Supplementary Order Paper No.77 – child support debt
Two submissions were received on Supplementary Order Paper No. 77. Overall the submissions are supportive of the proposals to address child support legacy debt. Submitters have raised issues which can be categorised as follows:
- discretion for write-off of penalty debt where “fair and reasonable”;
- apply “fair and reasonable” to other tax types; and
- reduction in penalty rates.
Issue: Discretion for write-off of penalty debt where “fair and reasonable”
Clauses 44A, 44B and 55
Submission
(Chartered Accountants Australia and New Zealand)
The submitter supports the rationale for the proposed amendments: that the penalty regime should support rather than discourage the payment of child support. In regards to the proposal to introduce a discretion to write off penalty where it is “fair and reasonable” the submitter encourages a “fair, large and liberal” interpretation of the phrase “fair and reasonable” to ensure the desired effect is achieved.
Comment
The proposed penalty debt write-off provision is a Commissioner discretion where doing so would be “fair and reasonable” and will replace the current “inefficient use of resources”-based test.
As this is a discretionary measure it will be for the Commissioner to determine when a circumstance is fair and reasonable. Guidelines will be developed for what is “fair and reasonable” covering what the Commissioner will consider when determining what is “fair and reasonable” and therefore whether or not a penalty will qualify for write-off.
Development of the guidelines will draw on the depth and breadth of experience of Inland Revenues child support staff who understand the range of circumstances that can affect a parents ability to repay debt. It will also consider the objectives of the Child Support Act 1991.
Adopting a “fair and reasonable” test would enable penalty relief to be applied in circumstances when it makes sense to do so but where the current “inefficient use of resources”-based test would not allow relief.
Recommendation
That the submission be noted.
Issue: Apply “fair and reasonable” to other tax types
Clauses 44A, 44B and 55
Submission
(Chartered Accountants Australia and New Zealand)
That the “fair and reasonable” test for a write-off of debt be considered for application more widely to other tax areas such as income tax, student loans and Working for Families tax credits.
Comment
The “fair and reasonable” phrase is used in some parts of the Student Loan Scheme Act 2011. Applying the phrase more widely to other areas such as income tax and Working for Families would require comprehensive consideration within the context of those areas. The submitter’s comments have been noted by officials.
Recommendation
That the submission be declined.
Issue: Reduction in penalty rates
Submission
(Baucher Consulting Limited)
Further changes should be made to penalty rates to align the initial late payment penalty for child support with income tax and GST, and further reduce the incremental monthly late payment penalty from 2% to 0.5%.
The submitter provides a number of reasons for suggesting penalty rate reductions, including: the extent of essentially uncollectable debt resulting from the current penalty rules; the higher penalty rates for child support than income tax and GST, low incomes of many child support debtors and compliance costs for tax agents.
Comment
Reduction to penalty rates for child support was considered as part of the comprehensive review of the child support scheme, which has resulted in the penalty rate reductions to come into effect on 1 April 2016. These reductions focus on penalty rates looking forward and can be summarised as follows:
- a two-stage late payment penalty with an immediate 2% late penalty, with the remainder of the current 10% penalty only being charged if the debt remains unpaid after seven days; and
- a reduction in the on-going monthly penalty rate from 2% to 1% after a year.
These changes had majority support through consultation on the review of the child support scheme. The review did not recommend aligning rates across child support and income tax on the basis of differences between the regimes, such as use-of-money interest for income tax and the collection of payments for receiving carers rather than the Crown.
Any further review of the penalty rates could be considered following a post-implementation review of the proposed measures and as part of the Generic Tax Policy Process at the appropriate time. Officials have noted the submitter’s comments in this context.
Recommendation
That the submission be declined.