Appendix 6 - Social policy
6.1 Inland Revenue administers a number of social policies, either directly or on behalf of other agencies. The social policy areas primarily considered as part of this Green paper are:
- Working for Families tax credits; and
- Child Support.
6.2 Some of the potential changes discussed may, however, also affect Paid Parental Leave, Student Loan repayments and KiwiSaver.
6.3 Currently, social policies administered by Inland Revenue generally operate within the tax system. This has sometimes resulted in changes being made to social policy settings to ensure they fit within existing tax system parameters. An example of this is having annual return cycles for social policies linked to the tax year (for example, having annual entitlements from 1 April). These can sometimes limit potential policy outcomes and customer experiences.
6.4 Although many social policies use household income as a base for entitlement, other non-income information is also often brought into account when calculating entitlements.
6.5 This can take a number of forms – for example, living arrangements and family size are often taken into account, as are other sources of income that may not be included as income for individual income tax purposes.
6.6 Some Working for Families and Child Support customers will go into debt, or are already in debt, due to out-of-date information held about an individual or family. Others are receiving less than they are entitled to during the year, with payments instead being made late or not at all.
6.7 This clearly affects their overall well-being and may have a negative effect on their families, work incentives and economic situation.
6.8 This debt (or underpayment) tends to arise from having an annual assessment period, but requiring payments to be made in advance or concurrently with the assessment entitlement. Such a system requires an upfront estimate together with an end-of-period square-up, with a requirement for changes of circumstances to be notified during the year.
6.9 The alternative to estimates is using verified information. This usually means income or circumstances from 1 or 2 years prior. For many people this information is out of date and may no longer be relevant. For people who do have changing circumstances, this approach often produces inaccurate results.
6.10 Even if information is correct at the beginning of the year, changes in individuals’ circumstances are often required during the year, necessitating contact to be made between individuals and Inland Revenue, often several times a year.
6.11 However, the current rules often provide little incentive for a customer to initiate that contact, particularly if it would result in a reduction in payments received. Ultimately, this frequently results in square-ups being required, again causing year-end debt, and penalties.
6.12 Social policy entitlements are generally based on the combined circumstances of the parents (whether together or separated) and their dependent children. This is at odds with the overall tax system which focuses on the individual taxpayer with secrecy provisions in place to prevent information being shared with other family members. The result is often higher compliance and administration costs. If this results in people not taking up the assistance (or complying with obligations), it could have a detrimental effect on the social policy outcome the Government wishes to achieve as well as affect the families directly.
6.13 While the social policies have common features (for example, the support of children) they operate as separate products, requiring duplication and additional contacts. They can also develop and evolve differently over time, leading to complex interactions for families who are subject to more than one set of rules.
6.14 The intent is to design a process that works for the customer and is fit for purpose. It should match the timeliness of payments to the need to receive (or ability to pay) on a real-time basis.
6.15 Key objectives for any change should be:
- to make it as easy as possible for people to:
- comply on time; and/or
- receive their correct entitlements in a timely manner
- to provide a reasonable level of certainty for individuals and families (for example, to help with budgeting);
- to minimise an individual’s debt, and assist recovery of any overpayments arising;
- to provide sufficient information so that key policy and operational concerns can be identified easily and resolved quickly;
- to provide value-for-money for the government;
- to allow for cross-agency interaction and outcomes; and
- to be adaptable, flexible and scalable to cater for future changes.
6.16 It is likely that future changes would have the following characteristics:
- a low cost of contact;
- be designed for a digital world, but allow for multiple customer channels;
- be designed for the family household rather than just the individual members; and
- cater for multiple changes in members of a household over time.
LIKELY SCOPE OF REVIEW
6.17 The scope of the review on Inland Revenue’s social policy administration is likely to be wide and varied, and will likely include the following general issues:
- reconsidering the annual approach often taken for social policies administered by Inland Revenue (for example, for Working for Families tax credits);
- making greater use of information and services from other sources (including other government agencies) as a trigger that a customer’s circumstances may have changed;
- consideration of ways to encourage more frequent contact from customers – as this allows for a better reflection of real-life circumstances;
- allowing for more frequent contact, facilitated by advances in technology that allow for easy, more active, low-cost interaction;
- looking at other ways of minimising debt, and consideration of whether debt recovery could, in some circumstances in the future, be offset against future entitlement payments;
- potential greater alignment of definitions and rules across various social policy services;
- whether a different, low-cost approach could be taken for families with simple arrangements and minimal changes in circumstances; and
- how best to administer unique or complex family situations.
6.18 Some of the more fundamental issues that will likely form a significant part of the scope of the review of Inland Revenue’s social policy administration are considered briefly below. Given their linkages and dependencies, these will likely be considered after potential changes to withholding taxes and individuals’ taxation have been explored further.
6.19 Any change to the annual cycle would be a fundamental change to the way social policy is administered by Inland Revenue, having a big impact on both individuals and Inland Revenue.
6.20 The scope of this review will assess whether changing periods is feasible and sustainable. It will cover issues
- Period of assessment: looking at what the best period of assessment for families/individuals for social policies is, covering criteria such as residency, age, family status, relationships, employment status and income. Should it be annual, quarterly, monthly, weekly or daily?
- Period of payment: consideration of whether arrears, current periods or prospective periods, should form the basis for making payments. Alignment of payment period options between Working for Families, Child Support and Paid Parental leave should also be considered (currently some are paid weekly, others fortnightly or monthly).
- Period of income measured: looking at whether current, future or prior period income should form the basis for measuring income. The need for estimates and subsequent square-ups (or otherwise) will be a key factor here.
6.21 There will be advantages and disadvantages in each of these considerations. For example, on the face of it, a shorter period of assessment may intuitively seem more appropriate for many social policies as it may better mirror changing family circumstances. On the other hand, such an approach can help some people to try and structure, their affairs to arrange outcomes for their own purposes.
Debt prevention and collection
6.22 The scope of the review on debt prevention and collection will likely cover, as a minimum, the following issues and considerations:
- Removal of an annual terminal assessment and subsequent debt collection approach for Working for Families, replaced by a system based on on-going accumulative adjustments taking into account changing circumstances. Under such a system, any over-or under-payments are adjusted for in later payments with a final square-up only at the end of entitlement. Debt would then only arise when entitlement ends, and then on a smaller scale.
- Reducing interim entitlements for Working for Families, resulting only in end-of-year payments and not debt.
- Reviewing penalty rules, debt collection and write-off rules to see if any changes can be made that better reflect the social policy environment.
- Improving upfront debt prevention by reviewing rules such as those backdating requirements to pay, payments in advance of eligibility confirmation, and use of default assessments where information is lacking.
Better alignment of definitions and rules
6.23 As part of the wider Government review of social policy administration, it is likely that a review will be conducted of all common definitions and rules across different social policy elements. This will help to determine whether there are valid reasons for variations or, if not, to determine what the default setting should be across these policies.
6.24 This review could indicate if it would be helpful to have a simplified policy and legislative system that covers the large majority of families and circumstances supplemented by a special delegated arrangement to address unique or complex situations.