Forgiving debt to encourage child support payments

Budget 2015 includes changes to tackle child support debt and to encourage parents to pay what they owe for children for whom they are responsible, Revenue Minister Todd McClay says.

Over the next four years, the Government will forgive around $1.7 billion of penalties owed by parents to encourage more support to reach children.

“Child Support debt is currently $3.2 billion and rising, and only around $700 million is actual child support,” Mr McClay says.

“The rest is debt from penalties. This is the legacy of a penalty system that was overly punitive and which is now being changed.

“We need to get parents to start paying so that children, many of whom are in hardship, are better off. Liable parents are facing paralysing levels of debt from penalties, and as a result are not attempting to pay their outstanding amount, nor are they meeting their current obligations.

“Many have chosen to leave New Zealand. Some $827 million of the total debt, of which most is penalties, is owed by people living in Australia.

“A further $778 million, of which 84 per cent is penalty debt, is owed by those living outside New Zealand and Australia.

“This is in no one’s interests. We want child support paid so it goes directly to the children who need it, or back to the taxpayers who are paying it by default in the form of a benefit to that child’s family.”

Many people receiving or paying child support are on low incomes. Almost 54,000 of the 120,000 people with child support debt earn less than $30,000 annually.

And those low earners owe more than $700 million of the total $3.2 billion in debt.

“We want liable parents to pay what they owe,” Mr McClay says. “To make that happen, Inland Revenue will adopt a ‘fair and reasonable’ test to consider applying penalty relief where it makes sense to do so.

“In addition, mandatory write-offs of monthly incremental penalties will apply to those liable parents who are paying by compulsory deduction and meeting their payment requirements.”

If maximum discretion is applied, this will result in $1.7 billion of penalties being forgiven over four years.

More than $1.6 billion of this is already reflected as an impairment in the Government’s books. The measures will result in a net estimated decrease in Crown operating revenue of $47.1 million over the next four years. This is the value of the penalties currently in the Government’s books, less the expected increase in child support payments to the Crown.

In future, the growth of child support debt will be slowed by changes made in the recent child support reforms, including;

• Replacing the penalty rates from 10 per cent for late payment with a two-stage penalty, (2 per cent if a payment is not made by the due date, and a further 8 per cent if the amount remains unpaid after seven days).
• Reducing monthly incremental penalties from 2 per cent to 1 per cent.

“These measures should not be seen as a soft option,” Mr McClay says. “We remain focused on liable parents meeting the obligations to their children and will have no tolerance for parents who deliberately avoid responsibility.

“We intend to use every measure available to us to collect debt from those who do not make arrangements for payment even though they are able, including arrest at the border for people who have consistently refused to pay.

“Improving the rate of child support collected means more money going to low-income New Zealand families who rely on it to help cover the cost of raising children,” Mr McClay says.

All changes are expected to take effect from 1 April 2016.