. The child support scheme is voluntary for parents unless the caregiver is receiving a sole parent benefit.

2.19 When an application for child support has been properly made, the Commissioner of Inland Revenue is bound to accept it. Liability then arises under a simple administrative formula. The parent with the liability makes his or her payment to the Crown which then passes it to the person who has primary care for the child. In most cases this will be the child’s other parent. If the caregiver is receiving a sole-parent benefit, the child support payments are retained by the Crown to help defray the cost of the benefit and any excess is passed on to the caregiver.

The standard formula

2.20 The current formula for calculating child support is:

(a – b) x c

where:
“a” is the child support income amount;
“b” is the living allowance; and
“c” is the child support percentage.

2.21 For most paying parents, the child support income amount is their taxable income in the preceding income year. The maximum child support income that can be assessed is set at two and a half times the national average earnings for men and women as at mid-February of the tax year immediately preceding the most recent tax year. The maximum is currently $120,463.

2.22 There are six separate living allowance levels, ranging from $14,158 to $35,868, depending on whether the paying parent is living alone or with a partner and/or other children. The allowance is based on benefit rates plus a set amount for each dependent child up to a maximum of four children.

2.23 Once the living allowance has been deducted from child support income, the product is multiplied by the child support percentage relevant for the number of children being supported. The standard percentages are:

No. of children	Child support percentage – sole care
1	18
2	24
3	27
4 or more	30

2.24 There is a minimum amount of child support payable each year, the current minimum amount being $815.

Shared care

2.25 The above percentages are reduced if parents share the care of their child. Under the Child Support Act, care of a child is regarded as being shared when each provider of care shares the ongoing daily care of the child “substantially equally” with the other care provider. A paying parent who looks after a child for at least 40 percent of nights is considered to meet this test.

2.26 If a parent does not meet this test, he or she may qualify under an alternative test based on the court’s interpretation of “substantially equally”. This is at least 50 percent of the responsibility in relation to the factors constituting care other than overnight care.

2.27 If shared care is established, parents can cross-apply for child support. This involves respective liabilities being offset to produce a net amount for one parent to pay.

Administrative reviews

2.28 If either parent considers that the amount payable under the formula is not appropriate, they can apply for an administrative review under one or more of the 10 grounds set out in the Child Support Act. The Commissioner of Inland Revenue then appoints an independent review officer experienced in relevant cases to consider the application. The review officer makes a recommendation on whether departure from the child support formula assessment is warranted. The Commissioner has the discretion to either accept the review officer’s recommendation or conduct a rehearing.

Advantages of the current approach to calculating contributions

2.29 The scheme is fairly simple and provides relative certainty for parents about their obligations and entitlements. Assessment under the scheme is simple to understand and relatively easy to administer. Furthermore, the formula’s fixed standards generally ensure that parents with like circumstances are treated the same. In most cases, there is no need for a reassessment.

Disadvantages of the current approach to calculating contributions

2.30 The main disadvantage of the current approach is that it does not adequately reflect the variety of social and parenting circumstances in New Zealand today. To the extent that, in the longer term, this adversely affects parents’ willingness to pay child support, it adversely affects the children concerned. It is also at least questionable, given increasing child support debt rates, whether the current penalties system creates the appropriate level of incentive to pay.

Actual expenditure for raising children

2.31 The formula is linked directly to income rather than expenditure. Expenditure appears to rise in tandem with income, but whether the current income percentages and the cap in the formula are set at appropriate levels may be questioned. Incentives to pay child support may decline if parents are unhappy with the basis used for calculating the payments.

2.32 An associated issue is the impact of the increase in the living allowance when a paying parent establishes another family. This leads to a lower contribution towards the expenditure for raising children from an earlier relationship even though costs have not declined.[5]

2.33 These concerns are explored in chapter 3.

2.34 Generally, there is a need to ensure that child support in New Zealand focuses on the expenditure for raising children rather than any wider objective such as providing a general income supplement for single-parent households. If a greater equalisation of lifestyles between parents is intended, there are other income transfer mechanisms for separated families designed precisely for this purpose – namely, domestic maintenance, Working for Families Tax Credits and state-provided benefits.

Shared care

2.35 Shared care is assumed under the formula to arise in a narrow set of circumstances. In reality, parenting arrangements are far more varied. The current approach, therefore, acts as a disincentive to shared care. Specifically, the threshold tests for recognising shared care are perceived as too high and as creating a “cliff” effect. A “cliff” effect results in there being a substantial change in the amount of child support payable, depending on whether shared care is established at the prescribed level.[6] Paying parents who have care of their children for lesser periods are not entitled to a reduction in their liability even though they incur costs in providing for their children during those periods of care. The cliff effect may have a negative impact on the time children are able to spend with the paying parent because, in reaching the threshold, there is a sudden and substantial drop in the amount of child support received. These matters and how they might be addressed are explored in chapter 4.

Respective incomes

2.36 The current child support formula assumes that receiving parents’ main contribution to raising their children is their time and that they have little income because of this commitment.[7] Consequently, the child support formula only applies to the paying parent’s income. This approach can produce inequities when both parents are in fact in paid employment and are, therefore, able to financially contribute towards their children’s upbringing. In some cases, the receiving parent may even have a higher income than the paying parent.

2.37 A method of calculating child support that not only reflects the expenditure for raising children but also more closely mirrors what parents would likely do were they living together, such as pooling more of their income and expenditure, could produce a better outcome for both parents and children.

2.38 These issues are explored in chapter 5.

Interaction with administrative review process

2.39 Inevitably, a formula cannot take the wide variety of often complex circumstances surrounding the breakdown of a parental relationship fully into account. The administrative review process is designed to provide further flexibility but the factors that it can currently take into consideration are not always pertinent and the process can be cumbersome and stressful. Appendix 2 sets out the current administrative review criteria.

2.40 A consequence of the measures outlined in this document is that a wider range of relevant factors could be taken into account up-front. This could result in efficiencies in the administrative review function.

Child support debt and penalties

2.41 A critical issue in delivering child support is the timeliness of the payments. Chapter 7 outlines how this could be improved by ensuring deductions are made automatically from salary or wages.

2.42 Penalties play a vital role in encouraging parents to pay their child support obligations, and should continue to do so. However, if they are excessive, they can perversely discourage the payment of child support, to the detriment of the children concerned.

2.43 Changes that could encourage the timely payment of child support and increase compliance by paying parents, in addition to dealing with existing accumulated debt, are discussed in chapter 8.

Summary

2.44 Although the current scheme provides a relatively straightforward way of calculating child support liability for the majority of parents, there are some major concerns that seem to be affecting an increasing number of parents. These concerns need to be addressed in any revised approach. The following chapters explore how this might be done.
 

4 New Zealand Child Support Arrangements – A research report for the Families Commission: Kōmihana ā whānau by Colmar Brunton.

5 This issue was discussed in the 1994 Trapski report. See Child Support Review, Report of the Working Party, 8 November 1994.

6 Under the current scheme, in extreme cases, this change can come down to which parent the child is with on a given night.

7 This in-kind contribution can be measured as the foregone potential employment opportunities and loss of work while providing day-to-day care of the child.