Determinations initiated by Inland Revenue
2006 amendments allow IR to initiate administrative review if it considers the amount of child support payable by a parent does not accurately reflect their income.
A further set of amendments allows Inland Revenue to initiate the administrative review process if it considers that the amount of child support payable by a liable parent does not accurately reflect that parent's ability to provide financial assistance for his or her child(ren).
The child support formula is based on taxable income, which can provide an incentive for liable parents who wish to minimise their child support liability to reduce their taxable income. Most liable parents receive a salary, wages or a benefit and thus have limited opportunity to manipulate their income in order to minimise their child support liability. However, the way in which other liable parents, such as business people and those with investment income, can structure their financial affairs means that the amount of child support they pay may not reflect their capacity to pay. The structures they use may be legal for income tax purposes and may have been adopted for legitimate reasons, such as separating business and private assets. Equally, they may have been adopted to minimise child support liabilities. Whatever the reason for the way in which liable parents structure their financial affairs, if they have the effect of reducing their taxable income, and thus their child support liability, the intent of the Child Support Act, that parents contribute to their children's support according to their capacity to pay, is defeated.
Custodians can already deal with this problem by seeking a departure from an assessment if they consider that special circumstances exist that make the amount payable by the liable parent unfair. The administrative review process is a low-cost, informal process which is carried out by independent people, experienced in law and contracted to Inland Revenue, who follow precedents set by past court cases. However, for a variety of reasons, including a lack of knowledge of the liable parent's current financial position, custodians may fail to seek a departure.
The intention behind Part 6B is to allow Inland Revenue to identify cases where it considers that liable parents have a greater capacity to contribute to their children's financial support than that arising from basing their liability on their taxable income. Inland Revenue will thus be considering just one of the 10 grounds on which a departure may be granted. However, both the liable parent and the custodian may make an application under the existing provisions in Part 6A on any of the other grounds, and the liable parent may also raise the financial position of the other parent and/or child.
Case selection will occur by applying set criteria (which will not be made publicly available) against information held by Inland Revenue. No distinction in case selection will be made on the basis that the custodian is, or is not, a beneficiary. While information from custodians will be accepted, and fed into the case selection process, it will not be the single determinant of whether a liable parent is selected for review. Likewise, information referred by staff or Review Officers will also feed into the selection process. It is expected that self-employed liable parents will form the bulk of those investigated. However, liable parents who earn salaries or wages will also be included if any evidence is received that their capacity to pay child support is not reflected by their taxable income.
Inland Revenue will use its powers under the Tax Administration Act 1994 to establish what it considers to be a liable parent's full financial position. These powers include:
- requiring liable parents to provide any information that Inland Revenue requires, such as details of any financial interest in any entity which is not reflected in their income tax returns, recent dispositions of assets, and the like;
- if there are doubts about the veracity of the information supplied, requiring the liable parent to make a statutory declaration; and
- if the information is not supplied, seeking a court order to require the liable parent to supply the information.
From the information gathered in this way, plus any other information to which Inland Revenue has access, a summary of the liable parent's income, assets, liabilities, any indirect interests in other tax entities and any other relevant information (such as whether a new partner is financially independent of the liable parent) will be prepared. This summary will be supplied to the liable parent, and a period will be allowed for the liable parent to raise any concerns he or she has with Inland Revenue. An amended summary will be issued if Inland Revenue agrees with the liable parent. Should liable parents not accept that the summary truly represents their financial position, their reasons for holding that view may be set out in writing and this will be attached to the summary.
Once the information is agreed (or a statement of disagreement is received from the liable parent), a notice will be sent to both the custodian and the liable parent advising that Inland Revenue intends to initiate the review process. The liable parent (but not the custodian) will also receive a summary of the information on which Inland Revenue has based its decision. At this stage, the custodian will have three choices: to ask Inland Revenue not to proceed (non-beneficiary custodians only); to become a party to the proceedings; or to accept the outcome of the review without becoming a party to the proceedings.
The usual review process will then follow. Review Officers will consider the summary provided by Inland Revenue, together with any submissions made by the liable parent and/or the custodian, and reach a conclusion based on existing case law as to whether the child support assessment ought to be amended. As with any administrative review, the liable parent and the custodian will each have the opportunity to appear before the Review Officer in person (or by telephone if this is more convenient). The liable parent will still have the choice of not participating but, should this happen, the Review Officer will be able to recommend a departure on the basis of the information contained in the summary. Inland Revenue will not make any further representations to the Review Officer, although Review Officers will be able to seek clarification of any item included in the summary and/or further information from Inland Revenue.
As with any other administrative review, the first step will be to establish that "special circumstances" exist. Once that test has been met, any adjustment to the child support liability will still need to be "just and equitable" and "otherwise proper".
As with the existing review process, if it is relevant to the decision, information (other than that relating to a third party, such as the income of the liable parent's new partner) on which the decision is based may be included in the information supplied to both the liable parent and the custodian.
As departures from the formula assessment are not limited to just the current year, it is envisaged that any departure made under Part 6B will usually be made for a number of years. That is to prevent Inland Revenue having to review the same cases year after year until child support ceases to be payable for the child(ren). If a liable parent or custodian is unhappy with the outcome of the review, he or she will be able to lodge an appeal in the Family Court against the decision (with the usual appeal rights to a higher court). However, Inland Revenue will not be able to lodge an appeal but will automatically be a party to the proceedings.
The amendments apply from 26 September 2006