# A new child support formula

**(Clauses 9, 11, 23 and schedule 1)**

### Summary of proposed amendments

The comprehensive new child support formula introduced by the bill will base child support payments on:

- a wider recognition of shared care;
- the income of both parents; and
- the estimated average expenditures for raising children in New Zealand.

#### Lower levels of shared care

To deal with concerns about insufficient recognition of regular shared care of children, and the costs associated with that care, the revised formula will accommodate lower levels of shared care by way of tiered thresholds, commencing from 28 percent of nights (the current formula recognises shared care only if it amounts to at least 40 percent of nights).

#### Total income of both parents

Both parents’ incomes (less a living allowance for each parent) will be included in the formula, with the costs of raising children being apportioned according to each parent’s share of total net income. When a parent has other dependent children or is paying child support for children in other relationships, the parent’s income will be reduced for the assumed expenditure on those children, based on the same method of calculation as for other children, before calculating their child support contribution.

#### Expenditures for raising children

The formula will use a new scale of costs (expressed as percentages of child support income) that reflects more up-to-date information on the expenditure involved in raising children (after allowing for likely tax credits). These percentages vary with the number of children, the age of the children (the percentage being higher for children over 12 years), and the total income of the parents. As income rises, the percentages progressively decline to reflect that the proportion of income spent on children declines as income rises. Given that the additional expenditure becomes increasingly discretionary as income rises, the new formula will, as currently, also include a cap on the amount of child support payable.

#### New child support formula

The net effect of these changes is that, under the new formula, the costs will be apportioned between the parents according to the relative difference between their respective shares of combined child support income as adjusted by their share of each child’s care when the proportion of that care is at least 28 percent.

Non-parent carers may be eligible to receive a proportion of any child support payments if they care for the child for at least 28 percent of the time.

### Application date

The amendments will apply from 1 April 2013.

### Key features

#### Summary of key steps in determining child support payable for a particular child

**Step 1**: Work out each parent’s child support income amount (section 32). This is the parent’s taxable income plus adjustments to take into account a number of other forms of “income” (section 33), less:

- a living allowance (section 34);
- any allowance for other dependent children (section 35); and
- any allowance for other children from other relationships (referred to as child support groups) for whom the parent is paying child support (section 36)

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**Step 2**: Work out the parents’ combined child support income

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**Step 3**: Work out each parent’s income percentage (section 31)

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**Step 4**: Work out each parent’s and non-parent carer’s percentage of care for the child

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**Step 5**: Work out each parent’s and non-parent carer’s care cost percentage for the child (section 16 and schedule 1) that relates to their care percentage

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**Step 6**: For each parent, subtract their care cost percentage from their income percentage (section 18). If the answer is positive (i.e. the income percentage exceeds the care cost percentage), the parent is a liable parent. If the answer is negative, (i.e. the income percentage is less than the care cost percentage), the parent is a receiving carer

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**Step 7**: Work out the expenditure for the child using the child expenditure table (section 36D), taking into account the combined child support income amounts of the parents, the number of children in the child's child support group; and the age of those children. This expenditure amount is divided by the number of children in the child support group to get a per child amount

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**Step 8**: The annual rate of child support payable by the parent for the child is worked out using the formula (section 29):

*(parent’s income percentage – parent’s care cost percentage) x expenditure on the child*

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**Step 9**: The amount that a carer receives is determined in sections 36A-C. A receiving parent receives an amount calculated applying the formula in step 8, based on their income and care cost percentages. If this is less than the amount that the liable parent pays, the balance is split between any other receiving carers

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**Step 10**: When a parent is paying child support for more than one child support group, the amount may be capped. If the amount calculated at step 8 is more than the amount calculated under the multi-group cap (section 29), the multi-group cap amount applies. This cap ensures the liability is no more than it would be if all the children from the various child support groups were living together

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**Step 11**: The amount payable may also be subject to minimum annual rate (section 30)

#### Analysis of key features

Clause 9 repeals sections 8 to 24 and introduces new sections 7B to 19.

New sections 14 to 16 relate to establishing the proportion of ongoing daily care that each carer of a child provides to the child. A person who provides at least 28 percent of ongoing daily care (which equates to two nights per week on average) is entitled, under new section 16, to a “care cost percentage” in relation to the child. This gives recognition for the parent’s costs for the care they provide. The care cost percentages are set out in new schedule 1.

New section 14 provides that the Commissioner must establish the proportion of ongoing daily care that each parent and non-parent carer provides to a qualifying child. It also provides that if two or more people who live together provide that care, only one person may be treated as the carer with the care provided by both people being treated as care provided by that person. If one of the people is the parent, that person must be treated as the carer.

New section 15 identifies how the Commissioner establishes the proportions of ongoing daily care each carer provides. This is described in more detail in “Recognition of care for child support purposes” later in this commentary.

New section 16 determines, on the basis of the proportions of care already established, each carer’s care cost percentage. This is done by reference to the table in new schedule 1. A proportion of care that is less than 28 percent results in a care cost percentage of 0 percent. A proportion of care of 72 percent or more results in a care cost percentage of 100 percent. Proportions of care between 28 percent and 72 percent have different care cost percentages attributable to them.

New section 17 provides for the Commissioner to identify the liable parents and receiving carers of qualifying children. This requires that the care cost percentages of every carer, and an “income percentage” of every parent, be determined. A parent whose income percentage exceeds their care cost percentage will be a liable parent. A parent whose income percentage is less than their care percentage will be a receiving carer. A non-parent carer who provides at least 28 percent of ongoing daily care, and therefore has a care cost percentage, will also be a receiving carer. The income of non-parent carers is not taken into consideration in the calculation because, unlike the parents, they are not treated as having financial responsibility for the child.

Clause 11 introduces new sections 29 to 36, which replace the current sections that determine the amount of child support liability under a formula assessment.

New section 29 sets out a new formula for assessing the annual amount of child support payable in respect of a child. The amount is determined by subtracting a liable parent’s care cost percentage from their income percentage (which must result in a positive percentage, because otherwise they would not be a liable parent) and multiplying the result by the appropriate amount calculated in accordance with the “child expenditure table” that the Commissioner must issue annually in accordance with section 36D. The Commissioner’s table will be based on the expenditure on children table in schedule 2, and will, in most cases, use the combined child support income of both parents when determining the appropriate level of expenditure.

However, for liable parents that have more than one child support group (see new section 36), this formula may result in an assessment of child support liability that is higher than would arise if all the parent’s qualifying children were living in a single household, rather than in multiple households. For these parents, an alternative formula, called the multi-group cap, is provided. This provides that their child support liability for each child is 100% minus their care cost percentage for the child, multiplied by the multi-group cost of the child. That multi-group cost is determined under new section 36(5).

New section 30 relates to the annual rate of child support liability of a liable parent. At present, there is a minimum annual rate that a liable parent must pay, regardless of the number of children to whom the liability relates. In order to retain this concept, new section 30 provides that, if the sum of the amounts of child support payable in respect of each of a liable parent’s children is less than the minimum amount, the parent must pay the minimum amount.

New section 31 describes what a person’s income percentage is in relation to a particular child. It is their “child support income amount” (determined under new section 32) divided by the sum of the child support income amounts of all parents of the child.

New section 32 sets out how a person’s child support income amount for a child is determined. The amount is the person’s “adjusted taxable income” minus each of the following:

- the person’s living allowance;
- any dependent child allowances; and
- any applicable multi-group allowance.

New section 33 sets out how a person’s adjusted taxable income is determined. This is explained further in “Definition of income for child support purposes” later in this commentary.

New section 34 sets out the living. At present, there is a range of different living allowances. Under the new scheme, the allowance for most people will be the amount payable under the domestic purposes benefit to a person with one or more dependent children, as set out in schedule 16 of the Social Security Act 1964. If, however, a parent is receiving a domestic purposes benefit granted under section 27G of the Social Security Act 1964 (because the person is caring at home for someone sick or infirm) their living allowance will be equivalent to the benefit payable to such a person with one or more dependent children. The living allowance is adjusted annually in line with changes to the above benefit rates.

New section 35 sets out the dependent child allowance. A parent is entitled to a deduction from their child support income for expenditure associated with each of their other children that they are financially supporting, provided they are paying child support in respect of those children. The dependent child allowance is the parent’s care cost percentage of the dependent child multiplied by the appropriate amount taken from the child expenditure table for that child based on the adjusted taxable income, less living allowance, of that parent alone.

New section 36 sets out the multi-group allowance. This allowance applies to a parent who has more than one “child support group”. A child support group is all those children of the parent who share the same other parent. A parent’s multi-group allowance in relation to one child is the sum of the multi-group costs of all other children who are not in the same child support group as that child. Like the dependent child allowance, the multi-group allowance is a way of recognising the costs of other children for whom the parent is contributing.

The multi-group cost of a child is worked out according to a formula involving the appropriate amount from the child expenditure table for that child using the adjusted taxable income of the parent (after deducting the living allowance and any dependent child allowances) and assuming that all the children from the various child support groups were living together. The result from the child expenditure table is divided by the total number of children of the parent to get the cost for the particular child.

New section 36A provides that, when there is only one receiving carer, and that person is a parent, the proportion of the cost of raising the relevant child for that person is determined by how much their care cost percentage exceeds their income percentage.

New section 36B sets out the formula for allocating child support payments when there are one or more receiving carers of a child and none of them is a parent of the child. Non-parent carers receive a proportion of the payment made by the liable parent according to their relative share of the carers’ combined care cost percentages.

New section 36C sets out the formula for allocating child support payments when there is more than one receiving carer of a child, and at least one of them is a parent of the child. This formula is, in effect, a combination of the formulas in sections 36A and 36B.

New section 36D requires the Commissioner, before the start of each child support year, to approve a child expenditure table that will apply for that child support year. A child expenditure table is based on the “expenditure on children” table in new schedule 2, which prescribes the proportion of child support income regarded as being spent on children.

The expenditure on children varies according to the number of children in a household, the child support income of the parents, and the age of the children (the percentage being higher for children over 12 years). The table expresses the annual expenditure on children as a percentage of the combined child support income amount. This expenditure on children reflects more up-to-date information on the expenditure involved in raising children (after allowing for likely tax credits). As income rises, the percentage progressively declines to reflect that the proportion of income spent on children declines as income rises. Given that the additional expenditure becomes increasingly discretionary as income rises, the new formula also includes a cap on the amount of child support payable.

### Background

The primary assumption under the current child support scheme is that the paying parent is the sole income earner and that the receiving parent is the main care provider. However, patterns of parenting have changed since the introduction of the scheme, and it is now more common for both parents to be actively involved in raising their children. Since the scheme’s introduction, there has also been greater participation in the workforce by both parents, meaning that the principal carers of children are now more likely to be in paid work.

Some liable parents are concerned that the current scheme does not take into account their particular circumstances. For example, parents may share the care and costs of their children, but have arrangements that do not qualify as shared care for the purposes of the current child support formula. They are also concerned that current payment liabilities do not accurately reflect the true expenditure involved in raising children in New Zealand.

The new child support formula is designed to provide a system of financial support that takes into account a wider variety of circumstances. In particular, it will better reflect many of the social and legal changes that have occurred since the introduction of the current scheme, such as the greater emphasis placed on separated parents sharing the care of and financial responsibility for their children. This in turn will increase incentives for parents to meet their child support obligations. It will also be based on a more up-to-date estimate of the expenditures involved in raising children in New Zealand at different income levels.