Write-off of penalty debt

Liable persons who reach an agreement with Inland Revenue to begin making regular payments again, which will include paying something towards the arrears that they owe, will be able to have some of the late payment penalties that they owe written off if they keep to the agreement for 26 weeks.

Background

This major change is a response to the escalation of penalties owed by liable parents. It is intended to serve as an incentive for those who have stopped paying to begin making their payments again.

As at June 30 2006, liable parent debt was $1,073 million. Of this, core debt was $433.4 million, with unpaid penalties amounting to another $640 million. Penalties compound and grow very quickly, so much of the increase in child support debt over recent years is the result of unpaid penalties rather than a dramatic increase in the numbers of parents not paying.

Key features

The previous provisions in the Act relating to penalties have been rewritten to provide a consistent form for the granting of relief from them, distinguishing between those provisions under which relief is discretionary and those under which relief is mandatory.

Sections 135B to 135F describe the discretionary power available to Inland Revenue to grant relief from penalties that already existed, while the new provisions for relief from penalties are contained in sections 135G, 135J, 135K and 135L.

When a liable person has no current or future liability for financial support, all initial 10% penalties have been paid, and all that remain are incremental penalties, section 135G gives the Commissioner of Inland Revenue the discretion to consider writing off those incremental penalties. Inland Revenue must have regard to whether recovery is an inefficient use of resources or whether it would place the liable person in serious hardship as defined in the section.

The provisions for mandatory relief in respect of the initial late payment penalty that were in section 135A are located in new sections 135H and 135I.

When there is continuing liability, or arrears still to pay, the write-off of accrued incremental penalties is mandatory if the terms of a new payment agreement have been complied with. Section 135J provides a formula for the calculation of the amount that is to be written off at 26-weekly review points for new agreements.

The formula is modified in section 135K in respect of arrangements that are already in place, while section 135L gives Inland Revenue the discretion to disregard failures to make a payment under an agreement in specified circumstances.

The mandatory relief from continuing incremental penalties previously in subsection 135(3) is in new sections 135M and 135N.

New section 135O provides for refunds to be made out of a Crown Bank Account and for the new provisions to apply to penalties that are imposed before or after the new legislation comes into force.

Application date

The amendments apply from 26 September 2006.