Child Support and Penalties – What the 2021 Changes Mean

By Nashi Ali*

The child support regime affects approximately 135,000 carers, 166,000 liable parents, and 185,000 qualifying children. In 2019 it was reported that there was $2.2 billion in child support debt. A crippling $1.6 billion of this debt consisted of compounded penalties, which meant only $558 million was unpaid child support.

Changes made by the Child Support Amendment Act 2021 simplify the child support penalties regime and encourage liable parents to meet their obligations. The changes take effect in two stages. The first stage was implemented on 1 April 2021, which made changes to the way in which penalties are imposed and written off.

The second stage takes effect from 1 April 2022, introducing timeframes for parents to establish paternity and advise Inland Revenue of their existing childcare arrangements. The kinds of income that are considered when child support is calculated will also be changed, and paying of child support through mandatory automatic employer deductions will be introduced for parents who are new to paying child support.

The consequence of compounding penalties

Historically, if liable parents did not meet their child support obligations, they were charged initial and incremental penalties. Initial penalties charged in the first month were done so in two stages. The first stage was the greater of 2% of the outstanding amount, or $5 the day after the due date. The second stage was the addition of a further 8% of the outstanding amount eight days after the due date. If the initial penalties were not paid, incremental penalties were added to the outstanding balance, each month the amount remained outstanding. The incremental penalties were 2% of the outstanding amount, including penalties, from one month after the due date for the next 12 months and 1% of the outstanding amount including penalties each month from 13 months after the due date. Penalties on late payments have been an area of contention for many years. A recent report by Inland Revenue demonstrated that many parents were unable to understand the penalty rules. The report also highlighted that liable parents felt the penalties increased their outstanding child support debts to an unmanageable amount, resulting in them no longer being motivated to repay their debt or meet their ongoing child support obligations.

Examples of significant penalty debt are seen in Commissioner of Inland Revenue v Horsey1, and Inland Revenue Department v Codling2 .

In Commissioner of Inland Revenue v Horsey, Mr Horsey sought to have his child support liability reduced by the Court. Mr Horsey owed Inland Revenue in excess of $140,000 in child support arrears and penalties. Mr Horsey had made no payments since the date of assessment. While Mr Horsey’s child support obligations totaled just over $46,000, penalties charged reached a staggering $94,222. Mr Horsey submitted that he found the child support process distressing and felt victimised by Inland Revenue’s attempts to seek payment. The Family Court directed Mr Horsey to pay $500 per month towards his child support arrears, noting that Inland Revenue had the discretion to waive the penalties accrued if the child support assessed was paid in full.

In Inland Revenue Department v Codling, Mr Codling was required to pay child support for three children from 1992. In 1999, Inland Revenue commenced proceedings against Mr Codling for his outstanding child support debt and penalties. Mr Codling was summoned for an oral examination, and a warrant for his arrest was issued, but he could not be located. Subsequently, Inland Revenue applied for a charging order over a property owned by Mr Codling, which was sold at auction in 2003.

In December 2003, Mr Codling received a letter from Inland Revenue regarding the outstanding child support debt and penalties which equated to $249,879. Mr Codling had been involved in a serious car accident, resulting in significant longterm physical and psychological implications.

He successfully sought an order suspending his liability to pay child support, with an agreement that the net proceeds of the sale of his home be held in trust pending further order of the court. Mr Codling requested further examination by Inland Revenue which was declined.

By 2008, the child support assessed had been paid, but Mr Codling owed $102,318 in child support penalties. Mr Codling was unsuccessful in his application to Inland Revenue to have the penalties written off and applied to the Family Court for a review of that decision. The court held that Mr Codling had already suffered a significant consequence by having his house sold for an amount far less than its market value and imposing such a hefty penalty would amount to double jeopardy. The court ordered that all costs and child support penalties be waived, aside from the reasonable reimbursement of Inland Revenue’s legal costs for enforcement proceedings.

How have the penalties changed post 1 April 2021?

Incremental penalties have been removed and will no longer be charged. Liable parents will only be charged an initial penalty of 2% of the amount of financial support unpaid at the expiry of the due date.

What does this mean for parents already paying child support?

From 1 April 2021, liable parents will not be charged any further incremental penalties on their existing unpaid child support debts. While incremental penalties imposed before 1 April 2021 will not automatically be removed, liable parents who satisfy the criteria under the penalty write off rules may apply to Inland Revenue to have some or all of their pre 1 April 2021 penalties waived. In addition to the pre 1 April 2021 grounds on which liable parents could seek penalties to be written off, three new grounds have been introduced:

a) the parent is experiencing severe hardship;

b) it is not a good use of Inland Revenue’s resources to collect the penalty; and

c) Inland Revenue is satisfied that it would be fair and reasonable to write off part or all of the pre 1 April 2021 penalties.

How will payment of child support change from 1 April 2022?

Under the previous law, parents who were new to the child support regime were able to choose to make payments in a manner that was acceptable to Inland Revenue. Only liable parents receiving a benefit or were in default of their obligations were required to pay child support through automatic deduction.

After 1 April 2022, liable parents who are salary and wage earners or contractors who receive schedular payments, and are new to the child support regime, will have child support payments made by mandatory automatic deduction unless:

a) they are already paying child support by another payment method and are not in default of their obligations; or

b) if Inland Revenue considers payment by automatic deduction inappropriate in their circumstances and accepts another payment method.

In addition, parents who are new to paying child support are provided with a grace period of 60 days before the initial penalty is imposed.

Tax losses and investment income post 1 April 2022

Child support payments calculated prior to 1 April 2022 are based on taxable income as defined by the Child Support Act 1991. From 1 April 2022, taxable income will be replaced with income.

Under the previous law, if a liable parent suffered tax losses in a previous year, the losses could be brought forward into the current income year, reducing their income and therefore the amount of child support that was due. From 1 April 2022, liable parents will no longer be able to carry such tax losses forward.

Another change means investment income will be taken into consideration when calculating a liable parent’s means to pay child support.

Conclusion

From research conducted by Inland Revenue prior to the introduction of the new penalty regime, it was clear the overall feeling was that the payment framework needed to help participants navigate the child support process more easily. Both liable and receiving parents wanted the penalties to remain but expected leniency around the application of penalties, a grace period for those starting the child support process, and flexibility around the due date.

It will be interesting to see whether the changes brought about by this new legislation will achieve those aims.

* Nashi Ali is an Associate Knowledge Manager with the New Zealand Dispute Resolution Centre’s Knowledge Management team. Nashi has worked across various law firms across Australia and is an experienced commercial litigation paralegal.