Chapter 7 - Automatic deduction of child support payments from salary and wages

7.1 With the Government’s commitment to streamlining the administration of the tax system, changes are planned for the administration of the student loan scheme, the Working for Families Tax Credit, the PAYE scheme, and the company tax return. As child support is one of the social policy schemes administered by Inland Revenue, there are obvious advantages in ensuring that child support administration evolves with changes to the administration of these other areas.

7.2 Changes to the administration of the tax system are focussed on:

• Increased use of electronic technology. Most Inland Revenue processes are currently paper-based. Processes and systems for online delivery of relevant services and information will, however, become the norm, allowing greater levels of customer self-management.
• A wider range of self-management options for customers who do not have access to the web, such as interactive voice response and text phone services.
• Increased reliance on accurate PAYE deductions each pay period and less need for end-of-year square-ups.
• Legislation being updated to reflect the use of new technologies and processes by Inland Revenue.

7.3 The proposed reforms are the first step in transforming Inland Revenue to help protect the integrity of the tax system and the social programmes it administers, reduce compliance costs and deliver better services to customers.

7.4 Any changes to Inland Revenue’s administrative functions are likely to have implications for the way that child support services are delivered – in particular, the making of payments and the approaches adopted when payments are not made. Allowing child support assessment periods to be spread more evenly across a year – an idea which could in future be considered – may also be consistent with future administrative reforms.

Payment deductions

7.5 Paying parents currently have a range of options for paying their monthly child support liability. Payment methods include cheque, credit card, automatic payment or by cash. Employees, however, generally cannot choose to have direct deductions made by their employer from their pay. Deductions from pay only currently occur when parents default on their payments.

7.6 The absence of direct deductions may increase the risk of non-payment of child support which, in turn, adversely affects the wellbeing of the children involved. It can also unnecessarily inconvenience paying parents, especially those who are paid weekly or fortnightly. If they wish to make child support payments to match their pay cycle, they need to calculate the amount to be paid and set up a separate automatic payment arrangement with a bank to ensure their liability is met on their payday.

7.7 To address these problems, it is suggested that deductions from pay by employers be made compulsory for paying parents who receive regular employment income. This would be similar to the process currently applicable to KiwiSaver contributions. Paying parents would have their payments automatically co-ordinated with their pay periods, whether those periods were weekly, fortnightly or monthly.

7.8 It is recognised that some paying parents may have concerns about their employers knowing that they are making child support contributions. However, arguably the public interest in operating an effective child support scheme should outweigh these individual concerns.

7.9 There may be some, albeit marginal, increased compliance costs for employers from having to make deductions and record and pay the monies to Inland Revenue through the PAYE system. The increase in the number of deductions would, however, be very small relative to the volumes already being processed at the same time to account for PAYE, ACC and KiwiSaver contributions.

7.10 Additional compliance costs to employers should be mitigated if this change were incorporated as part of proposed changes to the PAYE scheme – in particular, in improving the design and functionality of the employer monthly schedule.

7.11 This suggested change would complement the legislation enacted in 2006 allowing Inland Revenue to review a child support assessment if an investigation into a paying parent’s financial affairs shows the assessment does not reflect the parent’s ability to provide financial support to the children involved. This is a very useful tool that enables Inland Revenue to counter the parent’s use of vehicles such as trusts to shelter income for child support purposes.