Pursuing the impossible at a high price

Personal Finance

Tax specialist Terry Baucher looks at the heavy hand of the law when it comes to penalities on child support payments and questions their effectiveness. Your view?

7th May 12, 9:14am by Terry Baucher

By Terry Baucher*

This month tax and the economy will be in the foreground in the run-up to the Budget on May 24th. The talk will be of millions and billions of dollars spent or not spent on this, that and the other. But economies are made up of people and sometimes an individual event brings a brutal reality to otherwise abstract concepts.

The news of the tragic suicide of Paul Jenkins last week is one of those events. Mr Jenkins, then living in Geelong, apparently killed himself shortly after receiving a demand for over $53,000 of child support arrears relating to his daughter from a previous relationship. Although Mr Jenkins had moved to Australia and was living with a new partner, the Inland Revenue Department used its powers to request the Australian Child Support Services Agency to collect the outstanding debt on its behalf.

Whatever the circumstances behind this tragedy and leaving aside the enormously complicated question of a parent’s responsibilities to the children of a relationship after that relationship ends, the story highlights a concern that the current IRD procedures for collecting any overdue child support appear to be not only ineffective but also counter-productive.

Child support payments are collected and distributed by the IRD usually on a monthly basis. The problem is that the penalties for late payment of child support are very onerous, an initial 10% and then a further 2% per month on the outstanding amount (including penalties). According to the New Zealand Institute of Chartered Accountants the effective annual rate of late payment penalties is an eye-watering 36.8% in the first year of non-payment. It’s therefore quite easy to quickly run up large arrears through non-payment as seems to have happened with Mr Jenkins.

Parental runaways

In the past one option to deal with arrears was to leave New Zealand. Therefore, although it might be surprising to discover that the IRD can, and do, enlist the support of Australian authorities to collect arrears, this is necessary to buttress compliance.

In fact, according to the Office of the Auditor-General as at March 2010 in each of the ten largest child support debt cases where the liable parent had never made a payment the individual involved now lived overseas. The total amount those ten parents owed? Over $7 million.

But before getting steamed up over this apparently outrageous non-compliance look at the following graph:

As can be seen the actual amount of child support owed by the ten largest debtors is maybe not even five per cent of the total owed. The rest is penalties.

Too steep a price to pay?

Which begs the question is the current penalty regime working? According to a 2010 report from the Office of the Auditor-General many Inland Revenue staff felt that the current penalty regime acts as a disincentive. No wonder, because the amounts outstanding are scarcely believable: at 30 June 2009 total child support outstanding was $1.56 billion including over a billion dollars of unpaid penalties. The IRD has so little confidence that it will collect these outstanding penalties that its bad debt provisions in respect of penalties were more than 99%.

So if the IRD doesn’t believe that it will ever collect any penalties for unpaid child support why persist with a regime that isn’t working? Particularly in an area which causes great resentment amongst payers. Well that was the conclusion the Office of the Auditor-General reached in 2010 when it recommended the IRD “assess whether the current child support penalty regime provides an impediment for parents to comply with child support obligations.”

The IRD have been carrying out an internal review and although no formal moves have been made to change the penal rates for non-compliance the IRD cancelled $287 million of child support penalties in the latest Crown financial results for the eight months to 29th February 2012.

This is a first step in the right direction but tragically one too late for Mr Jenkins and his family.

*Terry Baucher is an Auckland-based tax specialist with 20 years experience. He works almost exclusively with high net worth individuals and owners of medium sized and emerging businesses. Prior to starting his own business, he spent six years with one of the "Big Four' accountancy firms including a period advising Australian businesses how to do business in New Zealand.

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33 Comments

by ngakonui gold | 7th May 12, 10:18am 1336342710

my son pays 17% of his pay for child support.

the more he earns the more he pays,despite having try and live himself.

on the other hand my bro in law has just returned from aussie after 35 years having not paid 1 cent in child support.

he has a rental property in aussie and 1 in nz and lives a great life.

no wonder there is hatred and so much bitterness towards exes

by Kate | 7th May 12, 1:17pm 1336353429

To my mind - if the Family Court just started adopting a policy which favoured day-to-day care by the working parent - then alot of these problems would be solved.

by meh | 7th May 12, 1:21pm 1336353696

Not at all. The care arrangements and child tax are two completely seperate issues. The Family Court has no say on the financial care of children.

by Kate | 7th May 12, 1:28pm 1336354117

The Family Court has no say on the financial care of children.

That's the dumb irony of it - and why I suspect so many kids continue to be raised in benefit dependent households. Surely the household that requires no state transfers in the raising of the children should be the preferred environment for raising the children - (safety of course not being a concern with either household)?

I mean I'd have thought lifting children out of poverty should be the main objective?

by meh | 7th May 12, 2:14pm 1336356889

The govt. doesn't care about the raising of the children. They care about the welfare state (and the votes it gets them) and the tax revenue to support it.

There is no concept of encouraging the financial support by both parents - he who earns has the ability to pay and must pay.

There is no concept of what is a fair and reasonable cost of bringing up a child - you earn, we'll take a constant % no matter what.

It's not the penalty system that discourages payment of child support, it's the inequitable and unjust calculation of the child tax that discourages it.

Some of us pay it anyway because we do believe in being financially responsible for our children. There will be a large number of society who don't and most of these are probably on a benefit anyway who only pay a minimum $12 a month. There will be a number who can take advantage of loopholes and not pay any.

There is no avenue for appealing to common sense when setting/calculating the assessment of child tax.

by Kate | 7th May 12, 3:21pm 1336360915

You COULD NOT pay me enough to be a social worker in this asylum.

I think they might be a big part of the problem.

Interestingly, in the only day-to-day care matter which I have expereince of, the court appointed psychologist recommended day-to-day care by the father was in the best interests of the children, but the judge ruled that the mum should retain that day-to-day care.

The psychologist suggested the father and his wider family had "boundaries" - whereas the mother and her wider family had "no boundaries" - and that children are most settled and successful in a home environment with boundaries.

The "social worker" - termed by the court as a lawyer for child - took the opposite view - largely arguing on the basis of the 'status quo' - suggesting readjustment for the children would be a higher risk strategy. But this lawyer for child did not visit either parent in their home environment, whereas the psychologist did (also interviewing both extended families as well).

The mother' and her wider family had history or 'form' with CYFS and the courts - the father and his wider family had none. Father was working (as he had been when the break up occured), mother was not then, and had not been working since.

To my mind, the Family Court had the chance to break the cycle of welfare dependence but they chose not to.

Oh, and mother had had another child while on the DPB - and by the time of the court hearing that relationship had ended as well.

by scarfie | 7th May 12, 7:24pm 1336375487

It is really quite simple Kate, get the family court out of custody issues all together. Make it a 50/50 affair automatically where both parents are obligated to provide care. No courts, just the Police if there are any concerns for the safety of the child. The Police afterall have the resources and the statutory authority to deal with child abuse if it is occurring, and even better they have independence unlike the council for child gravy train.

by scarfie | 7th May 12, 10:28am 1336343331

If the parent paying child support took 50% of the custody instead, then there would not be any liability to the ex(via IRD)

by meh | 7th May 12, 10:37am 1336343833

Not true scarfie. Child support is just another tax and is calculated on gross income less a certain "living" cost. Depending on earnings the paying parent will still be required to pay even with 50/50 custody. In many cases the "cost" of the child is equal to or more than the parents "living" costs.

Rather than questioning the penalty regime the child support system and basis of calculating the "tax" needs to be looked at. Peter Dunne has been jawboning this for many years yet his final decision was to retain the status quo.

by scarfie | 7th May 12, 11:42am 1336347737

If both parents come to an agreement regarding care of the child or children, then IRD has no need for involvment at all. They get invovled when one parent applies for the DPB and Winz act as an agent on behalf of the IRD when they apply for child support as part of the package. However in a case of 50/50 there is no entitlement for child support, unless both parents draw a benefit. But yes the calculation needs to be looked at. Good article to see and great that attention is being drawn to this issue. Afterall now they poor guy has topped himself that money is not longer able to be recovered(I hope).

by scarfie | 7th May 12, 12:54pm 1336352073

Not quite correct. Should read unless 'either' parent draws a benefit. Also enlarged upon further down.

by Banksterbasher | 7th May 12, 11:25am 1336346712

Many fathers have given their left nut trying to gain time with their presious little ones, but the state blocks them through the legal system (note "legal system" not "justice system").

All the while having their net worth (and along with it their ability to give their little ones the best life they can) extracted from them by the state.

Often the ex sees little or no incentive to raise herself out of her situation. As sitting on the benefit, having her accommodation and cost of living paid for, and endless challenges paid for against her kids dad in court as that much easier than allowing dad to have a bit more time with the kids and doing a bit of work.

This is the moral hazard that is created by this sort of culture.

And this is the culture the child is living into to repeat the cycle.

by scarfie | 7th May 12, 11:45am 1336347935

Trust me mate, I know only too well. There are ways, if you are creative enough, to avoid paying twice for the privilege of having your children stolen.

by Neven911 | 7th May 12, 12:07pm 1336349259

scarfie

I'd suggest you go do some research before making such ignorant statements. There are a number of inconsistencies in the justification & calculation of child support not the least being that 50/50 care does not negate liability, a few orthers are:

1/ Chlild support is meant to be non custodial parents contribution to the cost of the childrens' upbringing but in the case of the custodial parent being on the DPB *NONE* of this money is passed onto the children until the complete cost of DPB is offset, i.e. it is state enforced spousal support

2/ The NCP (Non-Custodial parent) is given the equivalent of the unemployment benefit for a single adult living alone before CS cuts in, this is hardly consistent with the intent to allow NCP to share care as the greatest of the costs of children (Accomodation) is ignored.

3/ CS *assumes* that only the custodial parent spends money on the children, (this is the basis for the prorata rate on NCP income) this basically means the NCP is removed from this process.

The net effect is that the NCP is treated the same by IRD if you never see your children or look after them 39.9% of the time, which is why the every second weekend and 1 day a week access formula is so popular

by scarfie | 7th May 12, 12:42pm 1336351362

Don't get me wrong, I agree with what you say. My reply above is that in a situation where the parents work out an arrangement for themselves. I mean the IRD does not even need to know that a family is separated. Only works if both are working though.

But in a 50/50 split, then what need is their for the custodial parent to be on the DPB?

It is actually possible for both to be on the benefit (but not both on DPB) and both receive assistance for child support and accomodation, but they also both pay child support. The net result is still positive for both parents however.

Both situations require an amicable separation, which rarely happens of course.

What I am really hinting at is a change in culture, although that is side stepping the main article. I mean both are parents, so why should one be custodial and one not? Interesting how they don't actually use custody in their language anymore, but have replaced with with "care" just to confuse everybody.

by scarfie | 7th May 12, 12:55pm 1336352132

Actually the interesting point you raise in there is one of Alimony rather than child support :-)

by Neven911 | 7th May 12, 1:20pm 1336353640

Thats one issue, i'm surprised that no-one has ever taken the gov't to task on this, the issue is so clouded with protests over access the fiscal unfairness is ignored, I've heard lawyers express the same opinion, that whilst the family court gets the headlines because of the profile given to the protests they overall do a good job, but the CS calcs are grossly unfair.

If you read Dunne whitepapers they are based on the same assumption of spend, i.e. if a family has income of x, y is the avarage spend on the children so we will enforce this, unfortunatley this disenfranchises the paying parent

by Banksterbasher | 7th May 12, 11:24am 1336346686

by meh | 7th May 12, 11:34am 1336347257

Remove the DPB first then and maybe people will think twice before having children.

by Kate | 7th May 12, 1:09pm 1336352945

Exactly - and the Big Kahuna delivers on that (as well as relinquishing IRD's involvement in the present mess).

by Caylibgirl | 7th May 12, 4:34pm 1336365262

If that were the case I would be living with two children in my car. Actually I'd have to sell the car to feed my children. As a woman who is currently receiving the DPB, I am very thankful for the safety net this has provided for the last 2 months. Not that I should be in this position, however my former multi millionaire husband has decided that he no longer requires to pay Spousal Maintenance as per our Property Sharing Agreement which was signed prior to marriage.

Conveniently he is self employed, and collects an income of $48k per annum. His child support payments of $177 per month are handed to Work & Income to off-set the Benefit. So tell me tax payers - how do you feel about supporting me and my boys, when a multi millionaire is sitting there pleased with his abilities to avoid his responsibilities?

by Kate | 7th May 12, 5:14pm 1336367693

The Big Kahuna would provide you with a guaranteed minimum income - in fact (if implemented in the past) it would have been providing you with one since the age of 18 - perhaps you'd have used it to study (without encurring debt) - maybe you would have saved it during the period of raising your children - maybe you wouldn't have married someone under circumstances that required a Property Sharing Agreement to be signed prior to marriage.

And how would such a guaranteed minimum income for all be affordable? Folks with capital (like your now estranged husband I assume) would be paying a comprehensive capital tax.

Granted that doesn't help your current situation but maybe you wouldn't be in your current situation.

For me, the Big Kahuna is about changing the incentives, closing the tax loopholes you suggest your ex is presently using, recognising both paid and unpaid work and generally getting the government out of our lives (aside from the paying of tax, that is!).

by Kate | 7th May 12, 1:50pm 1336355441

Did you ever contest day-to-day care? Sounds like you and the children would have been in a much better financial position had you been the primary caregiver?

by Neven911 | 7th May 12, 2:15pm 1336356929

Kate

Are you serious? a) The chances of a man becoming the CP in NZ as long as the mother can breathe are nil and b) there is a whole legal industry drooling at the prospet of telling mothers that they 'deserve' more of the matrimonial property and how they can get it, so anything you do as the NCP is putting out the fire with gasoline

by meh | 7th May 12, 2:46pm 1336358761

I must've been one of the lucky ones then. I did manage to become the Custodial Parent even though I was only aiming for 50/50. A year and a half through the court system and $15k of legal fees. The court didn't actually make the final desicion though - I think the ex figured she was about to lose. Certainly not easy working fulltime and looking after primary aged child.

Now the child support is on the other foot - do you think I receive anything though? The ex chose to have more children so she doesn't have to work. She is a rather entitled one though. Her and her partner have considerable property assets/business but none of that counts under the existing child tax system. I am still 100% financially responsible for our child.

When I was paying child tax for our son I was in effect paying for her to stay home and look after kids that aren't mine.

by Kate | 7th May 12, 3:42pm 1336362171

Sounds like you were lucky because the court didn't rule.

by meh | 7th May 12, 3:46pm 1336362419

I was pretty confident they were going to rule in my favour and I believe that suggestion had been made to her.

The court had already ruled that she had to move back to Auckland in the first instance while the court hearings and assessments were being completed.

by Neven911 | 7th May 12, 2:10pm 1336356627

Mate,

I feel for you and am almost embarressed to tell you what you *should* have done...And its all within the "Rules"

First thing immediately start paying PAYE on a salary paid by your own company, and submit an estimate of earnings based on a 'payslip' (thats gets all the numpties off your back for 12 months) and you don't need to engage an accountant to prove what you already know, You retain profit in you company for this year so when you file your personal return you have 'paid' the correct CS. In subsequent years you alternatate between PAYE and Self employed this "works" because CS is calced on your income on the either the year before last or your estimate of income for the current year, so as long as you can manufacture alternating good and bad years for personal income then you can stay below the radar.

Do not under any circumstances go for a review...its a farce

by Neven911 | 7th May 12, 3:07pm 1336360037

To be fair I didn't really game the system, but rather felt that since my ex had got 60% of the matrimonial property, I had the kids 38% of the time and was supporting them directly (holidays etc) I felt paying $1000+ per month in "child support" was a tad OTT.

Yes you can try and be *above board* but the system is so screwed you will lose and anytime its gets publicly critiqued the following happens, they trot out the COE of womens refuge or somesuch for a soundbite, hence the public perception of us all being "dead beats" and wifebeaters.

Interesting what you say about the payslip, I produced my own, but printed it on an old dot matrix as long as it was 'real' and my personal income matched it i see no problem, I aslo had a taxation agent at the time.

Hang in there mate, this was 12 years ago and I'm very close to my children

by scarfie | 7th May 12, 7:47pm 1336376878

Sympathies to you both. I have been through the ringer also, but my handle partly explains my tactic to deal with CS. It was the best move I could have made on a number of levels. As I said earlier, bugger paying twice for the priviledge of having your kids stolen. To be fair although I had a rough time, I made some good moves and saw the best of my kids formative years. Fighting relocation offshore was one of my battles, that and every other nasty tactic that could be used to undermine any chance I had of shared custody. My ex was determined to by the court to be a vexatious complainant, but I still got shafted one time when the council for child perjured herself and make an application essentailly on her behalf.

If you really want to know the achilles heal of the family court, it is legal aid. Transfer your assets into trusts, or what ever you can come up with that they can't put a covenant over, so you qualify. Chances are the ex gets it also and I found the court was little (only a little) bit more discerning when both parties are sponsored by the tax payer. Needs to be done at the outset though really.

As my accountant said to me once, tax evasion is illegal but tax avoidance is perfectly acceptable. The family court and child support are the same in this regard, you have to be creative but still stay on the right side of the line.

It is great that a forum such as this to bounce around strategies or pitfalls.

by Stephen Hulme | 7th May 12, 3:50pm 1336362608

Sad stories boys . You have my utmost sympathy.

by Justice | 7th May 12, 8:12pm 1336378360

These stories put me off EVER having kids full stop. The CS system only cares about the money and not the actual welfare of the family unit. It creates bitterness, jealousy, hatred even. It's totally distructive and pits one parent against the other.

by Gummy Bear Hero | 7th May 12, 8:25pm 1336379136

...... a willing and fertile female human partner is also required .

You can have a great deal of fun , but not make alotta babies with the blow-up sheep dolly ....

....... sad , but true , ewe know ....