Part 1: Introduction

1.1
We carried out a performance audit to examine how effectively and efficiently the Inland Revenue Department (Inland Revenue) is managing child support debt (a part of its role in administering the child support scheme). Child support debt is the amount of money owed by the parent responsible for making monthly child support payments (the liable parent).¹ These payments are made to the parent, caregiver, or the Crown – whoever is caring for a child on a continuing basis (the custodian).

1.2
Unless a liable parent pays the full amount they owe, on time, every month, debt will start accumulating. In addition to the actual amount owed to the custodian for supporting a child, a range of penalties (payable to the Crown) are imposed. When a debt is not paid, the penalties compound. Some of the debt owed to the Crown is in the form of, or reimbursements for, benefit payments.

1.3
Most of this debt (the majority of which is penalties) will never be collected, in part because Inland Revenue has very limited options for writing off child support debt. Having few options for writing off a debt means that a case will continue accruing penalties unless Inland Revenue can resolve the debt (resolving a debt means that a liable parent either owes no money or owes only their current assessment). In its Annual Report 2009, Inland Revenue recognises that unpaid penalties are unlikely to ever be recovered by noting that impairment provisions against the penalty debt are more than 99%.

1.4
The amount of outstanding child support debt is substantial and growing. Most of this debt is made up of penalties owed to the Crown. Total child support debt at 30 June 2009 was $1.56 billion (comprising $540 million for unpaid child support assessments and $1.02 billion for unpaid penalties). By 2018, if the current system remains unaltered, Inland Revenue estimates that outstanding child support debt will be about $7 billion.

1.5
Inland Revenue administers the child support scheme under the Child Support Act 1991 (the Act). The scheme is designed to help financially support children by collecting money from parents not living with their children. This occurs when a couple with children have split up, or when two people have children and are not living together.

1.6
Inland Revenue interprets the objectives of the Act through two main aims relating to the child support scheme. These aims are to ensure that:

• parents take financial responsibility for their children when marriages and other relationships end; and
• liable parents make financial contributions to help offset the cost of benefit payments that support custodians and the children, such as the Domestic Purposes Benefit.

The structure of this report

1.7
We explain the main aspects of the child support scheme in Part 2 of this report. Part 3 looks at Inland Revenue's current strategy to manage child support debt (child support debt strategy) and how effective it is. Part 4 looks at what Inland Revenue does to help parents understand the child support scheme when first entering it, and ongoing support for parents while they remain in the scheme. Part 5 gives an overview of the current penalties regime, before looking in more detail at the regime's effectiveness in encouraging parents to make child support payments voluntarily. Part 6 considers how Inland Revenue monitors and prioritises debt, and Part 7 looks at debt recovery mechanisms (in New Zealand and offshore).

1.8
Appendix 1 looks in more detail at the characteristics of child support debt: debt considered to be uncollectible, debt likely to require legal action, and debt where payment arrangements had been made – either here or in Australia.

1.9
The main expectations that we assessed Inland Revenue against appear at the start of Parts 3, 4, 5, 6, and 7.

How we carried out the audit

1.10
In this report, we have relied on and reproduced information on the levels of child support debt, and parts making up that debt, that Inland Revenue provided to us. Our focus has been on how Inland Revenue manages child support debt, rather than how it records that debt.

1.11
We reviewed a sample of child support cases with the help of child support officers. We also spent time listening to telephone calls between Inland Revenue officers and parents to understand how child support officers worked with parents. Both of these activities helped us to understand how child support operates in practice, and we used this understanding when evaluating what we were told in interviews by staff.

1.12
We interviewed staff at Inland Revenue's national office and staff working in Wellington, Hamilton, and Christchurch. We spoke with parents who are in the scheme and representatives from groups with an interest in child support. We reviewed a wide range of Inland Revenue's documents and reports, both public and internal. We also reviewed relevant documents and reports produced by other agencies both in New Zealand and overseas.

1.13
For all of our findings, we have considered the consistency of information across these information sources. We also looked at how well that information aligned with our expectations. Our analysis of how well Inland Revenue met our audit expectations is the basis for our judgement on how effectively and efficiently Inland Revenue is managing child support debt.

What we did not audit

1.14
We did not audit:

• the efficiency of Inland Revenue's information systems;
• accuracy of the data in Inland Revenue's systems;
• management of debt that was not child support debt;
• assessments and debt managed by the Australian Child Support Agency; and
• formulas used to calculate child support assessments.

1: Child support debt comprises debts owed by liable persons (those liable for child support and/or domestic maintenance of an ex-partner), debt owed by employers who have not passed on child support deductions to Inland Revenue, and overpayments of entitlement to payees (custodians or domestic maintenance recipients). Nearly all of child support debt (99%) is owed by liable parents.