Reduction in child support penalty rates
Summary of proposed amendments
The bill proposes replacing the current 10 percent initial penalty for late payment with a two-stage initial penalty where the current full 10 percent is only fully charged if the debt remains unpaid after 7 days.
The bill also proposes that the incremental monthly penalty be reduced from 2 percent to 1 percent after a year of non-compliance, which is expected to be complemented with more intensive case management from Inland Revenue.
The amendments will apply from 1 April 2014.
Clause 28 replaces current section 134 with new sections 134, 134A, 134B and 134C.
New section 134 re-enacts section 134, for penalties imposed on or after 1 April 2014, with two changes. One change is that the initial late payment penalty, which is currently the greater of 10 percent of the unpaid financial support or $5, is replaced with:
- an initial late payment penalty, at the expiry of the due date, of the greater of 2 percent of the unpaid financial support and $5; and
- an additional initial late payment penalty, at the expiry of the seventh day after the due date, of 8 percent of so much of the sum of the unpaid financial support as remains unpaid at that expiry.
The other change in new section 134 is to the current 2 percent incremental monthly penalty. The bill proposes that these incremental penalties are adjusted so that, after 12 of those monthly penalties, the monthly penalty rate is reduced from 2 percent to 1 percent, which is expected to be complemented with more intensive case management from Inland Revenue.
Penalties play an important role in encouraging parents to meet their child support obligations. If they are excessive, however, they can discourage the payment of child support to the detriment of the children concerned.
In respect of the initial penalty, a 10 percent rate for any late payment may be seen as excessive if the payment was late only because of an oversight. Introducing a two-stage initial penalty whereby a paying parent is only charged 2 percent if the payment is not made on time, with the remaining 8 percent only being charged if the amount remains unpaid after 7 days, will give the paying parent a week to make any payments inadvertently not made. This may encourage earlier payment and decrease the level of unpaid debt owing by the paying parent. This approach also better mirrors the two-stage treatment adopted for the initial late payment of tax debts.
The cumulative nature of the 2 percent incremental penalty means that penalty amounts can grow rapidly, often vastly outstripping the original debt. At some point, parents who would otherwise be willing to pay off their assessed liability may become reluctant to approach Inland Revenue to do so, the high penalty levels acting as a disincentive to compliance.
Reducing the incremental penalty from 2 percent to 1 percent will help prevent the current rapid rate of escalation for penalty debt, and will help stop debt reaching levels that paying parents feel are disproportionate to the original debt. Other offsetting enforcement measures, such as intensive case management from Inland Revenue, are expected to be implemented if payments are still not made.