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Inland Revenue

Tax Policy

Additional matters raised by the Social Services Committee

The following matters were raised specifically by the Social Services Committee (the Committee) during the hearing of evidence on submissions, and are not otherwise discussed in relation to the written submissions summarised above.

Issue: United Nations Convention on the Rights of the Child obligations


It was noted that New Zealand has obligations under the United Nations Convention on the Rights of the Child. The Committee asked, in terms of the proposals in the bill:

  • What would this mean in terms of New Zealand’s obligations under the convention?
  • What would New Zealand need to do to ensure it complies with its obligations under the convention?


The Human Rights Commission, in its submission on the bill, specifically noted three Articles of the United Nations Convention on the Rights of the Child that applied. They are:

  • Article 1, which provides that: “child means every human being below the age of 18 years unless, under the law applicable to the child, majority is attained earlier”.
  • Article 3, which provides that: “In all actions concerning children, whether undertaken by public or private social welfare institutions, courts of law, administrative authorities or legislative bodies, the best interests of the child shall be a primary consideration”.
  • Article 18, which provides that: “Parties shall use their best efforts to ensure recognition of the principle that both parents have common responsibilities for the upbringing and development of the child. Parents or, as the case may be, legal guardians, have the primary responsibility for the upbringing and development of the child. The best interests of the child will be their basic concern”.

While recognising that the proposals in the bill are consistent with or enhance New Zealand’s compliance with Articles 1 and 18 of the Convention, the Commission felt that the bill should amend the objects provision of the Child Support Act to require that financial arrangements made to support a child reflect and promote a child’s best interests, consistent with Article 3 of the Convention. (See officials’ earlier comments and recommendation on this submission on “Incorporating the promotion of child well-being as a core objective of the Child Support Act”.)

Issue: Questions asked by the Auckland Coalition for the Safety of Women and Children and the Auckland Women’s Centre


The Auckland Coalition for the Safety of Women and Children and the Auckland Women’s Centre, in addition to their submissions, posed a number of additional questions.


Officials’ comments on the questions are as follows:

Q1: There is a perception amongst single mothers that the Child Support Agency makes vigorous attempts to enforce payments from liable parents when the other parent is on the DPB, but not when the other parent is not on a benefit. Does the Child Support Agency have any data in this area?

A: Inland Revenue does not differentiate according to whether a parent is on a benefit when attempting to enforce child support payments from liable parents.

Q2: International research has found that women experience a 30 percent decline in income in the first year after separation, while men experience a 10-15 percent increase (St John, 1995). There is an urgent need for New Zealand research on this topic before the proposed changes are undertaken which will make separated mothers worse off financially.

A: Inland Revenue is not aware of other more recent research on this specific issue. In respect of the proposed changes to the child support formula, taking both paying and receiving parents into account, it is projected that approximately 26,000 female parents would receive more or pay less child support and approximately 31,500 female parents would receive less or pay more child support. Approximately 83,000 parents would be unaffected – for example, receiving parents who remain on a sole parent benefit would continue to receive full benefit levels.

Q3: We know that when parents make arrangements outside of the Inland Revenue Department (IRD), these arrangements provide for considerably higher payments for children than when arranged by IRD. Payments organised outside the IRD are a median of $433 per month, while payments organised with IRD assistance are $241 per month. What are the factors that account for this difference?

A: There will inherently be a greater degree of trust and ability to work together when parents are able to make their own financial arrangements.

It is not known what the factors are that account for any difference in payments. However, a potential factor could be that the income levels are lower for paying parents in the child support scheme, and these are reflected in lower child support payments. As at 31 March 2011, approximately 42 percent of paying parents in the child support scheme were receiving a Government benefit.

Q4: What percentage of parents pay the allowable minimum because they have declared a very low income. (In 1997, it was a considerable 65 percent of the liable parents whose income was assessed by IRD.)

A: In 2011, approximately 56 percent of paying parents were required to pay the minimum payment.

Q5: The bill claims that in 2006 IRD was given the ability 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 true ability to provide financial support. IRD claims that this is a very useful tool that enables it to counter the use of vehicles such as trusts to shelter income for child support purposes. What data is there to support this claim?”

A: Every year approximately 300 cases are reviewed to establish whether a Commissioner-initiated administrative review (CIAR) should be instigated. Every year, this leads to approximately 20 administrative review cases. These typically represent cases when income is sheltered for child support and social policy purposes and does not include cases where the custodian has, for whatever reason, instructed the Commissioner of Inland Revenue to stop the CIAR process themselves.

Q6: What are the implications for discrimination through implementation of the bill under the New Zealand Bill of Rights Act 1990 and what is the best way to ensure that children and primary caregivers do not suffer from discrimination through existing child support legislation and through any changes to the legislation? We would like to see a report from the Human Rights Commission on this topic.

A: The bill has been vetted for New Zealand Bill of Rights Act implications. For further details, please see:
The Human Rights Commission made a submission on the bill, commented on elsewhere in this report.

Q7: The bill is based on the belief that fathers provide more caregiving to their children than was the case in 1991. What evidence is there of this? If there is evidence that they do provide more caregiving, what do we know about this caregiving? How much more caregiving do they provide now than in the past? What does it involve? For instance, does it involve taking children to doctor’s appointments? Does it involve paying for extra school activities?

A: In 2008 the Families Commission commissioned Colmar Brunton to undertake high-level research into a number of issues relating to separated parents. The Families Commission then released an issues paper entitled What separating parents need when making care arrangements for their children.

The research yielded the following information on care and contact arrangements:

  • 51.9 percent of parents who pay child support (through voluntary arrangements as well as through the child support scheme) say they see their child at least a few days per fortnight, compared with 41.2 percent of receiving parents who say their child sees the paying parent at least a few days a fortnight (an average of 44.1 percent across both parent groups).
  • 48.3 percent of parents who pay child support (again, through voluntary arrangements as well as through the child support scheme) say their child stays overnight at their house at least a few days per fortnight, compared with 32.0 percent of receiving parents who say their child stays overnight at the paying parent’s home at least a few days a fortnight (an average of 36.4 percent).

Care and contact arrangements vary depending on personal circumstances – in particular, based on whether parents can achieve agreement on these arrangements. The type of arrangements made by paying parents include:

  • taking their child to school and also picking them up from after-school activities (47 percent for parents with voluntary arrangements, compared with 35 percent for those in the child support scheme);
  • picking their child up from school (45 percent for parents with voluntary arrangements, compared with 36 percent for those in the child support scheme); and
  • taking care of their child while the other parent meets work commitments (43 percent for parents with voluntary arrangements, compared with 31 percent for those in the child support scheme).

The research did not comment on which parents tended to take children to doctor’s appointments or extra-curricular activities, but a significant portion did note that paying parents paid for such things, indicating their involvement.

Q8: The bill proposes that the per-child payment decreases when more than one child is involved. Do we know that economies of scale apply to the cost of raising children?

A: Research undertaken internationally, including in New Zealand and Australia, (noted elsewhere in this report), shows that economies of scale do apply to the cost of raising children.

Q9: The Trapski report (1994) found that the Child Support Act allows wealthy and self-employed liable parents to conceal their income through trusts and other devices, thereby escaping liability for child support payments (McLoughlin, 1995). The report recommended that when the Child Support Agency was looking at the liable parent’s ability to pay it should look not only at taxable income, but also at earning capacity, property and financial resources. In 2006, IRD was given the ability to review a child support assessment if an investigation into a paying parent’s financial affairs showed that the assessment did not reflect the parent’s true ability to provide financial support. Is there an evaluation of whether this has been a useful tool that enables IRD to counter the use of vehicles such as trusts to shelter parental income for child support purposes?

A: See the response to question 5 above. It should also be noted that the effect of the proposed “adjusted taxable income” definition proposed in the bill will be that the following will all be included as income for the purposes of the child support formula:

  • business and other losses that have been offset against taxable income;
  • income from a trust and companies owned by trusts when the parent is the settlor;
  • income kept in a closely held company;
  • fringe benefits received by shareholder-employees who control the company;
  • overseas pensions that are exempt from New Zealand tax;
  • distributions from superannuation schemes that relate to contributions made by a person’s employer within the last two years, when the person has retired early;
  • PIE income that is not “locked in”;
  • tax-exempt salaries and wages;
  • 50 percent of the value of private pensions/superannuation payments/annuities;
  • main income equalisation scheme deposits; and
  • other payments if the total exceeds $5,000 a year (this captures, for example, income received from a trust where the parent is not the settlor).

Issue: Application of the shared-care formula in shared-care situations


If you have a shared-care arrangement, is there a formula that could be used to combine both parents’ incomes to determine where a child would sit relative to the income stream, the total cost of child support, and then how that total cost of child support could be apportioned on a pro-rata basis? If so, how would that child support liability compare with the liability under the current child support calculation?


The proposed child support formula in the bill aims to achieve all these objectives, including in shared-care situations.

Currently, in shared-care situations (when the 40 percent care threshold is achieved), parents are able to cross-apply against each other. This has the effect of recognising both parents’ income. The proposed formula in the bill, in addition to recognising both sets of income, not only takes into account the level of care provided by each parent, but also reflects up-to-date estimates of the costs of raising children at different income levels.

Issue: Household incomes


What work has been done on including the income of new partners, and are there jurisdictions which operate on the basis of household bands? What are the advantages and disadvantages of such an approach?


Officials are not aware of any jurisdictions that operate an administrative scheme that automatically takes into account the whole income of a household. Instead, it is typical for child support schemes to only take the income of the child’s parents into account, and not that of any new partners the parents may have.

As noted in the officials’ comment on submissions on this issue, sometimes a new partner in effect becomes a parent, while for others the parenting of the child in question will remain primarily with the separated parents. The presumption in child support schemes is that the biological parents will generally have the responsibility to support their children.

Since it is not possible to reflect such different approaches in a formula, the proposed formula in the bill (and the existing formula) only takes into account the income of parents. It should be noted that the administrative review process is, and will continue to be, available to parents who consider that a parent’s new partner’s circumstances should be taken into account. Again, this approach is consistent with other child support schemes, both of an administrative and court-based nature.

Issue: Expenditure for raising children in different family circumstances


Does the new system proposed under the bill accurately reflect the expenditure for raising children in different family circumstances in New Zealand?


Any child support formula is necessarily a proxy that tries to derive an appropriate cost (expressed as a percentage of income) that represents the assumed expenditure for raising a child. The proposed formula far better reflects that expenditure for raising children in different family circumstances in New Zealand than the current formula.

As noted in previous comments on submissions, there is a significant amount of available research into the expenditure of raising children, including recent New Zealand and Australian work undertaken for child support purposes. The proposed system, designed against the backdrop of this research, specifically takes into account:

  • the combined income of both parents;
  • the number of children, up to three children;
  • the age of the children concerned; and
  • other dependent children.

Although there are some inherent limitations – for example, some difficulties exist in larger multi-group situations, these are problems that would be difficult to overcome with any formula assessment. In circumstances where the formula assessment may not be considered to support an appropriate outcome, the option of an administrative review is often available for parents so individual circumstances can be taken into account.

Issue: Incentives to pay child support


Do the provisions in the bill provide a great enough incentive for payments to be made in order to promote the welfare of the child (in the context of an alternative proposal to provide for guaranteed payments, also described as an “advanced payment scheme”)?


Some parents have concerns that the current child support scheme does not take into account their particular circumstances, or that the principles on which the scheme is based are now out of date. These concerns, or even perceptions of such concerns, often undermine parents’ incentives to meet their obligations under the child support scheme, to the detriment of the children involved. Other parents are concerned about either the non-payment of child support or the instability of such payments.

The proposals in the bill are designed to increase incentives to meet child support obligations. Those incentives include creating a scheme that is seen as a fair reflection of the expenses of raising children, which is well administered and that applies appropriate sanctions for non-payment. Parents are more likely to comply if a scheme is perceived as fair.

Various measures in the bill, including automatically deducting child support from all salary and wages, will also help timely payments to custodial parents.

In terms of an alternative option to also provide for what is referred in submissions as an “advanced payment scheme”, whereby child support payments are guaranteed by the Crown, this could actually have the effect of reducing the incentive to pay. If a parent knows that their child will receive child support regardless of whether they pay or not, this may well reduce their inclination to pay. It would also involve a significant fiscal cost to the Crown.

Issue: Administrative effect of the changes on Inland Revenue


What are the administrative effects on Inland Revenue of the following:

  • administering a scheme based on the formula in the bill, including costs associated with informing the public and its clients of the changes and their impact;
  • costs for training existing call centre staff or hiring new call centre staff;
  • costs associated with changes to the IT system to ensure that it is able to cope with the changes and capacity demand; and
  • any other additional implementation costs.


A business case incorporating all these issues is due to be considered by Cabinet late September. The information will, therefore, be submitted to the Committee once this consideration has taken place.

Issue: Capacity to pay


Under what circumstances can a parent’s capacity to pay be taken into account when an administrative review has been applied for, particularly in terms of potential earnings?


The Child Support Act provides that an administrative review is available when, “by virtue of special circumstances … formula assessment of child support assessment would result in an unjust and inequitable determination of the level of financial support to be provided by the liable parent for the child because of the income, earning capacity, property, and financial resources of either parent or the child”.

In practice, once a hearing has been held, the administrative review officer considers all the information given by both parents as well as any information already held by Inland Revenue (including, for example, tax information held). The review officer looks at each case on its own merits and how any decision to depart from a formula assessment might affect the child(ren) and both parents (after establishing that special circumstances to depart from the formula do in fact exist).

The ability of a parent to earn more income than they currently do would not necessarily, in itself, justify a departure. Review officers would look at the individual circumstances of each case, and listen to the evidence of both parties, before making a decision. This would involve looking at the evidence of parents’ previous incomes.

Issue: How the child support formula works in more complex situations


How, in detail, does the proposed child support formula work when more complex and unique situations are involved?


The chart below highlights the key steps in determining child support payable for a particular child (referenced to the proposed new sections of the Act).

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 financially responsible (section 36)

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

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

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

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

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

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

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

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

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

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

More complex or unique situations (and therefore calculations) are likely to arise where there are other dependent children or other child support groups, or alternatively multiple receiving carers or more than two parents.

Step 1 notes that a dependent child allowance, where appropriate, can be deducted. A parent is entitled to this in respect of each other dependent child they are a parent of. This allowance is designed to recognise the costs of raising children in new relationships. The dependent child allowance is calculated in the same manner as any other formula calculation, apart from the fact that it is based on the adjusted taxable income, less the living allowance, of that parent alone.

Likewise, step 10 sets out the multi-group allowance. This allowance applies to a parent who has more than one child support group. In other words the paying parent is paying child support in respect of at least two relationships. 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. 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 are living together. The result from the child expenditure table is then divided by the total number of children of the parent in all his or her child support groups.

The purpose and effect of the multi-group allowance is to adjust child support payments to ensure equity between the different child support groups that a liable parent may be paying child support for. It has a similar effect as the dependent child allowance, in that it reduces a parent's child support income amount in recognition of the cost of their children in other child support groups. In such cases, however, the liable parent’s payment is subject to a cap (the multi-group cap). This ensures the liability is no more than if all the other children were living together.