Terry Baucher details big changes afoot in child support payment calculations and asks why late penalties remain so heavy handed?

By Terry Baucher*

Peter Dunne recently commented that almost 40% of all the correspondence he receives as Minister of Revenue relates to child support.

He made his remarks in the wake of the passing of the Child Support Amendment Bill which received the Royal Assent on 16th April.

The Child Support Amendment Act was some six years in the making, which is small wonder as it represents the most major modifications to the child support system since it was first introduced in 1992.

The principal amendments include a new child support calculation formula, revisions to the definition of “income” for child support purposes, together with changes to the payment, penalty and debt rules and the administration of the scheme.

As the level of the Minister’s correspondence indicates, the child support system generates a lot of emotion, not all of it productive, for those it directly affects.

Wider afield, the level of arrears and penalties which has built up since 1992 ($2.6 billion as at 30 June 2012) has come under increasing criticism for failing to prevent parents evading their responsibilities.

Against this background significant amendments were needed to address these issues as well as benefiting the 210,000 children who are dependent on the child support system.

Probably the most significant change is with how child support is calculated. Instead of being based on a single “liable parent” the new system uses a complex formula based on both parents’ income. The intention is to give greater recognition to shared care, which is a particular source of irritation under the current system.

At the same time the definition of “income” for child support purposes will be more closely aligned with the broader definition of “family scheme income” used for Working for Families’ purposes. This is very significant as it is intended to deal with the issue of liable parents manipulating income to minimise their liability, a practice which understandably causes great resentment for the recipient parent.

The new child support calculation formula will apply from April 1 2014 with all other changes becoming effective a year later on April 1st, 2015. This split introduction is to allow the Inland Revenue “sufficient time to prepare” for the changes particularly in relation to the new child support formula. The Inland Revenue expects a 15% increase in its workload in what it describes as “[its] most expensive product to administer on a per person basis.”

In fact Inland Revenue estimates the costs of implementing the Child Support changes to be $91 million. It has allowed a further $28 million contingency fund for potential cost overruns. As is often the way in the tax world, “fairness” is only achievable with increased complexity and additional costs.

When it comes to “fairness”, there is little that is fair about the current late payment penalty regime as the following anecdote reveals. The ex-husband of a fellow tax agent recently fell behind with his child support payments. The Inland Revenue therefore imposed late payment penalties on the arrears. This came as a huge shock to the ex, because he thought his employer was deducting and paying over child support payments as part of the employer’s regular PAYE payments.

Unknown to the ex-husband the employer was struggling with its cash flow and was behind with its PAYE payments. But here’s the rub: the late payment penalties the ex-husband was charged are double those the employer faced for defaulting on its PAYE. Currently, a late payer of child support is immediately hit with an initial 10% late payment penalty plus a further 2% per month thereafter.

At an annual rate of 36.8% arrears of child support can very quickly get out of control. Small wonder many parents simply give up and often run away to Australia to avoid dealing with the issue. The Inland Revenue has enlisted the support of the Australian Child Support Program to track down defaulters but I understand the numbers involved are beyond the ACSP’s present capacity. This imbalance will still exist when the new penalty regime becomes effective from 1 April 2015.

It seems strange for late payments of Child Support to be treated so harshly, particularly when you consider that Child Support is in essence a private arrangement which happens to be administered by the Inland Revenue. Furthermore as the Minister acknowledged when the topic was recently discussed on National Radio’s Nine to Noon, any late payment penalties which are collected go to the Crown, not the late paid parent. Part of the $91 million to be spent on implementation will be needed for the changes to the current penalty regime.

Whilst the proposed changes are welcome the question remains why does Child Support need a different late payment penalty regime? Surely, it would be less costly to adopt the late payment penalty regime which applies to taxes generally? Furthermore this approach should allow the “new” penalty regime to take effect at the same time as the changes to the calculation of the child support formula.

That would also deal with what does not seem to be a healthy combination: a new and untried calculation method and a penalty regime currently acknowledged to be unduly harsh. On the other hand, the Inland Revenue will have more tools such as attachment orders to manage Child Support.

As any good credit manager will tell you, debts quickly get out of control if left unattended. The hope is that the Inland Revenue will use its new tools to prevent arrears becoming unmanageable. Let’s also hope that as the other changes to Child Support bed in they achieve the goals of producing a fairer system focussed on the needs of the children. This should go a long way to drawing much of the poison which often pervades the topic. 

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*Terry Baucher is an Auckland-based tax specialist and head of Baucher Consulting. You can contact hime here »