Auditor-General's overview

Inland Revenue Department: Managing child support debt.

The Inland Revenue Department (Inland Revenue) is responsible under the Child Support Act 1991 (the Act) for making sure that parents take financial responsibility for their children when a relationship ends and the parents are unable to come to a voluntary arrangement for child support payments. Inland Revenue's role includes collecting money that is paid to the parents with whom the children spend most of their time (custodians), and collecting money for the Crown to offset the cost of any benefits paid to custodians.

Child support money is paid as monthly child support payments, usually by the liable parent (that is, the non-custodial parent). Debt will start accumulating unless a liable parent pays the full amount they owe, on time, every month.

Custodians who are not on a benefit will not receive any child support payments if Inland Revenue cannot collect child support payments. Custodians on a benefit will continue to receive a benefit paid by the Crown, even if Inland Revenue is unable to collect child support payments.

The performance audit we carried out found that, overall, Inland Revenue is doing a good job monitoring, prioritising, and collecting child support debt. However, Inland Revenue needs to do more to prevent debt from occurring in the first place. In my view, Inland Revenue's debt strategy has not adequately focused on preventing debt; nor has it addressed the adverse effect the penalty regime is having on levels of debt.

Penalties and the level of child support debt

Child support debt incurs penalties, and these penalties compound monthly if child support assessments remain unpaid. Any penalties collected are paid to the Crown. At 30 June 2009, child support debt totalled about $1.56 billion. Of this, $540 million was for unpaid child support assessments, and $1.02 billion was for unpaid penalties. Only about $195 million of the $1.56 billion debt is owed to custodians; the remaining debt is owed to the Crown, most of it for penalties.

The current penalty regime is inflexible and does not support the effective and efficient management of child support debt. Compounding penalties will see child support debt grow significantly in coming years. Inland Revenue's projections are that child support debt will increase to about $7 billion by 2018. Most of that projected growth will be in penalty debt, almost all of which will never be collected. In its Annual Report 2009, Inland Revenue notes that more than 99% of penalty debt is not considered collectible. Inland Revenue also has very few options for writing off the debt, regardless of how unlikely it is to ever be collected.

I cannot help but observe that, rather than supporting compliance, the penalty regime is impeding the effectiveness of the child support scheme.

At the time of our audit, Inland Revenue had an internal project under way to review penalties, but the findings were not yet available. In my view, this work needs to address whether the current child support penalty regime provides an effective incentive for parents to support their children or is instead creating a disincentive for parents to comply.

Preventing debt

Child support schemes work best when parents pay voluntarily. The larger the number of parents who make voluntary payments into a scheme, the more effective and efficient that scheme is to administer. Inland Revenue has assisted the Minister of Revenue in producing a discussion paper (yet to be released publicly) noting that aspects of the child support scheme may be out of date, and that this could be undermining some parents' willingness to make child support payments.

The child support scheme can be complicated for people to understand, and this is worsened by the fact that most parents' introduction to the scheme comes at a difficult and stressful time in their lives. Inland Revenue's research shows that parents who understand the child support scheme and their obligations are more likely to pay on time. Figures also show that more than 96% of liable parents have paid a penalty while in the scheme. In my view, this shows the need to improve the information that is provided to parents.

Inland Revenue should do more to identify and meet the information needs of parents. Both the content and delivery of information about child support obligations and how the scheme operates need to improve. Inland Revenue's child support debt strategy needs to better reflect how the penalty regime affects people and how penalty levels can influence their compliance.

Parents living overseas

Inland Revenue is unable to find thousands of parents who owe child support payments. Many of these people are believed to be living overseas. The remainder may be in New Zealand, but Inland Revenue is unable to locate them despite making reasonable efforts. The child support assessments for these parents are accruing compounding penalties.

When a liable parent leaves New Zealand and goes to a country other than Australia, Inland Revenue has no authority to enforce the payment of child support, so it must rely on liable parents making payments voluntarily. Inland Revenue has recently begun matching its records with New Zealand Customs Service's travel information, and this has proved a helpful, albeit limited, tool for locating liable parents who are living overseas. Without new international agreements on child support, Inland Revenue will continue to have challenges collecting child support debt from liable parents living overseas.

Monitoring performance

Inland Revenue monitors the child support scheme through monthly reports that show how it is performing against the standards of performance that it has agreed to. Some staff have identified a need for more information for internal reporting purposes, and have produced additional reports. These reports provide a more detailed view of how teams and individual staff are doing. The standards of performance that Inland Revenue monitors, when combined with the additional reports, provide a reasonable view of how the child support scheme operates currently.

I am pleased that some staff at Inland Revenue have begun to collect and produce additional detailed reporting information to better monitor the effectiveness and efficiency of their work.

The information that Inland Revenue collects and reports about its performance is consistent, internally and externally.

Concluding comments

In my view, the largest gains to be made in collecting child support debt come from making it more likely that a liable parent will make their payments voluntarily. This can be achieved in two ways: by creating a scheme that more parents understand and support, and the possibility of new international agreements making it easier to collect child support from overseas.

An effective child support scheme needs to support children, promote positive relationships between parents and their children, and – as much as possible – promote voluntary compliance because parents agree with the scheme. An efficient scheme will achieve these results with the least effort and resources. I encourage Inland Revenue to continue to provide advice on developing a more effective and efficient child support scheme.

I thank the staff of Inland Revenue and others for providing my Office with their assistance and co-operation during this audit.

Signature - LP

Lyn Provost
Controller and Auditor-General

20 July 2010

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