Formula assessment of child support

2013 Amendment to Child Support Act replaces formula for assessing child support to recognize income levels of both parents and average cost of raising children.

The formula for assessing child support is being replaced to recognise the income levels and care levels of both parents, and the estimated average expenditure of raising children in New Zealand. The current formula will be replaced, from 1 April 2014, by the following:

(i% - c%) x p
where -
i% is the parent's share of the combined child support income of the parents for a child
c% is the care cost percentage based on the recognised care levels of the person
p is the child expenditure amount for a qualifying child

The liability is determined by the parent's income percentage minus the parent's care cost percentage, multiplied by the child expenditure amount for the child.

The cost of raising children is apportioned between parents according to the difference between their respective share of combined child support income as adjusted by their share of each child's care (if at least 28%). If their care cost percentage (where the care percentage is at least 28%) is the same as their income percentage, a parent is assumed to have met their financial contribution to costs for the child under the child support scheme, unless the Child Support Act 1991 says otherwise. For example, a minimum amount of child support may be payable.

Income of both parents

The child support income of the parents of a qualifying child is added together to determine the combined child support income. A parent's income percentage is derived by dividing their child support income amount by the combined child support income of all the parents of the child.

The child support income for a parent is determined by calculating the parent's adjusted taxable income and deducting:

  • a living allowance
  • any dependent child allowances, and
  • any multi-group allowance.

When a parent has other dependent children, or is paying or receiving child support (administered by Inland Revenue) for children in other relationships, that parent's income will be reduced for their assumed expenditure on those other children.

A negative amount is not allowed, so if the allowances are greater or equal to the adjusted taxable income then the child support income for the parent is treated as being nil. This could arise with parents who are solely reliant on social security benefits.

Definition of Adjusted Taxable Income

The income used to calculate child support will be more closely aligned to the definition of family scheme income used for Working for Families tax credits. A person's adjusted taxable income is defined in new section 35, as replaced by the Child Support Amendment Act 2013. It is their taxable income adjusted as necessary to determine the person's family scheme income under subpart MB of the Income Tax Act 2007, with the following exceptions:

  • child support and spousal maintenance received will not be counted as income
  • income derived by a dependent child, such as interest, dividends, royalties and rent will not be counted, and
  • income of a spouse who is non-resident will not be counted.

This means that the definition of adjusted taxable income for calculating child support income will now include:

  • wages and salary that is exempt from income tax under a specified Act or regulation, such as the Consular Privileges and Immunities Act 1971
  • PIE income that is not "locked in"
  • overseas pensions that are tax exempt in New Zealand
  • business and investment losses, such as losses from rental property, which have been used to reduce net income for tax purposes
  • income retained in a close company where the person is a major shareholder
  • distributions from superannuation schemes and retirement savings schemes (other than KiwiSaver schemes) where the person is still employed and their employer had recently made contributions to the scheme
  • income derived by a trustee of a person's trust, where the person is a settlor of the trust
  • fringe benefits received where the person is a major shareholder-employee
  • deposits into main income equalisation accounts
  • tax exempt pensions and annuities, and
  • other payments received by the person and used to replace lost income or to meet their usual living expenses, where the total exceeds $5,000 a year. This can include distributions from a trust that the parent is not a settlor of.

A more extensive description of the adjustments under family scheme income can be found on Inland Revenue's website and in previous Tax Information Bulletins.

For the period between 1 April 2014 and 1 April 2015, a person's adjusted taxable income for a child support year will be their taxable income without any adjustments. This reflects that taxable income for a child support year usually relates to past tax year periods and the deferral of the use of adjustments for an extra year reduces the degree of effective retrospectivity that could arise from the change in definition.

If a person has no adjustments to their income, and their taxable income is solely derived from withholding income (wages, salary, interest or dividends), then a person's taxable income will be determined by their employment income in the calendar year immediately preceding the start of the child support year.

Otherwise, a person's taxable income in the tax year immediately preceding the most recent tax year will be used and inflated by the inflation percentage for the child support year. Likewise, the adjustments to the taxable income will be those relating to the tax year immediately preceding the most recent tax year.

Living allowance

A living allowance is provided for a parent based on the annual gross rate of various social security benefits. If the person has been granted a domestic purposes benefit (for care at home of the sick or infirm) at the sole parent rate or an invalid's benefit at the sole parent rate, then the appropriate rate is the living allowance for that parent. For everyone else the living allowance is set at the rate for a sole parent on the domestic purposes benefit. The living allowances will be updated annually in line with changes to the benefit rates.

The living allowances that apply to child support years will be available on Inland Revenue's website.

The names of the benefits have recently been changed by the Social Security (Benefit Categories and Work Focus) Amendment Act 2013. The name changes take effect in the Child Support Act 1991 in July 2013. The old benefit names will be reintroduced by the Child Support Amendment Act 2013 on 1 April 2014. References to old benefit names in the child support legislation, however, can be read as a reference to the new benefit names, and likewise for section references. Names and references will be updated in the Child Support Amendment Act 2013 at a later date.

Dependent child allowances

A child allowance is provided for each dependent child of the parent. A dependent child is a child of whom:

  • the person is a parent under section 7 of the Child Support Act 1991, and
  • who is maintained as a member of the parent's family and for whom the parent provides at least 28% of the ongoing daily care, and
  • is not a child for whom child support is to be paid, and
  • meets the other requirements of a dependent child such as being under 19/18, not financially independent and not married, or in a civil union or a defacto relationship.

The allowance is based on the same method for calculating child support for a qualifying child. It is the parent's care cost percentage for the dependent child multiplied by the appropriate amount taken from the child expenditure table for that child based on the adjusted taxable income, less living allowance, of that parent alone.

The amount of a dependent child allowance is determined by the formula:

c%  x e
n
where -
c% is the care cost percentage of the parent in relation to the dependent child
e is the amount determined by the child expenditure table in respect of the dependent child on the basis of:
  • the child support income amount of the parent alone, with that amount being treated as the adjusted taxable income of the parent, minus the parent's living allowance
  • the total number of the parent's dependent children, and
  • the age group of those children
n is the total number of the parent's dependent children.

Multi-group allowance

A liable parent may have child support liabilities for more than one group of children. This is referred to as multi-group. A multi-group allowance is calculated based on the same method of calculation for child support and the dependent child allowance. A multi-group allowance is the sum of the multi-group costs of each child of the parent who is not in the same child support group as the child being assessed. This recognises that the parent has financial responsibility for other children outside the child support group.

Multi-child cap and multi-group cost

The amount of child support liability of a parent can be capped where a parent has qualifying children in more than one child support group. This is referred to as the multi-group cap. The purpose of the multi-group cap is to avoid liable parents paying more in child support than they would pay if all the children for whom they are liable to pay child support were living together.

The multi-group cap for a child is the amount determined as:

(100%  -  c%)  x  m
where -
c% is the parent's care cost percentage in relation to the child
m is the multi-group cost of the child

The multi-group cost of a child is the amount determined by the child support expenditure table in respect of that child divided by the number of all the children in all of the parent's child support groups. When determining the amount in the child expenditure table, the income amount is the income of that parent alone, the number of children is the total number of children of the parent in all child support groups, and as if all those children were the same age as the child being assessed.

Care percentage

The Commissioner must establish the proportion of ongoing daily care for a qualifying child. Shared care for child support purposes is currently set at a minimum of 40% of nights during the year. This has been replaced by a minimum of 28% of nights during the year. This equates to two nights per week on average. For this purpose a year is assumed to be 365 days. The proportion of care is set as a whole percentage figure, with figures rounded as set out in section 15 as replaced by the Child Support Amendment Act 2013. 

The Commissioner must rely on the content of any care order or agreement relating to a qualifying child when establishing the proportion of ongoing care. This may be challenged by a parent or carer if they have evidence that the care order or agreement should not be relied upon. 

If there is no care order or agreement, the Commissioner must establish the proportion of care primarily on the basis of the number of nights that the child spends with a carer. If the number of nights is not a true reflection of the proportion of care actually provided by a carer, the Commissioner can use the amount of time that the carer is the person responsible for the daily care of the child.

To be a receiving carer, a person must have at least 35% of ongoing daily care. This means that there can be no more than two receiving carers for a qualifying child at the same time.

Care cost percentage

The care cost percentage reflects the amount of costs a parent incurs supporting the care of a child, relative to the amount of time that child is in their care. The care percentage is converted into a care cost percentage using a table in Schedule 2 as inserted by the Child Support Amendment Act 2013. The table has a tiered series of thresholds determining the person's care cost percentage based on their level of ongoing recognised care. A proportion of care that is less than 28% results in a care cost percentage of 0% and a proportion of care of 73% or more results in a care cost percentage of 100%. Between 28% and 73% is a tiered level of care cost percentage. For example, if the proportion of ongoing daily care is 30% the care cost percentage is 24%. If a carer's proportion of ongoing daily care is 37% their care cost percentage is 29%.

Child expenditure amount

The amount of child support is based on the estimated average cost of children in New Zealand. The cost of children varies based on age, number of children in a child support group and the combined income of the parents. The new scale of costs reflects up to date information on the expenditure involved in raising children, after allowing for likely tax credits. The cost of children is set as a percentage of income and differs based on the level of income. Income levels are grouped in bands set relative to the annualised amount of the average weekly earnings as published by Statistics NZ. These bands will be updated annually.

As incomes rise the percentages in the table decline to reflect that the proportion of income spent on children declines as income rises. The new formula also has a cap on the amount of expenditure for a child when child support income is more than two and a half times the average weekly earnings.

The child expenditure table will be published by Inland Revenue and will be available on Inland Revenue's website.

The child expenditure amount for a qualifying child in a child support year is the relevant amount determined in the child expenditure table divided by the number of children in the same child support group as the child.

A child support group describes the qualifying children (where there is more than one) of a parent who all share the same other parent and in relation to whom child support for that time has been or is being assessed. A parent could have qualifying children in more than one child support group.

Examples

Calculators and examples will be available on Inland Revenue's website to help people understand how the new formula works and the potential impact of the new formula on their own situation. The following examples demonstrate how the new formula works in some different situations.

Example 1: Paul and Ally's situation

Paul and Ally have recently split up. They have two children, Dylan aged 10 and Nathan aged 6. Ally is the main carer for Dylan and Nathan and she is not in paid employment. She receives a benefit from Work and Income for herself and the children. When Work and Income granted Ally a benefit she was required to apply for a child support assessment.

Paul spends time looking after his children but this is not enough to be recognised for child support purposes. Ally receives a benefit of $17,429 a year before tax. Paul is currently in full time employment and earns $72,610.40 a year before tax.

Calculation Ally Paul
Taxable income $17,429.00 $72,610.40
Less living allowance -$17,429.00 -$17,429.00
Child support income 0 $55,181.40
Ally and Paul's combined child support income is $55,181.40 and this will be used to calculate child support liability.
Percentage share of combined child support income 0% 100%
Care cost percentage 100% 0%
Percentage of income less care cost percentage -100% 100%

Because Paul's income percentage less care cost percentage is positive, he is assessed as the liable parent, and is required to pay 100% of the annual cost of raising Dylan and Nathan. The annual cost of raising Dylan and Nathan based on Ally and Paul's combined child support income and using the expenditure on children table is $12,880.

Paul's liability $12,880 x 100% is $12,880

Paul is assessed to pay an annual amount of $12,880 or $1,073.35 per month, for the care of Dylan and Nathan. Because Ally receives a sole parent benefit this payment will be used to help cover the cost of this benefit.

Example 2: Liam and Kirsty's situation - shared care

Liam and Kirsty are separated. Together they have two children, Joshua aged 12 and Olivia aged 10.  They have always agreed to share the responsibility of caring for their children. Joshua and Olivia both spend alternate weeks (Monday to Friday) at each parent's house, but they spend every weekend and the school holidays with Liam.

Liam has care of the children for 65% of the time and Kirsty has them for the remaining 35%. Because both Kirsty and Liam look after their children for more than 28% of the time, these percentages will be used when working out the child support assessment.

Calculation Liam Kirsty
Taxable income $53,152 $50,292
Less living allowance -$17,429 -$17,429
Child support income $35,723 $32,863
Liam and Kirsty's combined child support income is $68,586.
Percentage share of combined child support income 52% 48%
Care cost percentage 75% 25%
Percentage of income less care cost percentage -23% 23%

Because Kirsty's income percentage less care cost percentage is positive, she is assessed as the liable parent, and is required to pay 23% of the annual cost of raising Joshua and Olivia. The annual cost of raising Joshua and Olivia based on Liam and Kirsty's combined child support income and using the expenditure on children table is $15,561.

Kirsty's liability $15,561 x 23% is $3,579

Kirsty is assessed to pay an annual amount of $3,579 or $298.25 per month, for the care of Joshua and Olivia.

Example 3: Valerie, Lee and Jan's situation: non-parent receiving carer

Lee and Jan have one child together from their relationship, Sam aged 4. Lee and Jan have separated and they have asked Valerie, Sam's grandmother, to look after Sam. Valerie applies for child support for Sam. She must apply for it from both Lee and Jan.

Lee and Jan both work full-time and have no other children. Lee earns $35,212 a year before tax and Jan earns $45,092 a year before tax. Because Valerie isn't Sam's parent, her income is not used when working out the child support calculation.

Calculation Lee Jan
Taxable income $35,212 $45,092
Less living allowance -$17,429 -$17,429
Child support income $17,783 $27,663
Lee and Jan's combined child support income is $45,446.
Percentage share of combined child support income
39%
61%
Care cost percentage 0% 0%
Percentage of income less care cost percentage 39% 61%

Both Lee and Jan's income percentage less care cost percentage is positive, so they are both assessed as liable parents. Lee is required to pay 39% of the annual cost of raising Sam and Jan is required to pay 61%. The annual cost of raising Sam based on Lee and Jan's combined child support income and using the expenditure on children table is $7,343.90.

Lee's liability $7,343.90 x 39% is $2,864.10

Lee is assessed to pay an annual amount of $2,864.10 or $238.70 per month, for Sam's care.

Jan's liability $7,343.90 x 61% is $4,479.80

Jan is assessed to pay an annual amount of $4,479.80 or $373.30 per month, for Sam's care.

Valerie will receive the amounts that both Lee and Jan have been assessed to pay. Note that Valerie can ask for either of these amounts not to be collected.

Example 4: John's situation - multi group allowance

John has two children from a previous relationship, Jade aged 16 and Emma aged 11. John looks after Jade and Emma some of the time during the year, but not enough for it to be recognised for child support purposes. John earns $82,714 a year before tax.

Because John has children with more than one other parent, he is a multi-group child support customer, so is entitled to a "multi-group allowance" for Jade and Emma. The child support for each of his children is calculated separately, but must take into account that he has another child in a separate child support calculation.

Note: Before working out the child support formula for each of John's children, we must first work out his multi-group costs for each child. This is used for the multi group allowance.

John's multi-group allowance

John earns $82,714 a year before tax. After subtracting his living allowance, John's child support income for calculating the multi group allowance is $65,285.

We use the child expenditure table to work out the multi-group allowance based on $65,285.

Annual cost of raising two children (aged 0 - 12):

$14,901 divided by two children is $7,450.50
Emma is 11 so John's multi-group allowance for Emma is $7,450.50.

Annual cost of raising two children (aged 13 and older):

$18,165 divided by two children is $9,082.50
Jade is 16 so John's multi-group allowance for Jade is $9,082.50.

Child support for Emma

Emma's mother is Kim, she is Emma's main carer. Kim earns $65,000 a year before tax.

Calculation John Kim
Taxable income $82,714 $65,112
Less living allowance -$17,429 -$17,429
Sub-total $65,285 $47,683
Multi-group child support -$9,082.50 $0
Child support income $56,202.50 $47,683
John and Kim's combined child support income is $103,885.50.
Percentage share of combined child support income 54% 46%
Care cost percentage 0% 100%
Percentage of income less care cost percentage 54% -54%

Because John's income percentage less care cost percentage is positive he is assessed as the liable parent, and should pay 54% of the annual cost of raising Emma. The annual cost of raising Emma based on John and Kim's combined child support income and using the child expenditure table is $14,076.45.

John's formula assessed child support for Emma $14,076.45 x 54% is $7,601.30
John's liability for Emma will be the lesser of the amount we calculated in the formula, or the multi-group cap.

Multi-group cap for Emma

$7,450.50 x (100% minus 0%) is $7,450.50

John's annual liability for Emma is $7,450.50 because the multi-group cap is less than the formula amount calculated.

Child support for Jade

Jade's mother is Mary; she is Jade's main carer. Mary earns $45,092 a year before tax.

Calculation John Mary
Taxable income $82,714 $45,092
Less living allowance -$17,429 -$17,429
Sub-total $65,285 $27,663
Multi-group child support -$7,450.50 $0
Child support income $57,834.50 $27,663
John and Mary's combined child support income is $85,497.50.
Percentage share of combined child support income 68% 32%
Care cost percentage 0% 100%
Percentage of income less care cost percentage 68% -68%

Because John's income percentage less care cost percentage is positive, he is assessed as the liable parent and should pay 68% of the annual cost of raising Jade. The annual cost of raising Jade based on John and Mary's combined child support income and using the child expenditure table is $15,661.65.

John's formula assessed child support for Jade is $15,661.65 x 68% is $10,649.90

Multi-group cap for Jade

$9,082.50 x (100% minus 0%) is $9,082.50

John's annual liability for Jade is $9,082.50 because the multi-group cap is less than the formula amount calculated.

Summary

John's annual liability for both children is $16,533 or $1,377.75 per month.