Part 2: The child support scheme

2.1
In this Part, we describe how the child support scheme operates. We discuss:

• child support obligations;
• the child support assessment;
• child support penalties;
• resolving a debt;
• Inland Revenue's funding and organisational structure for the child support scheme; and
• comparisons with other countries.

Child support obligations

Inland Revenue administers two types of child support: formula assessments and voluntary agreements.

2.2
Child support is money paid by parents who are not living with their children to help support those children. Inland Revenue administers two types of child support: formula assessments and voluntary agreements. A formula assessment uses a legislated formula to calculate a child support obligation. A voluntary arrangement relies on an agreement between the custodian and liable parent on the amount of child support.

2.3
The custodian usually applies for child support and is usually one of the parents, but may also be any other person, or Child Youth and Family if it is caring for the child.²

2.4
A custodian must apply for a formula assessment (see next section) when they are receiving a sole parent rate of benefit from Work and Income New Zealand. If a custodian is not receiving a benefit, their participation in child support is voluntary. People in this latter group may choose to come to Inland Revenue if they cannot receive child support payments any other way.

2.5
An application for child support can be filed by either parent (although typically they are filed by custodians). Once Inland Revenue accepts an application for the formula assessment of child support, the child support liability begins.

2.6
To be eligible for child support, a child must:

• be under 19 years of age
• not be living with another person in a marriage, civil union, or de facto relationship
• not be financially independent and
• be a New Zealand citizen or ordinarily resident in New Zealand.

2.7
To be liable for child support, a parent must be the parent of the child and be a New Zealand citizen or ordinarily resident in New Zealand, or in a country with which New Zealand has entered into a reciprocal agreement for the enforcement of child support.³

The formula assessment

A formula assessment uses a legislated four-step formula to calculate a child support obligation.

2.8
The formula assessment is calculated using the following four steps (with figures for the tax year ending 31 March 2011):

• Step 1 – The before-tax annual income of the liable parent is calculated. The maximum annual income for child support purposes is $120,463. This means, for example, that a liable parent earning $200,000 would still be assessed for child support purposes based on an income of $120,463.
• Step 2 – The income for the liable parent is offset by a living allowance, which ranges from $14,158 for an individual living alone to $35,868 for someone in a relationship with four or more children.
• Step 3 – The annual child support assessment is then calculated by taking total income less the living allowance, and multiplying it by a percentage ranging between 18% and 30%. This percentage takes into account the number of children for whom support is paid.⁴
• Step 4 – The total assessment is divided by 12 to create a monthly payment amount.

2.9
Only a court or an administrative review can make variations to how a child support assessment is calculated. An administrative review is organised by child support staff but carried out by an independent person.

2.10
Inland Revenue usually calculates a liable parent's income based on their salary or wages or from an income tax return. When a liable parent is living overseas in a country other than Australia, Inland Revenue relies on that parent to provide their income information voluntarily. If the liable parent lives in Australia and is successfully located by the Australian Child Support Agency, Inland Revenue will receive any income information available. The minimum child support assessment is currently $815 each year regardless of income. Figure 1 shows some examples of a child support assessment for liable parents in different scenarios.

Figure 1
Examples of child support assessments for the tax year ending 31 March 2011

2.11
In 2008/09, Inland Revenue collected $387 million in child support from 176,000 liable parents, which helped support about 279,000 children. Of this amount, $205 million (53%) was distributed directly to custodians. The rest was paid to the Crown to offset benefits already paid to custodians or as revenue from collected penalties.

Penalties for not paying

A liable parent who does not pay their monthly child support assessment in full and on time will be charged a penalty (a mix of once-only and incremental penalties). Penalties can also be incurred when a parent does not estimate their income accurately.

2.12
When a parent does not pay their monthly child support assessment in full and on time, Inland Revenue is required by law to charge them a penalty. This penalty is either $5 or 10% of the unpaid amount – whichever is greater – and then a further incremental 2% penalty is added for each extra month that the amount remains unpaid. The overall debt compounds, roughly doubling every three years if there are no payments or additional child support assessments. All penalties collected go to the Crown, not to custodians.

2.13
If Inland Revenue cannot collect child support, a custodian on a benefit will continue to receive benefit payments. But custodians not on a benefit will not receive child support payments if the payments are not collected by Inland Revenue.

2.14
Penalties can also be incurred when a parent does not estimate their income accurately. A child support assessment is based on a previous year's income, not current income. In cases where a parent expects their earnings to drop by 15% or more than they earned the year before, they can estimate their income. However, if a parent estimated their income and earned more than they said they would, they need to pay the additional child support. A penalty is also charged if the estimate is inaccurate beyond a certain level. A person will pay a 10% penalty on the difference between actual and estimated liability if their estimated liability is less than 80% of their actual liability. There is an additional time-based penalty – if the parent does not pay the difference within 30 days, an additional 10% penalty is levied.

2.15
In the 2008/09 financial year, 6054 parents estimated their income. About a quarter of these parents underestimated their income by enough of a margin to incur penalties.

Resolving a child support debt

Inland Revenue has limited options for writing off child support debts. Penalties will continue accruing until a debt is resolved.

2.16
Under the Act, child support assessment debt can be resolved by only a limited number of options:

1. Paying off the debt (so that the liable parent either owes no money or resumes making their payments in the normal way).
2. A court order.
3. A finding that a person is not liable because they are not the parent of the child.
4. If it is proved that the liable parent has died, Inland Revenue will attempt to recover the debt from the estate. If it cannot (and because the Act does not have a provision for writing off assessment debt), Inland Revenue will choose not to commit resources to recovering the debt because it considers this to be an inefficient use of resources.
5. The custodian can take responsibility for collecting a debt they are owed when they were not in receipt of a sole parent rate of benefit by uplifting that debt from Inland Revenue. If all assessment debt is uplifted and any penalty debt remains, the penalties can be written off under the Act.

2.17
If a debt cannot be cleared by one of these five options, a child support assessment will remain on Inland Revenue's records and will continue to accrue penalties unless the parent enters into a repayment arrangement and keeps to that arrangement.

2.18
After amending legislation was passed at the end of 2006, Inland Revenue has been able to write off the 2% incremental penalties in some circumstances, and generally when outstanding child support assessments are paid. Inland Revenue has less discretion when it comes to writing off the initial penalty of $5 or 10% when a payment is missed. Inland Revenue can also stop penalties from accruing once a parent has entered into, and complies with, a repayment plan.

2.19
Inland Revenue wrote off penalties totalling $26.8 million in 2007/08 and $21.7 million in 2008/09. At 30 June 2009, the total penalty debt outstanding was $1.02 billion (comprising $66 million of initial penalties and $950 million of incremental penalties).

Inland Revenue's funding and organisational structure for child support

The number of staff working on child support has reduced during the past four years. Latest data indicates that performance has not suffered as a result.

2.20
Inland Revenue does not get a specific Budget appropriation for child support. Figure 2 shows the direct cost of supporting the child support scheme and the number of staff working on child support during the past four years. Direct costs do not include the costs of technology or property.

Figure 2
Direct cost and staffing for child support, from 2006/07 to 2009/10

* Nine months to 31 March 2010.

2.21
The number of Inland Revenue staff working on child support has reduced for 2009/10, along with a reduction in direct costs. As at March 2010, Inland Revenue's internal reporting shows that these reductions have not negatively affected performance, and that general levels of performance are very similar to the previous year. Inland Revenue told us that it has improved efficiency by using technology, such as automatic call backs, and improving its business processes.

2.22
Inland Revenue divides the operational aspects of child support between its Assistance and Assurance divisions. The Assistance division (which includes Inland Revenue's Call Centre) handles the general administration of child support, as well as some debt collection work. The Assurance division handles more complicated debt cases, and cases where one or both of the parents are located overseas.

2.23
Figure 3 shows how these groups are structured.

Figure 3
Inland Revenue's organisational structure for the child support scheme

Comparisons with other child support schemes

Although international comparisons are difficult, the available information suggests that Inland Revenue is generally doing its job well.

2.24
Although other countries have child support schemes, it is difficult to directly compare the performance of different countries. This is because of differences between these schemes and in the ways they report performance. However, it is possible to get some idea of how the child support scheme compares with schemes in two other countries.

2.25
In 2008/09, Inland Revenue reported that it had collected 88.6% of child support money assessed since the scheme began in 1992. In contrast, the Australian Child Support Agency had collected 92% of assessed child support since its scheme was created in 1988.⁵

2.26
In 2006, the National Audit Office audited the United Kingdom's Child Support Agency and found that the Agency "has so far failed to perform as effectively as its international counterparts, such as Australia and New Zealand." We have been unable to update the 2006 analysis because of changes in the schemes and in the public reporting about the schemes.

2: Both parents may pay child support in such circumstances.

3: At the time of our audit, Australia was the only country in a reciprocal child support agreement with New Zealand.

4: If there is a shared care arrangement in place, whereby each parent has the child at least 40% of the time, the percentage paid will be reduced.

5: The Australian scheme differs in that it includes an option for child support debt to be paid directly through private arrangements registered with the Australian Child Support Agency. Figures for these private payments are included in the figure of 92%.