Other policy matters raised in submissions
Issue: Providing for a uniform commencement date of the proposed changes
Submission
(New Zealand Law Society)
Currently, it is proposed that the amendments in the bill apply in two phases. All the changes should instead be introduced on the same date, rather than applied across two years (including bringing forward the reduction in the qualifying age for children from age 19 to 18).
Comment
The bill currently states that the new child support formula will apply for assessment periods from 1 April 2013, with all other changes to the child support scheme applying from 1 April 2014.
It should be noted that these implementation dates are currently under discussion with Ministers, and are due to be considered by Cabinet in late September. Further details will therefore be submitted to the Committee once this consideration has taken place.
Consideration was given to whether a single implementation would be preferable. Although introduction on a single date could potentially be less confusing, such an approach would be difficult for Inland Revenue to implement, given the significant number of projects it currently has underway. Consequently, split implementation dates continue to be the preferred approach.
Recommendation
That the submission be declined.
Issue: A parent’s adjusted taxable income should be calculated on the basis of a 37.5-hour working week
Submission
(New Zealand Law Society)
A cap should be placed on the amount of adjusted taxable income so that the level of income available for use in an assessment reflects no more than the primary full-time income for a liable parent calculated on the basis of a 37.5-hour working week.
Comment
Taking the income of both parents into account reflects the parents’ relative abilities to financially contribute towards the expenditure for raising their children. It also parallels the likely expenditure on the children were the parents living together. Limiting income on the basis of a set working week not only dilutes this principle but would also be less transparent and add a further layer of complexity to the formula.
There is already provision in the bill for a parent to seek an administrative review of a child support assessment to take account of re-establishment costs incurred out of income that was earned in accordance with a pattern that was established after parents have separated (for example, from income earned from overtime). This relief, open for a period of three years post-separation, is for up to 30 percent of a parent’s income.
Recommendation
That the submission be declined.
Issue: A Māori perspective should be taken into account
Submission
(New Zealand Law Society)
A Māori perspective should be taken into account and included in the objectives of the bill – for example, in relation to questions over who may claim child support.
Comment
The issue of who may claim child support is worth considering further, but officials believe some further detailed policy work should be undertaken first. Currently, a person can claim child support if they are the sole or principal provider of care for a child (or share that role equally with someone else), but there are conflicting views about who should be able to claim child support.
Many of the concerns that arise in this context extend beyond child support and encompass not only Māori issues, but also wider questions regarding child welfare. To that end, it is recommended that Inland Revenue, the Ministry of Social Development, the Ministry of Justice and, where appropriate, Te Puni Kōkiri, work together to determine who should be able to claim child support, with a view of reporting back to Ministers on next steps.
Recommendation
That the submission be noted, and that Inland Revenue discuss this matter with the Ministry of Social Development, the Ministry of Justice and, where appropriate, Te Puni Kōkiri, to identify whether further policy work is needed on this matter and, if so, to report to Ministers on next steps.
Issue: Allowing children to apply for child support in certain circumstances
Submission
(New Zealand Law Society)
Consideration should be given to extending the class of person who may apply for a formula assessment to include children, in certain circumstances.
Comment
As previously noted, officials agree that some further detailed policy work should be undertaken on who should be able to claim child support. It was recommended that Inland Revenue, the Ministry of Social Development and the Ministry of Justice work together on this issue with a view to reporting back to Ministers on next steps.
Recommendation
That the submission be noted, and that Inland Revenue discuss this matter with the Ministry of Social Development and the Ministry of Justice to identify whether further policy work is needed on this matter and, if so, to report to Ministers on next steps.
Issue: Factors used when establishing care levels
Submissions
(New Zealand Law Society, Patricia Morrison)
New section 15(5), that sets out the factors that the Commissioner of Inland Revenue should use for determining proportions of care, should not include matters that fall within guardianship obligations. This is because such obligations tend to represent major decisions affecting a child’s life rather than day-to-day care responsibilities and decisions.
The guardianship factors are contained in subsections (c), (d) and (f) and have regard to the education and health of the child, and which parent or carer pays for which expenses of the child.
Comment
Officials agree that the factors noted in this submission, together with factor (e), do tend to represent major decisions affecting a child’s life, rather than day-to-day care responsibilities and decisions, and should be omitted from section 15(5). It is additionally noted that the financial factors can often be taken into account during the administrative review process.
Recommendation
That the submission be accepted, and also extended to include the factor in section 15(5)(e).
Issue: Right of review when determining care cost percentages
Submission
(New Zealand Law Society)
New section 16 should be amended to provide that a person affected by the decision of the Commissioner of Inland Revenue to determine their care cost percentage should have a right of objection or review.
Comment
New section 16 merely requires the Commissioner of Inland Revenue to determine, on the basis of the proportions of care already established under new section 14, a carer’s care cost percentage. This is done without discretion by applying the table in new schedule 1.
It should also be noted that clause 16 of the bill proposes that section 90(1) of the Child Support Act be amended so that “a decision under section 14 establishing the proportion of ongoing daily care that a carer provides to a qualifying child” becomes an appealable decision. This should effectively address the submitter’s point.
Recommendation
That the submission be declined.
Issue: Dependent child allowance
Submission
(New Zealand Law Society)
Step-children, foster children and children in whāngai situations should be included in the definition of “dependent child”.
Comment
New section 35 sets out the dependent child allowance a parent is entitled to for each dependent child that he or she is financially supporting. This submission notes that excluding step-children, for example, from the dependent child allowance goes against the objectives of the child support scheme.
The approach taken towards foster and step-children is consistent with not including the income of a parent’s new partner when calculating child support. Also, a parent may not, in fact, support a step-child financially.
Officials consider that it is preferable to exclude step-children, foster children and children in whāngai situations from the definition of “dependent child”. The option of an administrative review remains open to those who feel that a departure from the child support formula assessment is warranted, on the basis that they have a duty to maintain another child or person.
Recommendation
That the submission be declined.
Issue: Re-establishment costs
Submission
(New Zealand Law Society)
The drafting in clause 26 should be simplified if possible (for example, the phrase “a re-establishment costs situation” should be replaced with “re-establishment”).
It is further submitted that:
- Consideration be given to allowing a person to claim re-establishment costs even when they have not undertaken extra work, having instead relied on existing income to pay for the re-establishment.
- The Commissioner of Inland Revenue be given the power to extend the three-year period in new section 105(2)(d) when it would be just and equitable to do so, and the costs remain actual and reasonable.
- Consideration be given to providing a list in the Act detailing basic examples of re-establishment costs.
Comment
As previously noted, taking the income of both parents into account reflects the parents’ relative abilities to financially contribute towards the expenditure for raising their children, and also parallels likely expenditure on the children. This principle would be diluted if parents were allowed to claim re-establishment costs out of existing income, and would reduce the amount available to provide for children. There is an acceptance that standards of living for both parents will reduce when parents separate, with a period of re-establishment being the norm for both parents.
Although noting that the three-year period proposed is necessarily arbitrary, it is preferable to limit the availability for relief to a specific period, otherwise there is a risk that costs for re-establishment will, over time, become everyday costs.
On the question of providing a list of basic examples of re-establishment costs in the legislation, officials agree that examples would be helpful but consider that it is preferable that the Commissioner of Inland Revenue instead publish guidelines periodically on the types of expenditure that have generally been accepted as qualifying costs, rather than including less flexible legislative examples in the Act itself.
Recommendation
That the submission on the drafting in clause 26 be noted, but that the other submissions be declined.
Issue: Qualifying payments
Submission
(New Zealand Law Society)
Section 131, which gives the Commissioner of Inland Revenue discretion to reduce the amount of child support that a parent pays in some circumstances so it takes into account certain direct payments made to other parties, should be amended as follows:
- A person affected by the Commissioner’s decision will have a right of objection, and that an agreement reached with the receipt of independent legal advice will create a rebuttable presumption that the agreement will be upheld. Alternatively, legal advice should be a factor that the Commissioner of Inland Revenue takes into account when exercising the discretion.
- The Commissioner of Inland Revenue be given discretion to “recognise” payments for more than one child-support year, subject to the ability to reverse the decision when circumstances change.
- Section 130(2) and (3) be included in section 131 rather than section 130.
Comment
Given that the parties involved must reach agreement on the terms of the arrangement in the first place, there appears to be no need for the further ability to object. Officials do, however, agree with the other recommendations.
Recommendation
That the submission to give a right of objection be declined, but the other submissions accepted.
Issue: Non-compliance without reasonable cause with previous payment agreements
Submission
(New Zealand Law Society)
New section 135AA, which allows the Commissioner of Inland Revenue to decline to enter into a payment agreement with a liable person when the person has breached a previous agreement, should be amended to give a right of objection to the liable person if the Commissioner of Inland Revenue declines to enter into a payment arrangement.
Comment
The right of the receiving carer to timely financial support needs to be balanced against a liable parent’s obligations when they have failed to pay their liability in full and on time. Conferring a right of objection to the Commissioner’s refusal to accept periodic payment agreements in the face of a previous failure to adhere to arrangements would restrict the Commissioner’s right to enforce payment by way of lump-sum and/or legal action.
Recommendation
That the submission be declined.
Issue: Other “cost of children” issues
Submission
(Matter primarily raised by Deidre Butler)
The “cost of children” calculations do not graduate sufficiently against high income earners.
Comment
Recent New Zealand research on the costs of raising children – Costs of raising children[1] – measured the expenditure for raising children in New Zealand for the purposes of the proposed formula. It used methodology from equivalent Australian studies, but with New Zealand data.
The results show that the average expenditure for raising children in New Zealand varies according to the age of the child, the household’s level of income and the number of children in the household. In particular, higher income households are found to spend more on their children than lower income households, although the proportion of household income spent is lower.
These findings are reflected in the cost of children calculations contained in schedule 2 of the bill.
Recommendation
That the submission be declined.
Issue: Living allowances
Submissions
(Matter primarily raised by Robert Montgomery, Patricia Morrison)
The living allowances used to calculate the cost of children are not sufficient and should be increased, in particular if there is equal 50/50 care. Alternatively, it is suggested that both amounts of living allowance be used in all cases (for example, if one parent cannot use their allowance, any remainder should be transferred to the other parent).
A (private) submission also recommended that the current system, whereby there are various living allowances depending on circumstances, be retained.
Comment
A living allowance provides a deduction against child support income for parents, and recognises the living costs for that parent. This is necessarily a proxy, as parents’ true living costs will depend on their circumstances.
Under the proposals, the allowance for most people will be equivalent to the amount payable under the domestic purposes benefit to a person with one or more dependent children.
Parents receiving a higher domestic purposes benefit for looking after someone sick or infirm will be entitled to a higher allowance. These amounts are higher than the minimum amount provided in the existing child support scheme.
There are no specific justifications for increasing the allowance when there is 50/50 care. The new formula separately takes into account the costs of care when care is shared. Also, transferring allowances between parents when one parent does not have sufficient income in order to use their full allowance would run contrary to the principle of apportioning the costs of children between parents according to the relative difference between their respective shares of child support income. It would also be extremely administratively complex, and require square-ups and reassessments.
On the question of providing different living allowances depending on a parent’s circumstances, there is no need for this. Under the existing formula, the living allowance varies to reflect the number of dependent children. The dependent child allowance, under the proposed formula, is now separately provided. This allows a further deduction for expenditure associated with other children the parent is financially supporting.
Recommendation
That the submissions be declined.
Issue: Determination of income for child-support purposes
Submissions
(Matter primarily raised by Adam Simpson, Doreen Cleave, Pam Hulls, Paul Raynor, Sally Marr)
Several submissions provided comment and suggestions on how income should be determined for child support purposes.
There was general approval of the new definition of “adjusted taxable income” that ensures parents are assessed on their true financial capacity to pay when this is not reflected in their taxable income. One submission felt that this went too far and that parents should be able to operate a company on a more commercial basis, retaining profits to help grow their business. Other submissions, however, felt that the definition did not go far enough and that more should be done to ensure that the self-employed cannot shelter income in a company.
Other submissions suggested that, rather than using taxable earnings, the basis should instead be on a parent’s ability to earn – thereby preventing parents from choosing not to work to reduce their child-support liability.
Other methods proposed for determining child support payable included:
- taking the assets of a parent into account; and
- using a uniform cost of a child, rather than costs that vary with income.
Comment
The effect of the proposed “adjusted taxable income” definition will be that the following will be included as income for the purposes of the child support formula:
- business and other losses that have been offset against taxable income;
- income from a trust and companies owned by trusts when the parent is the settlor;
- income kept in a closely held company;
- fringe benefits received by shareholder-employees who control the company;
- overseas pensions that are exempt from New Zealand tax;
- distributions from superannuation schemes that relate to contributions made by a person’s employer within the last two years, when the person has retired early;
- PIE income that is not “locked in”;
- tax-exempt salaries and wages;
- 50 percent of the value of private pensions/superannuation payments/annuities;
- main income equalisation scheme deposits; and
- other payments if the total exceeds $5,000 a year (this captures, for example, income received from a trust where the parent is not the settlor).
The first four adjustments, in particular, will ensure that it is more difficult for parents to shelter income. An administrative review is also available, including one initiated by the Commissioner of Inland Revenue, when a child support assessment does not take into account the income, earning capacity, property or financial resources of either parent.
This administrative review ground also allows an assessment to be set that is based on a parent’s ability to earn. This is, in officials’ view, a preferable approach to handling situations when a person’s taxable income does not reflect their ability to earn, rather than legislating for a deemed income based on someone’s ability to earn. Likewise, this administrative review ground can also be used when a parent has significant property or financial resources.
On the question of using a fixed uniform cost of a child, rather than one that varies with income, although this would be simpler to calculate, it would not reflect the findings of research that the dollar cost of raising children increases with family income (but declines as a proportion of income). It would also likely lead to further issues of equity or a parent’s ability to pay.
Recommendation
That the submissions be declined.
Issue: Treatment of the income of new partners
Submissions
(Matter primarily raised by Adam [no surname provided], Hayden Hughes, Raymond Porter)
The income (or assets) of a new partner should be taken into account in the child support calculations.
Comment
The income of a new partner is not taken into account in the proposed child support formula. In some cases a new partner in effect becomes a parent, while in others, the parenting of the child in question will remain primarily with the separated parents. It is not possible to reflect this variance in a formula, particularly if the new partner also has personal child support liabilities.
The administrative review process is, and will continue to be, available to parents who consider that a parent’s new partner’s circumstances should be taken into account.
Recommendation
That the submissions be declined.
Issue: Qualifying age of children
Submissions
(Matter primarily raised by Andrew Parsons, Human Rights Commission, Dunedin Community Law Centre, Law Society of New Zealand)
The provisions of the current Child Support Act whereby child support obligations continue until a child reaches age 19 are inconsistent with the United Nations Declaration of Human Rights.
One submission suggested that child support should remain payable until children make the transition into the paid workforce (or tertiary education).
Comment
The proposal to reduce the qualifying age of a child from age 19 to age 18 unless the child is still in full-time secondary education is consistent with the United Nations Declaration of Human Rights.
On the proposal that child support should remain payable until children make the transition into the paid workforce or tertiary education, it should be noted that children will still be qualifying children if they remain in full-time secondary education. The student loan and student allowances schemes are available for students in tertiary education.
Recommendation
That the submissions be noted.
Issue: Liable parents who live outside New Zealand
Submissions
(Matter raised by The Auckland Coalition for the Safety of Women and Children, the Auckland Women’s Centre)
Further bilateral agreements on the recovery of child support, in addition to the existing agreement with Australia, should be entered into with other overseas jurisdictions (for example, with the United Kingdom).
Comment
A number of factors need to be considered when investigating whether two countries should enter into a reciprocal agreement. For some countries, the relatively small numbers of people involved may be an important factor. New Zealand has had discussions with several countries over the years, but Australia remains the only country with which we have a reciprocal agreement for child support purposes.
However, as a member state of The Hague Convention, New Zealand is actively involved in progressing the unification of the rules of private international law. As part of that, New Zealand was a signatory to the Hague Convention for the International Recovery of Child Support and Other Forms of Family Maintenance (the Convention). The Convention, which includes rules on judicial and administrative co-operation, has the potential to improve New Zealand’s ability to assess and collect child support when liable parents are residing in countries that are (or will become in the future) signatories to the Convention.
The Hague Convention Permanent Bureau is currently exploring how to implement country profiles electronically and develop a business plan for implementing its proposed system. Once these practical issues have been developed further, a national interest analysis will be produced to identify the pros and cons of the convention for New Zealand, detailing any legislative and system changes that would be required before the convention could be considered for ratification in New Zealand.
From an operational standpoint, developing and enhancing partnerships to better address international child support debt and promote proactive compliance management is also a focus of Inland Revenue activity. This has included information-sharing with the New Zealand Customs Service and the establishment of a direct debt team that directly collects international debt from overseas.
Recommendations
That the submission be noted.
Issue: Pass-on of penalties
Submission
(New Zealand Institute of Chartered Accountants)
Initial and incremental late payment penalties should be passed on to the custodial parent provided that parent is not a beneficiary. This is on the basis that it is the receiving parent and their children that suffer from non-payment of child support, not the Crown.
Further, the proposed penalty changes in this bill should be made retrospective to 26 September 2006 (the date the Child Support Amendment Act 2006 came into force).
Comment
While noting the merits for passing on child support penalties, it should be reiterated that the application of penalties for child support debt has three main purposes – a monetary sanction for not complying, compensation for the lack of use of funds and compensation for the additional administration costs incurred in recovering overdue debts. Currently, penalties help to defray the costs of administrative collection in the first instance.
Passing on penalties may create inconsistencies in the treatment between receiving parents, as the approach adopted by Inland Revenue in writing off penalties could affect the amounts actually received. As a result, receiving parents who were in otherwise identical situations could receive different amounts of support, depending on circumstances, resulting in potential equity issues.
Further, passing on only a component to the receiving parent would make the child support scheme more complex to administer, and would require an appropriate rate to be passed on to be set (this would also need to be reviewed periodically).
On balance, officials therefore recommend not passing on penalties to custodial parents.
Officials consider that the penalty changes should not be made retrospective. There is no cohesive policy rationale for doing so, and there would be significant administrative and fiscal implications in backdating any changes.
Recommendation
That the submission be declined.
Issue: Application of the multi-group cap
Submissions
(Equal Justice Project, the Women’s Studies Association)
The application of the multi-group cap should be improved to better reflect the fact that in multi-group situations there may be no economies of scale. It is therefore proposed that the cap have safeguards that prevent affected children from receiving less financial support than is necessary (for example, by the cap not applying when a paying parent is liable for more than three children living in separate households).
Comment
It is recognised that in some multi-group situations the income-sharing principle, and the method of calculating the costs of children based on intact families, does not fit comfortably, but it is a matter of balancing this concern with simplicity.
Arguably, in such circumstances it could be preferable to treat each receiving parent separately, calculating the liability to such parents using the standard formula, which is in effect what happens with the multi-group allowance. However, doing so would ignore the fact that the paying parent does not live in multiple households supporting each family separately. Hence the multi-group cap applies to limit the overall liability as if all the children lived in one household. Arguably, this is also a contrived result as the children do not live together with the attendant economies of scale.
These generous economies of scale that the cap provides to the liable parent are tempered by the fact that the proposed multi-group cap only takes into account the income of the paying parent and therefore the paying parent does not benefit from a reduction in their liability if the income of any of the receiving parents increases.
While recognising its limitations, non-application of the cap where a paying parent is liable for more than three children would result in a different set of discrepancies for paying parents.
Recommendation
That the submissions be declined.
Issue: Application of the minimum payment
Submission
(Stacey Porteus)
The minimum payment should apply to each child, rather than to the liable parent.
Comment
The current scheme provides that there is a minimum amount of child support payable each year per parent. It is recommended that this provision be retained to limit the impact of the changes on low-income recipients.
While applying a minimum payment for each child may be a positive outcome in theory, in practice it would either require a reduction to be made to the applicable minimum amount payable per child or alternatively, result in child support liabilities that significantly exceed a parent’s ability to pay when a parent has to support several children (possibly leading to non-payment). Either option is likely to be to the detriment of the children involved.
Recommendation
That the submission be declined.
Issue: Child support payments should be linked to contact with children
Submission
(Peter Douglas Zohrab)
Child support payments should be proportionately linked to the amount of contact a liable parent has with their children.
Comment
While recognising the difficulties associated with care of children problems, and the disincentive that a lack of contact can have on making child support payments, the child support scheme is fundamentally about establishing the amount of financial support that parents living apart have to pay towards raising their children. The two issues are therefore separate. It should be noted, however, that the proposals in the bill will provide a level of recognition to parents who have significant levels of care.
Recommendation
That the submission be declined.
Issue: Introduction of a simplified appeal process
Submission
(Wayne Hulls)
A simplified “small claims court”-type function should be introduced for child support issues.
Comment
It should be noted that the administrative review process that is currently in place under the Child Support Act, effectively already serves such a function.
Recommendation
That the submission be declined.
Issue: Repayments under the student loan scheme
Submission
(Matter raised primarily by the New Zealand Union of Students’ Association)
Repayments under the student loan scheme should be considered as a reduction in income for child support purposes.
Comment
One of the arguments submitted for taking student loan repayments into account is the fact that student loan repayments are frequently deducted from salary and wages at source. The submission argues that it effectively adds to an individual’s effective marginal tax rate. It is also submitted that deducting loan repayments would be treated in the same way as a loan taken out for a business venture.
Income for child support purposes is based on gross income. No deduction is given for taxes. Further, the fact that student loan repayments are deducted directly from salary and wages is not unique. Many people have other deductions at source, such as KiwiSaver contributions.
The main factor for determining whether such costs should be deductible is the fact that student loan repayments are made in relation to personal expenses – in that way, they are more akin to mortgage repayments.
Using the same analogy, student loan repayments are often just in relation to the loan itself as there is often no interest applied. These repayments are more capital in nature, and would therefore not attract a business deduction. It is worth noting that, in any case, the bill actually proposes adding back business and other losses that have been offset against taxable income.
Recommendation
That the submission be declined.
Issue: Post-implementation review
Submission
(Matter raised primarily by the Human Rights Commission)
Inland Revenue should conduct a post-implementation review of any changes implemented.
Comment
Inland Revenue’s monitoring, evaluation and review of any child support changes would take place under the Government’s generic tax policy process (GTPP).
The GTPP is a multi-stage policy process that has been used to design tax policy (and social policy administered by Inland Revenue) in New Zealand since 1995. The final step in the process is the implementation and review stage. This involves a post-implementation review of legislation and the subsequent identification of any problems that transpire.
In practice, any changes identified from a post-implementation review would be added to the Government’s tax policy work programme, and proposals would go through the GTPP again. Opportunities for external consultation are built into this stage. Officials envisage this process being followed for the child support changes included in the bill.
Recommendation
That the submission be noted, recognising that post-implementation reviews are part of the GTPP.
Issue: Better alignment with Working for Families tax credits
Submission
(Matter predominantly raised by the Child Poverty Action Group)
There should be greater alignment (of the child support reforms) with Working for Families tax credits, in particular with regard to shared-care thresholds and the definition of “income”.
Comment
One of the policy rationales for the proposed lowering of the shared-care threshold is to move it generally closer to the tests used in other areas of social policy. However, child support is separate from Working for Families tax credits and other family-based tax credits and, while it is sometimes simpler to have thresholds that match, it is not always possible, necessary or desirable.
Working for Families tax credits has a one-third of time threshold. Consideration was given to a similar threshold for child support but there was concern over the “cliff effect” that would result. To reduce this effect, a series of thresholds is proposed. In the case of the proposed child support shared-care thresholds, these are tiered, commencing from 28 percent of care.
The proposed definition of “income” for child support purposes provides a very close alignment with the definition used for Working for Families tax credit purposes.
Recommendation
That the submission be declined.
1Costs of raising children, by Iris Claus, Paul Kilford, Geoff Leggett and Xin Wang.