New Zealanders owe billions in child support debt, with some individual parents owing more than $1 million. But most of the debt is late payment penalties, leading some to question whether the system is hurting the people it is designed to help.
Adrienne Gallie sees a lot of bad debts. As a financial mentor at Pakuranga and Howick Budget Service, she helps clients, many of them beneficiaries, get on top of what they owe.
One of the most common debts is child support. New Zealanders owe a collective $2.7 billion in unpaid child support and associated penalties.
“We get it a lot for single men who come in where their relationship has broken down,” Gallie told Newsroom.
“Wherever there is a single mum, there is a single dad paying child support.”
She said it was common for people on a benefit to be paying child support, often reluctantly. Reluctant payees were likely to fall behind, incurring late payment penalties that can compound into massive debts.
Massive debtors, massive penalties
The amount owed by individual parents can be eye-watering. Eleven percent of debtors owe more than $1 million each and 53 percent of debtors owe between $100,000 and $1 million.
This is a drastic increase from 2008, when there were no individual debts greater than $1 million.
But most of the amount owed isn’t unpaid child support, it is late payment penalties.
Penalties are not returned to the parent who has missed-out on receiving their child support, but are instead pocketed by the Government.
IRD acts as a collection agent for child support, taking payments from one parent and distributing it to the other. The penalties for non-payment are severe – they’re more onerous than those charged for late-payment of income tax. As a result, 77 percent of the mountain of child support debt owed isn’t actually unpaid child support, but penalties charged for late payment.
It equates to $2.1 billion in penalties and just $617 million in unpaid child support.
Penalties are not returned to the parent who has missed-out on receiving their child support, but are instead pocketed by the Government. That is a lot of money. It equates to roughly 3 percent of total tax revenue for the 2016-17 financial year and is more than what is raised from tobacco excise.
But most concede it’s unlikely to ever be paid. In fact, after a law change late last year, the IRD has begun writing large swathes of it off.
It wrote off $666 million in penalty debt in the 2016/17 financial year, reducing the debt mountain from over $3 billion to 2.7 billion.
Gallie said she had some success in getting debt written off for her clients and establishing repayment plans with IRD, but even the least onerous plans include a penalty repayment component.
Terry Baucher, director of Baucher Consulting questioned why the penalties charged on child support debt were so high.
IRD’s 2017 Annual Report proudly proclaimed child support debt had been reduced for the first time in 20 years, but Baucher cautioned that this was largely due to a substantial portion of the debt being written off.
He said many debtors fled overseas, but did not realise that IRD’s international agreements meant it could pursue debtors in countries like Australia.
The Australian Department of Human Services collected $45.2 million in unpaid child support and late-payment penalties on behalf of IRD in 2016/17.