PART B: Background and Analysis

Establishment of the Child Support Review 

On 29 July 2004, the Prime Minister, the Hon. John Howard MP, announced the Government’s response to the Report of the House of Representatives Standing Committee on Family and Community Affairs on the Inquiry into Child Custody Arrangements in the Event of Family Separation. One aspect of that response was to adopt the Report’s recommendation that the Government should establish a Taskforce to provide advice on whether particular changes to the Child Support Scheme are warranted.

The Minister for Children and Youth Affairs, the Hon. Larry Anthony MP, announced the establishment of the Taskforce and Reference Group on 16 August 2004. The Terms of Reference are given at the beginning of the Summary.

How the Taskforce conducted the Review

The main role of the Taskforce was to examine the formula used to calculate liabilities for child support and to consider a number of other issues arising out of the Government’s response to the House of Representatives Standing Committee on Family and Community Affairs’ Report, Every Picture Tells a Story (December 2003).

To fulfil this role, the Taskforce:

• analysed the submissions on child support made to the House of Representatives Standing Committee on Family and Community Affairs in 2003;
• analysed issues raised in Ministerial correspondence and unsolicited submissions to the Taskforce;
• consulted the Reference Group on issues to consider;
• reviewed the research on the costs of children both in Australia and overseas;
• conducted new research on the costs of children using three different approaches;
• examined the current impact of the Scheme on the living standards of both resident and non-resident parents;
• examined the child support systems of other countries and in particular, new approaches to child support since Australia developed its Scheme;
• consulted overseas experts on child support;
• commissioned the Australian Institute of Family Studies to conduct a survey of community attitudes towards child support;
• considered the interaction of the Child Support Scheme with Family Tax Benefit (FTB) and income support payments;
• consulted the Reference Group and other stakeholders on proposals for change;
• tested the proposals using a computer model that examined their impact for a range of different families; and
• consulted the Child Support Agency (CSA) on the feasibility of implementing the proposed new approach.

Papers containing the research underpinning the Taskforce’s findings are published in Volume 2 of this Report.

In analysing the costs of children, the Taskforce considered both the costs of children in intact families and the costs of children when parents live apart. Another major part of the work of the Taskforce required the analysis of the operation of the existing Child Support Scheme and proposed alternatives, and their interaction with the tax and income support systems. The National Centre for Social and Economic Modelling (NATSEM) at the University of Canberra was commissioned to develop a detailed model for this purpose. This was a complex task, but this microsimulation model and the extension of NATSEM’s population model (STINMOD) provide invaluable tools for future policy analysis and development. They enable the modelling of alternative policies to show outcomes for both individual families and the general population.

Submissions were not called for because all submissions presented to the House of Representatives Standing Committee on Family and Community Affairs in 2003 were available to the Taskforce. The Taskforce considered any unsolicited letters sent to it by members of the public during the course of its work.

What was not in the Terms of Reference

It is important also to state what was not in the Terms of Reference. In submissions to the House of Representatives Standing Committee on Family and Community Affairs, people raised a number of different concerns. Most of them were related to the operation of the formula. Others concerned aspects of the work of the CSA.

The Taskforce was not asked to examine issues concerning the administration of the Child Support Scheme. The CSA is now under the responsibility of the Minister for Human Services, the Hon. Joe Hockey MP.

The Taskforce was also not asked to consider aspects of the Family Law Act 1975 concerning parenting after separation. Many people who made submissions to the Parliamentary Inquiry were concerned that the Government had an administrative system in place to enforce the payment of child support but did not do enough to ensure that non-resident parents could see their children when the courts had made orders providing for regular contact. This is a very important issue, but it is one being addressed by other reforms that the Government has announced in its response to the Report of the House of Representatives Standing Committee on Family and Community Affairs—in particular, changes to the Family Law Act, the establishment of Family Relationship Centres, and the expansion of the Contact Orders program across the country.

Issues concerning the Family Law Act, including the enforcement of contact orders, are a matter for the Attorney-General, the Hon. Phillip Ruddock MP, and are outside the Terms of Reference of this Taskforce.

The context of the Child Support Review—reforming the family law system

While the Taskforce has focussed upon the issues that it was asked by the Government to address, it has done so with an awareness of the other initiatives that are taking place to reform family law and to enhance the counselling and dispute resolution programs that support parents who do not live together because of relationship breakdown. The Child Support Scheme is only one part of a broader system to ensure that both parents share in the responsibility for their children after separation and help their children to achieve their full potential as the adults of the future.

In particular, the Taskforce and the Reference Group have been motivated by a concern for the best interests of children whose parents are not living together. Children need parents who will provide more than just financial support for them. Children generally do best after their parents’ separation if they have a mother and father who are both involved in their lives and who can cooperate together as parents even if they are unable to live together as partners.

Arguments about money, or concerns about the fairness of the Child Support Scheme, can get in the way of that cooperation. The overriding goal of this Review of the Scheme has been to ensure that, as far as possible, the Scheme promotes, rather than hinders, the meaningful involvement of both parents in their children’s lives unless this is contrary to their best interests.

1.4 Explanation of terminology

The terms ‘residence’ and ‘contact’ have been in use in family law since 1995 for orders in relation to parenting. The House of Representatives Standing Committee on Family and Community Affairs, in its report Every Picture Tells a Story (December 2003), proposed a number of reforms to the Family Law Act 1975, including replacing the language of residence and contact with family friendly terms such as ‘parenting time’ (Recommendation 4). It is anticipated that changes in terminology will result from the proposed reforms, to be given effect in a Bill not available at this time. In this Report, the Taskforce uses the existing terminology in the absence of any readily substituted terms.

In this Report, the term ‘resident parent’ is used to mean the parent with whom the child generally lives, and ‘non-resident parent’ is used to mean the parent who has periodic contact with the child. Where care is being shared more or less equally, the term ‘shared care’ is used. For the purposes of the recommendations of the Taskforce, ‘regular contact’ and ‘shared care’ are given precise definitions. These are explained in Chapter 9 of the Report.

The Evolution of the Child Support Scheme 

The Child Support Scheme grew out of concerns about the poverty of women and children following separation and divorce and about the increasing government expenditure required to maintain children where their absent parents were not making an appropriate contribution to their upkeep.

The issue of poverty in sole-parent households

It has been estimated that, between the years from 1972–73 to 1985–86, the proportion of children living in poverty increased from 7.2% to 17.5%. This increase was partly due to the rising number of sole-parent households (from 9.2% of all families with dependent children in 1974 to 14.4% in 1985), who tended to be fi nancially disadvantaged in comparison with two-parent families.

Increasing marital breakdown was responsible for much of the rise in sole-parent households. Following the commencement of the Family Law Act in 1975, the number of divorces increased from about 17,000 per year to about 45,000 per year before falling and stabilising at about 39,000 from the mid 1980s. While the rate of births outside marriage also increased over this time, 1982 Australian Bureau of Statistics data showed that around two-thirds of sole-parent households had been formed through divorce (37%) or separation (30%).

In its 1986 study of the financial consequences of divorce, the Australian Institute of Family Studies (AIFS) found that women with children who did not repartner suffered the greatest losses from marriage breakdown. Concern about the ‘feminisation of poverty’, particularly in female-headed sole-parent households, was a signifi cant theme in discussions of the financial outcomes for men and women following separation. Community concern came to focus on the court-based maintenance system, which was perceived as inequitable, inaccessible, and lacking powers of enforcement. Only 30% of non-resident parents were making regular payments and only 26% of sole parent pensioners were receiving maintenance. Average levels of maintenance were inadequate, there was little or no indexation of court orders, and the proportion of the population covered was inadequate, particularly for parents who had never married. In general, the court-based system was seen as being too discretionary and as leading to inconsistent outcomes for people in similar circumstances.

There was also concern about the costs to taxpayers of the growth in the numbers of sole-parent households. Most sole-parent families were at least partially reliant on government welfare payments, and courts tended to award maintenance at levels below the free area (so as not to reduce welfare payments), which effectively transferred obligations to the Government.

During the 1980s, there were several major reports and academic studies addressing the issue of maintenance (child support) in Australia, including:

• Cost of children in Australia (the Lovering Report), AIFS, August 1984;
• A Maintenance Agency for Australia: Report of the National Maintenance Inquiry, AGPS, 1984;
• A paper by Edwards, Harper and Harrison on ‘Maintenance and Maintenance Enforcement’, presented to the Family Law Conference in November 1984;
• Work by the Family Law Council: Maintenance Enforcement in 1985, and Child Maintenance: The Family Law Council Proposal in 1986;
• Settling Up, AIFS, March 1986 (and the work done for its follow-up, Settling Down);
• A paper by Harrison, McDonald and Weston in 1987 on research fi ndings and reform proposals;
• A briefing paper on Child Maintenance Reform developed by the Parliamentary Library Legislative Research Service in 1987; and
• Work by Lee in 1989, providing courts with a benchmark on which to base maintenance amounts.

It was generally agreed that the system was far from perfect, and community consultations also indicated public support for reform.

In October 1986 the Government initiated community consultation following the release of Child Support: A Discussion Paper on Child Maintenance, and in March 1987 the Minister for Social Security announced the implementation of the Child Support Scheme in two Stages.

The Child Support Consultative Group (CSCG), chaired by the Hon. Justice Fogarty of the Family Court of Australia, was set up in May 1987 to advise the Federal Government on a legislative formula for the administrative assessment of child maintenance. The CSCG report, Child Support: Formula for Australia, was presented to the Minister for Social Security in May 1988.

Introduction in 1988 of the Child Support Scheme

The first Stage of the Child Support Scheme commenced on 1 June 1988. Stage One, empowered by what is now the Child Support (Registration and Collection) Act 1988, sought to move the collection and enforcement (but not assessment) of child support away from the courts to an administrative agency. This stage was primarily for those already in the existing (court-based) system. Stage Two then transferred the assessment function to the administrative agency. This Stage was primarily for new clients to the child support system.

Stage One covered children born before 1 October 1989 whose parents separated before that date (unless these children had a sibling born on or after that date, in which case Stage Two applied). Stage Two of the Scheme came into effect on 1 October 1989, empowered by the Child Support (Assessment) Act 1989. This Stage applies to children whose parents separated on or after 1 October 1989, or who were born on or after 1 October 1989, or who have a sibling born after that day.

In Stage One, the Child Support Agency (CSA) was established as part of the Australian Taxation Office. Under the Child Support (Registration and Collection) Act 1988, the Commissioner of Taxation was given responsibility for the collection of periodic child and spousal maintenance, and the power and authority to use collection and enforcement methods similar to those used for the collection and enforcement of income tax. It was envisaged that in most cases payment would be made as automatic deductions from salaries and wages, thus removing many of the difficulties and anomalies associated with the collection and receipt of child support. Child support awards were still assessed by the court, but the Family Law Amendment Act 1987 (amending the Act passed in 1975) asserted the primacy of the financial needs of children over all other considerations bar the basic self-support of parents.

Stage Two introduced the formula to calculate child support liabilities, making such calculation an administrative, rather than judicial, procedure. The formula was based on the recommendations of the CSCG, although not all of its recommendations were accepted. The administrative formula sought to produce much greater certainty and equity for children through equal access to fair, secure and regular child support at a level that represented an appropriate share of their parents’ income. The aim of the CSCG was to design a system that was predictable, accessible, simple, inexpensive, and readily understood. The formula was also intended to be flexible enough to apply fairly to a variety of circumstances.

The underlying philosophy of the Scheme shifted the balance more towards private parental responsibility for the financial wellbeing of children, rather than government-funded programs. One of the foundation principles of the Scheme, for example, was (and still is) that Commonwealth involvement and expenditure be limited to the minimum necessary for ensuring children’s needs are met.

Design of the Scheme

The Child Support Scheme rests on certain principles concerning how the responsibility for providing support and care to biological and adopted children should apply where two parents are not living together. It also expresses a basis for apportioning between the parents and the Government the additional costs faced by families that live apart.

The three most important design features of the Scheme are:

1. the use of percentages of the liable parent’s income as the basis for the child support obligation, with the percentages assessed on the principle that a non-resident parent should contribute a similar amount to that contributed in an intact family;
2. the modification of that principle by use of an exempt amount for the liable parent’s own self-support; and
3. the disregard of the resident parent’s income except to the extent that it exceeds average weekly earnings.

The CSCG also gave a great deal of attention to the definition and identifi cation of income and financial resources for the purposes of the Scheme.

The continuity of expenditure principle

The Australian Scheme, as proposed by the CSCG in 1988, was based upon a principle which has been influential in the development of child support policy in the United States and in other countries. This approach is known as the ‘continuity of expenditure’ principle. It was explained by the CSCG in this way:

As a starting point in considering what proportion of income should be shared, the Consultative Group accepted the proposition that wherever possible children should enjoy the benefit of a similar proportion of parental income to that which they would have enjoyed if their parents lived together. This proposition is based on the view that children should not be the economic losers from the separation of the parents or where the parents never lived together.

For this reason, in setting the percentages applicable for the payment of child support, the CSCG drew upon estimates of the percentage of gross income that is spent on children in an intact relationship. The notion underlying the basic formula (where there are no biological children of a second family) is that the liable parent can be expected to continue to contribute out of salary the same proportion as he or she would have contributed had the relationship not broken down. The percentages were based mainly on research from the United States on the share of family income spent on children, although the CSCG also had the benefit of one Australian study.

The continuity of expenditure principle was only a starting point. In determining the percentages applicable in the Scheme, the CSCG had regard to a number of other factors, including:

• additional costs of rearing children where parents do not live together;
• indirect costs of children (cost of care and loss of future earnings);
• access (contact) costs incurred by non-resident parents; and
• community views on what would be a fair level of child support.

The model for the Scheme in Australia was greatly influenced by the work of Irwin Garfinkel and the approach adopted in Wisconsin, U.S.A.This model is known as the percentage-of-obligor-income approach. In Wisconsin, however, there is no self-support component. This is the case also in other jurisdictions that adopt a percentage-ofobligor-income approach.

Exempt income

An important factor modifying the basic principle of continuity of expenditure was the need to ensure that liable parents had enough income for their own support. The CSCG wrote:

However, in designing an appropriate formula it was necessary to temper the application of this proposition in order to ensure a workable scheme and one which took into account the realities of capacity to pay and maintained appropriate incentives to work for both parents […] The recommended formula therefore guarantees the non-custodial parent a protected component of income, the self-support component, on which no child support is levied.

The exempt income amount meant that higher-income non-resident parents paid a higher proportion of their income than lower-income non-resident parents.

The Group proposed also that the exempt income amount should be increased where the liable parent had a second family. The basic aim of the Group was to treat all children of the parties as equitably as possible. In particular, the Group saw no value in transferring hardship to the children in the second family by giving no allowance whatever, whilst recognising that the increased self-support component may have the effect of reserving a greater proportion of a liable parent’s income for their second family, at least for low-income payers. However, the Group felt that it was important to avoid discouraging the formation of new relationships and families. The Group did not give an allowance to a second dependent spouse, except to acknowledge a spouse’s dependence by virtue of responsibility for children by giving a greater increase in the exempt income amount for the first dependent child.

The CSCG was strongly of the view that a parent’s assumed responsibility to a step-child should not take priority over the parent’s responsibility to their own children, except where this responsibility was ordered by a court. The allowances for children in a second family were therefore not extended to step-children.

The resident parent disregard

Another aspect of the Scheme was the resident parent disregard. This is the amount of income a resident parent is allowed before the rest of their income is taken into account in the calculation of the non-resident parent’s child support obligation.

The purpose and level of the disregard was considered closely in the original design of the Scheme. The CSCG noted that there were strong arguments for not taking resident parent income into account in the assessment, particularly that the carer parent is sharing a percentage of their income directly with the child by virtue of having the day-to-day care of the child. It was also noted that the more a resident parent’s income is taken into account, the greater the likelihood that the resident parent will remain on a benefit and not rely on paid employment. However, the CSCG recognised that there would be situations in which the results of not including payee income could be perceived as unfair by the general community. Accordingly, it was determined that payee income would be disregarded unless it was relatively high.

The definition of income

The CSCG originally recommended a very detailed definition of income, going so far as to deal with trusts, private businesses and partnerships, capital gains, and the imputation of income. They were particularly keen to ensure that opportunities for income minimisation were reduced as much as possible, and particularly recommended that any sharing of income with a spouse be undone, treating the income entirely as the income of the liable parent.

These recommendations were not initially implemented. The Government chose to apply the percentages just to taxable income. The availability of other financial resources was dealt with through the grounds for departure from the formula.

Shared care

The CSCG recommended a variation to the formula where the liable parent had care of the children for at least 35% of nights in an annual period. At the outset, the legislation set the threshold for the operation of the shared care formula at 40% of nights. Where care was ‘shared’, the calculation treated both payer and payee as liable in turn, and offset the resulting assessments. The child support percentage used in each calculation was reduced.

Grounds for departure

While the use of a formula was intended to create certainty and consistency, the CSCG was aware of a need to retain the discretionary elements previously applying in the court-based system, yet not to the extent that the advantages of a formula system were undermined by overly broad discretion. The CSCG proposed a court-based change of assessment process, with the court retaining a discretion to depart from the formula on specified grounds. The grounds for departure proposed by the CSCG included:

• high costs are incurred by either parent as the result of the liable parent having contact with the child;
• additional costs exist due to special needs of children in either the carer or liable parent household;
• adjustment is needed for income received by natural or adopted children or by step-childrenin the liable parent’s household, or for income of children received by the carer parent household;
• there are special needs of a spouse which amount to hardship;
• income of new partners may be taken into account where income splitting operates to avoid child support obligations;
• variation is required to exceed the cap where the circumstances justify a greater contribution by the liable parent;
• variation is required to factor in the financial resources of the parties not accounted for in the formula;
• adjustments are required to allow a court to deal with subsequent obligations of a liable parent, where they are now liable to a further carer, a court has imposed a secondary obligation to a step-child or liability for a child is additionally imposed on a step-parent; or
• a reduction in child support obligations exists on a narrowly defined ground of serious hardship or inequity.

The implemented change of assessment grounds drew broadly upon this range of reasons.

Reviews since the Scheme’s commencement

Recognising that neither families nor the world they live are static, the Scheme has been reviewed on several occasions since its inception.

Previous evaluations of the Child Support Scheme, prior to the 2003 Inquiry into Child Custody Arrangements in the Event of Family Separation, include:

• The Child Support Scheme: Progress of Stage 1, CSCG, August 1989;
• Who Pays for the Children? AIFS, 1990;
• The Child Support Scheme: Adequacy of Child Support Coverage of the Sole Parent Pensioner Population, Child Support Evaluation Advisory Group, AGPS, August 1990;
• Paying for the Children, AIFS, 1991;
• Child Support in Australia, Final Report of the evaluation of the Child Support Scheme, Child Support Evaluation Advisory Group, 1991;
• The Family Law Act 1975: Aspects of its operation and interpretation, Joint Select Committee on Certain Aspects of the Operation and Interpretation of the Family Law Act 1992; and
• The Operation and Effectiveness of the Child Support Scheme, The Joint Select Committee on Certain Family Law Issues, 1994 (the Price Committee).

Changes since the Scheme’s commencement

On the recommendation of reviews of the Scheme, the Government has made various changes over the years, resulting in some modification of its operation, although its structure and goals remain essentially unaltered. The major changes are as follows.

Effect of care arrangements

Care and contact arrangements for children have always been factored into the calculation of child support, on the basis that care arrangements affect the contribution to child support required of parents, but as noted above, to begin with shared care was only recognised in the formula where each parent cared for the child for at least 40% of nights (or equivalent care) per year. Where care is ‘shared’, the calculation treats each parent as liable to the other in turn, using an increased exempt amount and reduced percentages. The liability of each parent to the other is offset to find the overall payer.

Since 1 July 1993, a liable parent who has care of the child between 30% and 40% of the nights of the year has an assessment made as for a shared care assessment (each parent treated as liable and the calculations offset), although the percentages applied are different from those applying to parents with more than 40% care, and the parent’s exempt income is not increased from the basic rate without dependants. Generally, the levels of care each parent actually provides for a child are reflected in the assessment.

However, from 1 July 1999, the legislation was amended to reduce any fi nancial incentives the Scheme was creating to encourage parents to breach orders or court-registered parenting agreements. As a consequence, where a parent breaches a court’s parenting order without reasonable excuse, the level of care used in the assessment cannot exceed that set out in the order.

A further change is that, since 1 July 1999, parents can agree that the liable parent has substantial contact with a child, even though the care did not amount to 30% of nights annually.

Prior to 1 July 1999, all changes in care arrangements had effect for the entirety of the financial year to which the assessment applied, both for dates prior to and dates after the date of the change. Often, changes in care notified late in the year resulted in overpayments or debt being created. Since 1 July 1999, a change in care only has effect from the date the Child Support Registrar is notified. However, the care is still calculated over the entire child support period. Past periods of care are factored in when determining whether a change in the level of care has actually occurred such that the assessment should be prospectively amended.

The assessment of income

The income upon which child support was originally calculated was taxable income. Initially, the child support assessment was made for a financial year and was based on the taxable income from the financial year two years previously, inflated by a factor to represent the equivalent income in more current terms.

Since 1 July 1999, the period of a child support assessment is a maximum of 15 months, commencing the month after the making of a tax assessment by the Tax Commissioner for the last financial year. The relevant tax assessment is generally that of the payer. This permits the taxable income from the latest financial year to be used in an assessment as soon as possible after the ending of the financial year, to most closely represent the financial position of the payer.

Since 1 July 1999, supplementary amounts are added on to taxable income, including exempt foreign income and net rental property losses. Reportable fringe benefi t amounts have been included since 1 July 2000. This mirrors social security provisions where such forms of income were generally taken into consideration.

Where a parent’s taxable income was not known, the assessment was originally required to be based upon a default figure equivalent to 2.5 times average weekly earnings. Since 11 December 1992, CSA can choose an appropriate default income where a new assessment must start and taxable income information for the relevant year is not available.

Where a parent’s income situation has worsened (by 15%) since the relevant income period, the parent has an option of asking for the assessment to be based on their estimate of current income. Initially, this was an estimate of income for the full length of the then current financial year (which was retrospective). Such estimates regularly resulted in overpayments. The estimate provisions were changed from 23 December 1997, to allow an estimate for the whole financial year, but then to adjust the income used from the date of the estimate so that the resulting liability for the total year, adding the periods prior to the estimate to those after, resulted in the same rate as though the income for the entire year had been changed. This avoided overpayments in most instances.

Since 1 July 1999, with the advent of variable child support periods not tied to the financial year, estimates have been changed to being a prospective indication of expected annual income, from the date of the estimate. CSA can amend an assessment where the estimate is inaccurate or the income of the parent has changed.

Exempt and disregarded amounts

The exempt amount allowed to the payer and the disregarded amount allowed to the payee were designed with different functions in mind: the exempt amount is meant to prevent the payer (and any second family) from falling into poverty, while the disregarded amount includes the payee’s financial support of the children. This difference notwithstanding, the large disparity in the level of the amounts is one of the features of the Scheme that attracts the most criticism from the public.

Initially, the payer’s exempt income amount was equivalent to the annual amount of the relevant single rate of Social Security pension for the child support year. If the payer had relevant dependent children (that is, biological or adopted children or step-children for whom there is a legal responsibility living with him or her), the exempt income amount was twice the annual amount of the relevant married rate of Social Security pension for the child support year, plus additional amounts for relevant dependent children.

Since 1 July 1999, the payer’s exempt income amount has been increased to 110% of the unpartnered rate of Social Security pension. When the liable parent has relevant dependent children, the exempt income amount is 220% of the annual amount of the partnered rate of Social Security pension, plus additional amounts for relevant dependent children.

The exempt income rules change where the children for whom the assessment is in place are cared for by both the payer and payee (either on a shared basis in some proportion, or because some of the children live with the payee, and some with the payer). Prior to 1 July 1999, the exempt income amount allowed to each parent where both parents care for the child for 40–60% of nights was only that of a parent with no relevant dependants. Since 1 July 1999, additional amounts for the children are added to the single rate of exempt income where parents have care of above 40%.

Prior to 1 July 1999, CSA could include relevant dependent children in a child support assessment from the actual date when they became a relevant dependant. Substantial time could elapse between this date and the parent informing CSA, resulting in overpayments. Since 1 July 1999, the maximum allowable period of backdating is 28 days.

The resident parent’s disregarded income

The payee’s disregarded income was initially the ‘full-time adult weekly earnings’ figure, plus additional flat amounts for childcare for any children under 12. Any excess amounts were deducted in full from the payer’s Child Support Income. The payer’s liability could not be reduced to less than 25% of the assessment that would otherwise have applied.

Since 1 July 1999, the payee’s disregarded income is based on the ‘all employees average weekly earnings’ figure rather than the higher full-time average weekly earnings figure, and extra amounts for childcare costs are no longer added to it. In calculating the amount payable in an assessment, the payer’s income is reduced by 50 cents for every dollar of the carer parent’s income above the disregarded income amount. The payer’s liability can still be reduced by a maximum of 75% by this adjustment. A change of assessment reason allowing a payee to claim high childcare costs was also added.

Consideration of step-children

From 1 July 1999, a payer’s step-child is automatically considered to be his or her relevant dependant if a court has made an order under s.66M of the Family Law Act 1975. Prior to this, the paying parent would need to seek a change of assessment to have a legal duty under a court order to support the step-child taken into account in the assessment. This has not resulted in significant numbers of cases, due to the limited range of eligibility for parents to take advantage of s.66M (which is generally only available in the context of an application for maintenance against a step-parent living apart from the child).

A new change of assessment reason was added from 1 July 2001, allowing a parent to apply for a change of assessment on the basis that they were earning additional income to benefit a child living in their household. The child could be either their biological child or their step-child.

Minimum liability

Initially, where a payer had an income that resulted in a formula assessment of less than $260, the resulting child support liability would be nil. In 1999, a minimum child support liability of $260 was introduced, with few exceptions. This change was designed to reinforce the Government’s view that all parents should contribute financially to the support of their children. There was also a belief that payment of even a token amount would encourage the non-resident parent to be involved with the child, and would instil a habit of payment that could be used to support the children if the payer’s fi nancial situation improved.

Requirement that resident parents seek maintenance

At the inception of the Scheme, any resident parent (payee) in receipt of child support, after becoming eligible for a Commonwealth payment by originally seeking an assessment, could elect to end an assessment at any time. From 6 April 1992, payees in receipt of an income-tested pension, allowance or benefit could not elect to end their assessment. However, such payees could agree with the payer that the amount of the assessment would be nil, effectively getting around the 1992 amendment.

From 29 May 1995, CSA was required to refer a private child support agreement to the Secretary of the then Department of Social Security if the payee received more than minimum family payment or Sole Parent Pension. CSA could then accept these agreements only if the Secretary decided that the agreement passed the ‘reasonable action to obtain maintenance’ test. CSA was required to refuse to accept an agreement if the payee received more than the minimum family payment or Sole Parent Pension and had not applied for a child support assessment.

From 1 July 1999, payees who received more than the base rate of Family Allowance could elect to end their assessment if the Secretary of the Department of Family and Community Services approved. The same rule now applies to parents in receipt of Family Tax Benefit (FTB) Part A. The Secretary must be satisfied that the payee is taking reasonable action to obtain maintenance for the child. In practice, this generally requires that the payee be granted an exemption from reasonable maintenance action. Such exemptions are granted for reasons such as fear of violence and, more recently, well-founded doubts as to the parentage of the child.

Effect of maintenance payments and receipt upon Commonwealth payments

Consideration of maintenance income (including a requirement that resident parents seek maintenance) was introduced in June 1988 with the commencement of the Child Support Scheme. The maintenance income test covered all forms of received maintenance (cash, non-cash and capitalised maintenance). Both child and spousal maintenance were assessed. Maintenance income affected pensions, JobSearch, Newstart Allowance and sickness allowances and special benefi ts. The annual maintenance income free area was converted into a weekly figure of $15 plus an additional $5 per week for a second and each subsequent child dependent on the maintenance recipient. Payments were reduced by 50 cents for each dollar over a maintenance threshold.

With the integration of family payments from 1 January 1993, maintenance income no longer affected income support payments, but it reduced Additional Family Payment. Additional Family Payment and Basic Family Payment were merged in 1996 to form Family Payment, which was then subject to the maintenance income test. With the change to FTB from 1 July 2000, the maintenance income test was essentially retained, with the 50% taper rate applied to income over the maintenance threshold.

Parents paying maintenance could deduct 50% of the amount from family income for the purposes of their receipt of Family Allowance from 1 July 1999. The 50% deduction was retained when FTB was introduced. From 1 July 2001, the deduction was increased to 100% of maintenance paid.

Administrative system for changes of assessment

Although it was the exclusive domain of the Child Support Registrar to make child support assessments for children coming under the legislation, the flexibility of the system was preserved by allowing the Family and Magistrates Courts to depart from the formula in particular circumstances. From 1 July 1992, departure from the formula via an administrative process was established, which was free of charge and for which the parties did not require legal representation. Child Support Review Offi cers assessed applications for administrative departure from the formula, relying on the grounds previously available to the courts.

Payment of child support otherwise than to the CSA

Initially, where the child support liability was registered with the CSA, the Scheme required that payment be made to the CSA. From 1992, this was eased to a limited extent, and CSA could credit an amount as a Non-Agency Payment where the payer made that payment otherwise than to the CSA, although only if both parents intended the payment to be for child support. The provisions additionally required that there be special circumstances.

The requirement for special circumstances was removed from 1 July 1999 along with an easing of the payee parent’s choice to collect the liability privately, and the scope of Non-Agency Payments extended to non-cash payments. Payments were prescribed as payments which may be credited as child support, although only against 25% of the periodic liability.

The Formula for Assessment of Child Support 

This chapter explains systematically the current operation of the formula in the Child Support Scheme.

The process

Under the Child Support (Assessment) Act 1989, any eligible separated parent or carer for a child may make an application to the Child Support Agency (CSA) for a child support assessment.43 The previous system of court-ordered maintenance continues to apply to parents not eligible for a child support assessment. This group now represents only 2.3% of CSA’s active caseload.

Primacy of a parent’s responsibility to their own children

The basic child support formula gives priority to a parent’s duty to support their own biological or adopted child over other obligations, such as those to a new partner, step-children, or aged parents, where there is no duty to maintain. Thus only a ‘parent’ of a child within this limited definition is liable to support that child.

The Scheme draws a clear distinction between the legal obligation of a parent to share their income with their own or adopted child or children, and any assumed obligations of the parent. Where a parent has children in successive families, the formula attempts to draw a balance:

the duty of a parent to maintain a child:

1. is not of lower priority than the duty of the parent to maintain any other child or another person; and
2. has priority over all commitments of the parent other than commitments necessary to enable the parent to support:
   1. himself or herself; and
   2. any other child or another person that the parent has a duty to maintain; and
3. is not affected by:
   1. the duty of any other person to maintain the child; or
   2. any entitlement of the child or another person to an income tested pension, allowance or benefit.

The basic formula

The principal object of the Act is to ensure that children receive a proper level of financial support from their parents.

The current Australian child support formula is based upon a flat percentage of payer income.

The basic formula takes into account the income of each of the parents, the time each spends caring for the child support child or children, and the payer’s obligations to additional children for whom he or she is legally responsible.

The particular objects of the Scheme as set out in the Act include ensuring:

1. that the level of financial support to be provided by parents for their children is determined according to their capacity to provide financial support and, in particular, that parents with a like capacity to provide financial support for their children should provide like amounts of financial support; and
2. that the level of financial support to be provided by parents for their children should be determined in accordance with the legislatively fixed standards; and
3. that persons who provide ongoing daily care for children should be able to have the level of financial support to be provided for the children readily determined without the need to resort to court proceedings; and
4. that children share in changes in the standard of living of both their parents, whether or not they are living with both or either of them.

The care of children determines whether a parent is a paying or receiving parent, except for those situations where both parents have significant care.

Definition of income

Income for child support purposes is taxable income with various deductions added back (net rental property losses) and other amounts included (reportable fringe benefi ts and exempt foreign income). This is identical for the payee and payer.

Self-support component

Payer parents

The formula percentages are not applied to income for child support purposes in its entirety, since an amount of the payer’s income is first exempted for the self-support of the individual parent. The exempt income amount is 110% of the unpartnered annual rate of Social Security pension. For 2005, the exempt amount is $13,462.

Carer parents

The income of the carer parent is also taken into account in the current formula. The amount of payee income disregarded is the annual rate of All Employee Average Weekly Earnings as published by the Australian Bureau of Statistics, which includes full-time and part-time employees’ ordinary earnings and ordinary overtime earnings. For 2005, the disregarded amount is $39,312.

Payee income above the disregarded amount (excess income) reduces payer income by 50 cents per dollar of excess income. This has the result that the child support percentage for the payer is applied to a lesser income, and so the obligation is reduced. However, payee income cannot reduce the resulting assessment below 25% of the assessment that would be made without incorporating payee income.

Child support liabilities as percentage of income

Because of the exempt income allowed under the formula for the payer’s self-support, the actual percentage of a payer’s before-tax income paid in child support is lower than the percentages applicable in the formula.

Tables 3.1, 3.2 and 3.3 show the actual percentage of income before and after tax that is taken in child support for one, two and three children respectively, using the current basic formula (payer has no other dependants and any shared care is below 30%) at intervals up to nearly $50,000. $50,000 is about average full-time ordinary earnings in 2004.

Child support periods

A parent’s capacity to pay is determined by their adjusted taxable income. In order to reflect new taxable income information when it becomes available, child support assessments apply for a ‘child support period’. This period starts when a parent’s tax assessment is available and ends when the next tax assessment is made.

On average, such periods are intended to run for approximately 12 months. However, the 12-month period is not related to the financial year nor to any other period used for other purposes, such as the assessment of eligibility for Family Tax Benefi t (FTB). The assessment is based upon past income year information. If a parent’s circumstances have changed significantly since that year, an application for variation must be made.

The trigger for the new period is the lodgment of a tax return, generally by the paying parent. However, a large minority of child support payers do not lodge tax returns, at least in sufficient time for the child support period to be triggered by the resulting tax assessment. Approximately 44% of child support payers as at June 2004 had not lodged tax returns for the relevant financial year, and so had assessments based on income information other than that shown by the relevant tax assessment. For the four fi nancial years to 2002–03, by 3 December 2004, approximately 52% of payers had lodged all four tax returns. In the absence of a timely tax return, a maximum period of 15 months applies, so that a new period will start in any case, using an income that the Child Support Registrar thinks is appropriate.

Care of children

Care by an entitled carer

The Scheme assumes that a child under the age of 18 is dependent. Where the child is married, or living in a de facto marriage, the child is no longer regarded as requiring support from his or her parents. However, this is the only situation in which the child is defined as independent.

Only a person with care of a child may be the entitled carer under a child support assessment against the parent or parents of the child. The formula takes as a default that the carer is the sole or principal provider of care for the child. However, a parent is entitled to claim child support once they have care of a child amounting to 30% of the nights per year.

Dependants of the liable parent

Care of the child support children by the liable parent, and care of any further biological or adopted children, or step-children for whom there is a legal responsibility, is factored into the assessment. Where the liable parent has responsibility for care of either the child support children or new children, an increased exempt amount is allowed to take account of this. The amount makes no explicit reference to whether the liable parent has a new partner or otherwise. However, the amount allowed implicitly assumes a new dependent spouse. The exempt amount does not take into account the income of any other members of the parent’s household.

For the exempt amount to be increased to reflect a dependent child, the liable parent must have care of the child for 60% or more nights annually. In this case, the exempt amount increases to 220% of the partnered rate of Social Security pension, ($22,480 for 2005) plus additional amounts for children based upon their age:

The carer’s disregarded income does not vary with the number of children for whom that parent is caring.

Non-parent carers

Eligibility may be affected where a person is the carer for a child and is not the parent or guardian of that child. Where a parent or guardian lives with the child, although care is provided jointly with another person, the application for support must be made by or on behalf of the parent or guardian. If the carer is not a parent or guardian, the carer is eligible to have child support assessed in their favour unless the parents object to the carer providing such care. Despite parental objection, the carer may still be eligible if it would be unreasonable for the child to live at home.

The incidence of non-parents caring for children has increased, with approximately 1% of families with children now being grandparent families, and 52,100 children living with people who are not their biological or adopted parents. Whilst small in number, the impact of this increasing group within the child support population warrants more consistent treatment by the formula in terms of the treatment of income and refl ection of care by the liable parent.

Minimum and maximum amounts

Minimum liabilities

Since 1999, a minimum liability (of $260 annually, or $5 per week) applies to all liable parents who do not have at least 30% care of a child (that is, to the level acknowledged by the formula). Where the application of the formula results in an annual child support liability that is less than $260, $260 is substituted as the annual rate. The minimum rate can only be reduced to nil by application to the Registrar. The payer must establish that they have access to total financial resources during the child support period of less than $260 in order to have the minimum liability waived.

The minimum liability applies per payer, regardless of the number of children. If the payer pays child support to more than one carer, the $5 rate is apportioned between the carers according to the number of children in their care.

Maximum liabilities

The maximum income on which a liability may be calculated is capped at an annual rate of 2.5 times full-time adult average weekly total earnings, as published by the Australian Bureau of Statistics. Income beyond this level is not subject to the formula. The self-support amount for the individual payer is deducted from the capped income prior to application of the formula. As the level of the cap is related to average weekly earnings, it is automatically updated. The cap for 2005 is $130,767. This produces a maximum child support liability of $21,115 for one child, $31,672 for two children, $37,538 for three children, $39,884 for four children, and $42,230 for fi ve children.

The basic formula in operation

In the simplest of cases, where the child support child lives with one parent, the non-resident parent will be required to pay child support. The liability is a percentage of the liable parent’s taxable income after a self-support component is deducted ($13,462 for a non-resident parent with no dependants in 2005). The percentages are 18% for one child, 27% for two children, 32% for three children, 34% for four children, and 36% for five or more children. The formula reduces the liability of the non-resident parent where the income of the resident parent exceeds the level of average weekly earnings for all employees ($39,312 in 2005).

The formula involves the following steps:

Step 1—Calculate the income for child support purposes of the payer and of the payee.
Step 2—Deduct the applicable exempt amount from the payer’s income, and the disregarded amount from the payee’s income.
Step 3—Subtract 50% of any excess amount of payee income (above the payee disregarded amount) from the payer’s income.
Step 4—Take the applicable child support percentage of the remaining portion of payer income. The child support percentages are:

Step 5—If the resulting liability is less than either of the following, substitute the higher of:

1. an assessment amount which is 25% of the amount which would result if payer income was not reduced by payee income with the result of step 3, or
2. an annual rate of $260 if the resulting amount is less than $260.

The result of this formula application is the annual rate of child support liability for the child support period.

When the payer has other children to support

Whenever a payer has new biological or adopted children in a second family (or care of child support children), the parent is allowed an increased self-support amount. The child support percentage is then applied to only income exceeding the self-support amount. The result is still checked against the legislated minimum rates.

Payer with children with different carers

Where a paying parent is liable to pay child support to more than one carer, the percentage applied in each assessment is worked out according to the proportion of care each payee has of the total number of children. For example, a payer liable for two children to two different payees will pay 13.5% (half of the 27% applicable to two children) to each payee, not the 18% (applicable to one child) to each payee. The liability to each payee is then calculated separately under the standard formula, using this percentage.

Carers with children of different liable parents

Where a carer has children with different non-resident parents, the liability of each paying parent is calculated separately.

When the child is not being cared for by either parent

Where a child is living with someone who is not their parent, the liability of each parent is calculated separately, subject only to a cap on the combined amounts.

Treatment where both parents have care of their children

Where some of the children live with one parent, but others live with the other parent, the formula treats each parent in turn as liable to the other. The liabilities are offset so that one parent becomes the overall payer.

Shared care

The child support formula changes where there is contact of more than 30%. Where a child’s care is shared between both parents, or each parent has a child living with them, each parent has an entitlement to child support from the other. The calculation of how much each parent has to pay is according to how much care the other parent has. The liabilities are then offset so that only one parent overall is the payer.

Levels of care are generally based on the number of nights each year that a child spends with the parent. Care levels are based on bands, as follows:

Parents may agree that the non-resident parent should be considered to provide 35% of care even when the threshold of nights is not reached.

Each parent’s total level of care is calculated by adding together the assessed care percentage for each child support child. For example, a parent caring for one child 35% of the time and another child 55% (treated as 50%) of the time will be assessed as caring for 0.85 children. The other parent’s liability is then calculated by fi nding the relevant child support percentage for this amount of care and applying this to his or her Child Support Income (see below). Where a parent is liable for a ‘part’ of a child, the percentage of income payable is taken from a sliding scale between the percentages for whole numbers of children. For example, a parent liable for 1.15 children has a child support percentage of 20%, which is between 18% for one child and 27% for two. The process is reversed to calculate the second parent’s level of care and the fi rst parent’s liability. The dollar amounts are offset and the balance is payable.

Care of children also determines the exempt amount for each parent, which is subtracted from their total income to give their Child Support Income. The parent’s care of new biological children and of child support children is relevant for this calculation. In these cases, the same rules apply to both parents. In situations where there are different care arrangements for different children, the child for whom the parent has the highest level of care determines the base exempt amount.

The formula steps then become:

Step 1—Calculate the Child Support Income of each parent. If either parent’s income exceeds the cap, the cap is substituted.
Step 2—First, treat one parent as the liable parent, and the other as the payee parent. Deduct the paying parent’s exempt amount from that parent’s income.
Step 3—This step is omitted, that is, the income of the parent being treated as the payee is not applied to reduce the income of the parent being treated as the liable parent.
Step 4—Apply a child support percentage (based upon the care for child support children being provided by the other parent) to the remaining portion of payer income over their self-support amount.
Step 5—Repeat steps 2 and 4, but reverse the treatment of the parents, that is, treat the parent previously treated as the liable parent as the carer parent, and the parent previously treated as the carer as the liable parent.
Step 6—The parent with the higher liability as the result of the previous steps is the paying parent. The liabilities are offset, and the parent with the higher liability is liable to pay the difference between the higher and lower liabilities.

When child support ends

A child support assessment will end when particular specified events occur, including the death of one of the parents or the child, the liable parent moving overseas to a country with which Australia has no reciprocal arrangements, and the child ceasing to be in the care of the carer parent, or reaching the age of 18. Reconciliation of the parents does not end the child support assessment.

The carer parent may elect to end the assessment. However, their entitlement to FTB may be affected if they do so.

Children aged 18 and over

The Child Support Scheme does not currently extend to making an initial assessment for liability for the support of a young person aged 18 or over. Maintenance may be ordered in these cases by a court under the Family Law Act, where continuing support for the young person is needed by virtue of continuing education, disability or other compelling reason. The child support formula is not applicable in such court processes, although a court may have regard to likely formula assessment outcomes when making such determinations.

However, where a child has been the subject of a child support assessment, and is completing their secondary education in the year during which they turn 18, there is facility for his or her parent to seek an extension of an existing child support assessment to the end of the school year.

Variation to assessments

Updating of incomes

Where an assessment is formula based, the level is updated approximately annually by the CSA, either upon the receipt of a new income tax assessment for the liable parent or 15 months after the previous assessment was made, whichever is sooner. If a past assessment was made based upon an income determined by the Registrar (because no taxable income was available), this must be replaced retrospectively (to the start date of the assessment based upon the default income) when taxable income information for the relevant period becomes available.

By contrast, where the Tax Commissioner makes an amendment to a parent’s tax return upon which their child support assessment is based, the change in income will generally not be reflected by a change to the child support assessment, except where there has been tax avoidance.

Estimates of income

The original intention was that the assessment would operate annually, and hence only significant changes would result in a variation of the assessment. However, the original formulation of the Scheme recognised that basing an assessment of liability on a past year’s income could result in significant inequities where current circumstances had changed, and hence there was a need for a mechanism for variation of the assessment in a broader range of circumstances. The current estimation process aims to deal with unexpected changes, such as the loss of a job, and to enable immediate adjustment of the liability to avoid debt. This parallels the way in which the enforcement of court-ordered liabilities for those parents not eligible for child support formula assessment is suspended whilst a parent is in receipt of the full rate of income support. It is not intended to closely track current income and override the use of a past year’s income for standard formula assessments in the way required for income support eligibility.

Estimating income for the purposes of the child support formula now involves a parent applying to have their prospective estimate of current income substituted into the assessment, with the income calculated from the day the estimate is made to the last day of the child support period. The parent’s current income must have decreased by at least 15% from the Child Support Income amount used in the assessment before the parent is eligible to have their assessment based upon their estimate of their current income. However, thereafter a parent may, from time to time, substitute replacement estimates of either decreased or increased income to maintain the currency of the estimate, until the end of the child support period.

Estimates are subject to review by the Registrar where there is information tending to indicate that the estimate may not be correct. The last estimate in a child support period may also be reconciled after the end of the child support period.

The estimate mechanism is used only by individual parents who wish to amend their income details for the purposes of an assessment. Where a parent wishes to change the other parent’s income used in the assessment, they must use the change of assessment process.

Change in care

Each approximately annual child support assessment is made on the basis of each parent’s anticipated care of children for the first 12 months of the child support period. Changes may be reflected in a variation to the assessment, but any variation generally only operates from the time the Registrar is advised of the change of care. The only exception from this is where a parent has ceased to care for a child altogether. Where there has been a change, the ongoing level of care is calculated by taking into account care provided by the parents since the start of the child support period to the date of the change, along with the care anticipated to be provided up to the end of the period. Consequently, only increasingly large variations in care arrangements as the child support period progresses will necessitate an amendment to the assessment, and changes late in the period (particularly towards the end of the child support period) may not result in any amendment.

Agreements

Parents may prefer to substitute their own individualised child support assessment, reflected in a written child support agreement. What an agreement is, how it may be registered and factors relating to variations of agreements are set out in Chapter 13 of this Report.

Changes of assessment

Where a parent believes the formula does not operate fairly in his or her individual case, based upon a limited range of reasons, he or she may apply for a departure from the formula, or change of assessment. Details and some analysis of the reasons, or grounds, upon which departure may be sought are set out in Chapter 12, alongside an explanation of process.

Appeal and review

Internal review

Most decisions of the Registrar are subject to internal review by the CSA (except most decisions about enforcement of child support obligations). A parent seeks internal review by lodging a written objection against a decision, which is then considered by an objections officer (who did not make the original decision). The decision on the objection substitutes for the original decision.

A parent who is dissatisfied with the outcome of the decision on their written objection may then appeal the decision to a court with family law jurisdiction.

External review

Courts with family law jurisdiction may review most child support decisions once they have been reconsidered internally by the CSA. Courts also have original jurisdiction to make orders departing from a formula assessment in some instances.

The parties to an appeal against a CSA decision, and to an application for departure from a formula assessment, are the payer and payee parents. The Registrar is not a party and is not required to justify their decision. However, the Registrar may choose to intervene in a case.

Role of tribunals

Administrative tribunals have only a limited role in the Child Support Scheme. The Administrative Appeals Tribunal (AAT) has a limited role to review decisions about the time within which a parent is permitted to seek internal review by the Registrar of a decision, and about the Registrar’s decisions as to remission of late payment penalties, and penalties for inaccurate parental estimates of income. The respondent to such application is the Registrar, although the AAT will invite the other parent to seek to be a party to the proceedings if the other parent’s rights may be affected by the outcome.

The Interaction of Child Support with Government Payments to Families 

The operation of the Child Support Scheme cannot be fully understood without understanding its interaction with the income support system and payments to help families with the costs of children. Of greatest importance is the interaction of child support with Family Tax Benefit (FTB) Part A through the Maintenance Action Test (MAT) and Maintenance Income Test (MIT).
 

The family payment system

FTB is the centrepiece of family payments as we know them today. The system of family payments comprises:

• FTB Part A, a two-tiered payment linked to the number of children for whom a claimant is responsible;
• FTB Part B, to provide extra help for families with one main income, including sole parents;
• Child Care Benefit, to assist families with their childcare costs;
• Maternity Payment, to assist families following the birth or adoption of a baby; and
• Maternity Immunisation Allowance, to encourage immunisation of children aged 18–24 months.

The FTB Part A rate also comprises several additional components:

• Rent Assistance, for private renters;
• Multiple Birth Allowance, for the birth of triplets or more; and
• Large Family Supplement, for the fourth and subsequent children.

There are also several Australian Government concessions that base eligibility upon qualification for FTB Part A, including:

• the Health Care Card, which provides Commonwealth health concessions such as low-cost medicines under the Pharmaceutical Benefits Scheme, and in some instances concessions on services such as transport, rates and utilities; and
• Medicare Safety Net threshold, assistance for families with out-of-pocket medical expenses, over and above the Medicare rebate.

FTB Part A

FTB Part A is paid at two rates. The base rate recognises the costs of children for all but the highest income parents. It is concerned with what is sometimes called ‘horizontal equity’—fair treatment of people who have similar incomes but different family responsibilities.

Many families with relatively low household incomes are given an additional payment of FTB Part A. This is known as the ‘more than base’ rate. It is provided to ensure that parents on low incomes have enough money to maintain their children adequately. In the income year 2004–05, parents with a household income of less than $32,485 are entitled to maximum rate FTB Part A.

Payments of FTB Part A are for each child and do not take account of economies of scale in raising children. This contrasts with the Child Support Scheme, where there is an assumption, supported by research, that two children cost less per child than one, and that three children cost less per child than two. The current maximum FTB Part A rates are in Table 4.1.

Note: Annual rates include the FTB Part A Supplement ($613.20), which can only be paid after the end of income year reconciliation.
Centrelink, A guide to Australian Government payments, 20 March – 30 June 2005, p. 2.

Above an income of $32,485, the rate of FTB Part A declines by 20 cents in the dollar until parents are only entitled to base rate.

Note: Relevant to 2004–05 financial year. Income limit is higher if family is eligible for Rent Assistance.
Centrelink, A guide to Australian Government payments, 20 March – 30 June 2005, p. 2.

The current base rate for FTB Part A is as follows:

Note: Annual figures include the FTB Part A Supplement of $613.20. This is not included in the fortnightly figure as it can only be paid after the end of the financial year.
Centrelink, A guide to Australian Government payments, 20 March – 30 June 2005, p. 2.

* Income limit is higher than stated for three children aged 13–15 years.
Centrelink, A guide to Australian Government payments, 20 March – 30 June 2005, p. 3.

FTB Part B

FTB Part B provides additional assistance to sole-parent families and two-parent families with one main income. It is based on the age of the youngest child. Unlike Part A, Part B is not paid for each child.

Centrelink, A guide to Australian Government payments, 20 March – 30 June 2005, p. 4.

For a couple, this payment is not income tested on the higher earner’s income but on the income of the lower income earner. Under the FTB Part B income test, the lower earner can earn $4,000 each income year before the payment is tapered out at 20 cents for each dollar of income. For sole parents, there is no income test.

Splitting FTB

Shared care arrangements can be taken into account for both FTB Part A and FTB Part B. Eligibility for FTB is based on each carer’s household income and individual circumstances.

Introduced in 2000, this provision allows the parents to split FTB on the basis of the number of hours of care provided by each, subject only to the proviso that FTB cannot be paid to a parent who provides less than 10% of the care. By contrast, the child support formula provides for a reduction in child support liability only if the child spends more than 30% of the year (110 nights or more each year) with the paying parent.

The shared care percentage is generally based on the care arrangements in place between the parents, as advised by them to Centrelink/the Family Assistance Offi ce. Where there is parental dispute about the shared care arrangements, the parents are asked in writing to detail the level of care they provide. Where the parties do not agree, they are required to provide additional evidence regarding the actual level of care. Evidence can be a parenting plan, a court order, or any other document to support the actual care given.

Parents with at least 10% but less than 30% care of a child can choose to waive their FTB entitlement for the child in favour of the other parent. A small proportion of FTB customers share their payment. However, this proportion has grown over the last four years or so, even though many separated parents choose not to split FTB despite eligibility to do so.

Overpayments in FTB can occur in circumstances where the parent who receives FTB fortnightly fails to advise of the existence of a shared care arrangement. This happens when another parent claims FTB retrospectively for a period of up to three years. In order to avoid overpayments, all FTB customers are required to advise the Family Assistance Office of any change to their children’s care arrangements.

Interaction of Family Tax Benefit with child support

The Maintenance Action Test

Under the Maintenance Action Test (MAT), most separated people claiming the higher tier of FTB Part A must take ‘reasonable action’ to obtain child support—in other words, to lodge an ‘Application for Child Support Assessment’—and to:

• have the payments collected by the Child Support Agency (CSA); or
• privately collect 100% of the CSA assessment; or
• lodge a ‘Child Support Agreement’ for an amount no less than the formula assessment.

Some people are exempt from the MAT. The main grounds are fear of violence, emotional trauma, cultural considerations and inability to establish paternity. The number of children exempted from the MAT at 30 June 2004 was 33,250 (2.8% of the children who are eligible to receive child support and registered to receive FTB Part A).

The Maintenance Income Test

For family assistance purposes, maintenance payments (which can be child support and/or partner [spousal] maintenance) are assessed separately from all other income. The separate Maintenance Income Test (MIT) only applies to customers who are eligible for more than the base rate of FTB Part A.

Both the MAT and the MIT are central to the objective of limiting Commonwealth expenditure to the minimum necessary for ensuring that children’s needs are met, and shifting the primary responsibility of supporting children back to separated parents.

The MIT has the effect of reducing a resident parent’s FTB Part A by 50 cents for each dollar of child support above a prescribed threshold, usually $1,150 per annum plus $383 for each child after the first.

For most families, the MIT will affect:

• the more than base rate of FTB Part A for all children under 16; and
• Rent Assistance.

This means that the other components that are included in the base rate are not affected (that is, the base rate of FTB Part A, FTB Part A supplement, Large Family Supplement, and Multiple Birth Allowance).

As a result of the operation of the MIT, government expenditure on FTB was reduced by an estimated $433 million in 2003–04.

Income support

Nearly 25% of payers and 60% of payees are in receipt of some form of income support payments through Centrelink. The most common payment received by payers is Newstart Allowance, which 12.8% of all payers receive. The most common payment for payees is Parenting Payment (Single), which 50.8% of all payees receive. Other payments include Disability Support Pension, Parenting Payment (Partnered), Partner Allowance, Carer Payment, and Age Pension. Further demographic details are outlined in Volume 2 of this Report.

Payment rates, income tests and other supplementary payments vary considerably between payments. Newstart Allowance is indexed to the Consumer Price Index (CPI), whereas Parenting Payment (Single) is aligned with pensions, which are indexed to Male Total Average Weekly Earnings. Some income support payments are taxable, such as Newstart Allowance and Parenting Payment, and some are not taxable, such as Disability Support Pension and Carer Payment. The different levels of income support reflect different expectations of participation in the labour force and, hence, the length of time likely to be spent on income support.

Table 4.6 provides a comparison of some of the key payment characteristics.

PPS: Parenting Payment (Single), AP: Age Pension, CP: Carer Payment, DSP: Disability Support Pension,
NSA: Newstart Allowance, PPP: Parenting Payment (Partnered), PA: Partner Allowance. Figures are current for a period from 20 March 2005 to 30 June 2005.
Centrelink, A guide to Australian Government payments, 20 March – 30 June 2005.

Newstart Allowance

Newstart Allowance is designed to facilitate entry to employment. Centrelink clients receiving this payment are required to comply with the activity testing which includes:

• actively looking for suitable paid work;
• accepting suitable work offers;
• attending all job interviews;
• agreeing to attend approved training courses or programs;
• never leaving a job, training course, or program without a good reason; and
• giving Centrelink accurate details about any income they have earned.

Centrelink clients who fail to comply with activity test requirements may be ‘breached’, with reduction or suspension of their payments.

Parenting Payment

Parenting Payment is designed to provide an income and opportunities for greater financial independence to people with parenting responsibilities. Parenting Payment is an income support payment for both sole and partnered parents. However, it is only payable to one member of a couple. An alternative income support payment such as Newstart Allowance may be payable to the other member of the couple.

In 1998 Parenting Payment amalgamated the former Sole Parent Pension, which was paid to sole parents, and Parenting Allowance, which was paid to partnered parents. While some conditions that differed between the former payments, such as the assets test, have been aligned, core conditions, such as rates, the income test, and concessions, have not changed under Parenting Payment.

Therefore, single recipients of Parenting Payment continue to be subject to pension rates, income testing and concessions, while partnered recipients are subject to benefi t rates, concessions and a modifi ed benefit-style income test.

Shared care provisions for income support

The Government provides assistance for families within a system that encourages personal responsibility, independence, and self-help. Without this assistance, many children, particularly those in separated families, would be at risk of hardship.

The Government provides additional support to sole parents through measures such as higher rates of Parenting Payment, more generous income test and concession card arrangements, and entitlement to more supplementary benefits such as Education Entry Payment, Employment Entry Payment, and Pensioner Education Supplement.

As mentioned above, Parenting Payment can only be paid to one parent for the same child. Where separated parents share the care of a child, generally the parent with the greater proportion of care is eligible. The other parent may receive Newstart Allowance at the ‘with child’ rate, but this does not appear to be administered uniformly.

Where the care of the child is shared approximately equally (within the range of 46% to 54%), other factors are also considered to determine which parent is eligible. These factors include the relative financial needs of the parents, whether only one parent has claimed Parenting Payment, or whether one parent has already been receiving the payment continuously for a reasonable period when the other parent makes a claim.

If both parents qualify after separation for a pension payment (for example, Parenting Payment (Single), Disability Support Pension, Carer Payment or Age Pension), they receive the same amount of government assistance for their self-support. However, if the non-resident parent qualifies for an allowance payment (such as Newstart Allowance, Youth Allowance or Sickness Allowance) they receive a lower amount of government assistance for their self-support.

2005–06 Budget measures

As part of the 2005–06 Budget, the Government announced proposed changes to payment arrangements that are relevant to the work of the Taskforce, including the following.

Welfare to Work measures

• Parents receiving Parenting Payment prior to 1 July 2006 will remain on that payment until their youngest child turns 16. They will be required to seek part-time work of at least 15 hours per week when their youngest child turns six.
• Parents applying for Parenting Payment on or after 1 July 2006 will receive Parenting Payment while their youngest child is less than six years old.
• When their youngest child turns six, these parents will receive enhanced Newstart Allowance and be subject to an obligation to seek part-time work of at least 15 hours per week.
• The Newstart Allowance will be enhanced through changes to the income test. The maximum withdrawal rate will be reduced from 70 to 60 cents in the dollar. In addition, the income at which this rate commences will be increased to $250 per fortnight, up from $142 for Newstart Allowance currently.

Assistance for Families measures

• The lower income threshold for FTB Part A will be increased to $37,500 from 1 July 2006, to allow low-income earners to increase their earnings without affecting family assistance payments.
• Families receiving arrears of child support from previous years will also benefi t from a new measure that allows them to access any unused maintenance income free area from previous years to offset late maintenance payments.

The Taskforce became aware of these proposed changes as it was finalising its full Report, but considers that they do not materially affect any of its recommendations, including the details of the proposed new formula.

Evaluating the Scheme in operation 

There can be little doubt that the Australian Child Support Scheme has been a success in a great many ways. It has certainly led to a cultural change in community attitudes about the responsibility of both parents to provide for and support their children regardless of their relationship with each other. There is also evidence that the Scheme has made a significant difference to the financial circumstances of children in sole-parent households, with fewer living in poverty than before the Scheme was introduced. However, child support remains an area of very high concern to the community, particularly to the people most directly engaged by it-separated parents. As well, many non-resident parents-already on low incomes at the time of their separation-tend to remain on low incomes for long periods. This situation, and other factors, can lead to poor compliance in meeting their child support liabilities, resulting in debts that become increasingly difficult to pay off.

This chapter looks at each of these issues-the impact of child support on the fi nancial circumstances of payees and payers, concerns about how the Scheme is currently operating, and the issues of payer compliance and debt, including the performance of the Child Support Agency (CSA) in this regard.

Financial impacts of the Scheme

All separated parents with children are able to register with the CSA, and 94% of those eligible to register do so. At 30 June 2004 there were 713,000 CSA cases representing 661,000 paying parents, 657,000 payee parents and over 1.1 million children. Private Collect cases comprised 51.8% of these cases and 48.2% were CSA Collect.

In June 2004, the average annual child support liability under the Scheme was $2,570 for CSA Collect and $4,432 for Private Collect payer parents. If those clients on minimum liabilities are excluded, the figures are $4,470 and $5,900 respectively.

Taxpayers

The Child Support Scheme has helped to reduce the cost of relationship break down to taxpayers. As a result of the mandatory transfer, or deemed transfer, of child support between parents, expenditure on Family Tax Benefit (FTB) was reduced by an estimated $433.5 million in 2002-03.

Payee families

An analysis of data from Australian Bureau of Statistics income surveys shows that, in the period 1982 to 1997-98, the proportion of children in sole-parent families benefiting from child support payments rose from 12% to 31%. Over this period, the average amount of child support received by female-headed sole-parent families also increased-from $12 a week in 1982 to $41 a week in 1997-98 (both amounts in 1997-98 dollars). Without these payments, it is estimated that the incidence of child poverty would have been around 1.2% higher (representing 58,000 children) over this period than it otherwise was.

Payers

Many non-resident parents are already on low incomes when they separate from their partners and tend to remain on low incomes over a long period afterwards. The authors of a study that tracked a large group of male non-resident parents over a four-year period from when they first registered with the CSA in 1997 described the group's financial situation over this period as one of 'prevailing and persisting low incomes'. In fact, among the parents aged 25-44, the proportions reporting very low incomes actually increased marginally (from 39.7% to 42.4%) over the period of the study. At the same time, there was also a significant accumulation of child support debt among payers in the very low income group. Their average annual child support liability in 2001 was $679 but their average debt was $861. The authors attribute this, in the main, to the payers' continuing low-income status.

Australian Institute of Family Studies (AIFS) researchers used data from the Institute's Australian Divorce Transitions Project to determine whether the Child Support Scheme was having a detrimental effect on the economic wellbeing of payer parents. Data analysis revealed a detrimental impact for a small percentage of payers in the survey (all of whom were in the workforce): the proportion of payers with incomes below the Henderson poverty line increased from 3% before child support was being deducted to 7% when payments were being made.

In another study, which sought information on payers' views on the affordability of paying child support, payers and payees with a child support assessment of $260 were surveyed. Of those meeting their liabilities, 59% reported that they could do so only by reducing expenditure on other items, including food. Not being able to afford child support payments was the main reason given by non-paying respondents for not meeting their liabilities.

As noted in Chapter 4, about one-quarter of payer parents are reliant on income support (with about half of these being on Newstart Allowance). Consistent with this, payers have much lower rates of employment and labour force attachment than do their counterparts in the general population. For example, Household Income and Labour Dynamics in Australia (HILDA) data for 2001 shows that, of non-resident parents aged 18-64 who reported having a child support liability, 75.1% were employed, 10.1% were unemployed and 14.8% were not in the labour force. The equivalent figures for those in the same demographic group but without a child support liability were 89.7% employed, 3.5% unemployed and 6.8% not in the labour force.

Concerns about the Scheme

That the Child Support Scheme has proven controversial is not surprising. The Scheme operates at the intersection of family law, income support and the tax system. It sometimes seems to act as a lens for intensifying personal resentment on the part of those who feel aggrieved by court decisions on children's living arrangements and the division of property, or by the circumstances that resulted in separation, or the unplanned birth of a child. Even in the absence of conflict between the parents, it may prove difficult to develop a mechanism that both parents will consider fair.

There are a number of specific concerns that have been voiced repeatedly about the Scheme, most recently in submissions made to the House of Representatives Inquiry into Child Custody Arrangements in the Event of Family Separation.

Many submissions expressed concerns that:

• the costs of children are not well reflected in the formula;
• the disparity between the payer's exempt income and payee disregarded income is inequitable;
• the costs of contact to the non-resident parent are only reflected in the formula if the children spend at least 110 nights per year with each parent;
• child support liabilities are assessed against gross rather than net income;
• there is little incentive for either payers or payees to work;
• the costs of step-children are not adequately recognised;
• children are treated differently in first and second families; and
• property and court settlements are not reflected adequately in the formula.

Other issues frequently raised in submissions to the Inquiry include:

• some payers and payees avoid their child support obligations by minimising their reported income through cash-in-hand earnings;
• concern that 'capacity to pay' assessments either prevent contact parents from reducing their hours to provide care for children or result in debt;
• poor interaction with the income support system; and
• CSA administration problems.

Community attitudes towards the Scheme: fairness and effi ciency issues

The Australian Institute of Family Studies (AIFS) was commissioned by the Taskforce in December 2004 to conduct a national survey of community attitudes to the Scheme. Data for the survey was obtained through telephone interviews conducted over a three-week period in January and February 2005 from two samples: a general population sample comprising 1,001 people aged 18-64 who were not involved with child support and a national random sample of 620 separated/divorced parents with at least one child aged under 18.

The survey data thus represents the views of two distinct groups: those within the ambit of the child support system 'looking out' (resident mothers and non-resident fathers- the two most common post-separation parent groups), and those outside the system 'looking in' (men and women who had not experienced separation).

The survey collected information on respondents' attitudes on a range of aspects of the Child Support Scheme. Figure 5.1 shows the pattern of responses of resident mothers and non-resident fathers in regard to their opinion of the Scheme's functioning.

Figure 5.1: Do you think that, overall, the child support system is working well? Attitudes of separated parents with at least one dependent child

Note: Response options were not offered; χ2 (2) = 9.56, p<.01.

Most non-resident fathers (62%) maintained that the Scheme was not working well, while only one-third believed that it was. Resident mothers, on the other hand, were fairly evenly divided on this issue.

Separated parents' views as to whether they thought the Scheme was fair to both parents are summarised in Figure 5.2.

Figure 5.2: Do you think that the child support system is 'fair' for both parents? Attitudes of separated parents with at least one dependent child

Note: Response options were not offered; χ2 (2) = 30.53, p<.001.

Around three-quarters of non-resident fathers believed that the Scheme was not fair to both parents, while 18% said that it was fair. By contrast, the same proportion of resident mothers (46%) claimed it was fair as those who claimed it was not. Another 8% of these women and men volunteered that it was 'sometimes' fair.

In summary, although non-resident fathers tended to believe that the Scheme was not working well and/or was not fair to both parents, they were likely in particular to be negative about the issue of fairness. Resident mothers, on the other hand, tended to be evenly divided on both issues.

Compliance with child support obligations

In this context, compliance is defined simply as the regular and timely payment by non-resident parents of their child support liabilities. The CSA is the main source of data on compliance, some of which is presented in its annual publication, Child Support Scheme: Facts and Figures. Alternative data sources are relatively scarce. They include surveys conducted by AIFS and the Australian Bureau of Statistics (ABS) and some smaller-scale studies conducted by other researchers.

Paying child support pre-Child Support Scheme

In order to provide some baseline data against which the performance of the Child Support Scheme can be judged in regard to compliance, it is necessary to examine the child support payment situation before the Scheme was introduced in 1988. Payment data for this period is even more limited than for the current period, with the main sources being AIFS researchers and the former Department of Social Security. Estimates from these sources range from around a quarter to around a third of resident parents receiving child support on a regular basis during the 1980s. In terms of amounts, child support payments at this time are reported to have ranged from a weekly average of $10 per sole-parent family in 1982 to between $20 and $24 per week per child in the late 1980s.

Paying child support under the Child Support Scheme

Data sources on compliance include CSA administrative data, studies by the ABS, AIFS, and other researchers. These sources generally suggest improved levels of payment by non-resident parents, with compliance figures (as measured by the proportion of payee parents reporting receipt of child support) ranging from 40% to 50% in the 1990s, to around 60% in 2000.

Where payer parents have been surveyed on this topic, they have given a much higher estimate of their rate of compliance. For example, 79% of payer respondents in one study reported that they were paying child support, compared to 60% of payees in the same study who reported receiving it.

5.3.3 CSA data on compliance

Unpublished data on CSA Collect payers (produced by the CSA for the Taskforce) provides a picture of compliance that is broadly in line with the findings of the studies referred to above.

As shown in Table 5.3, in 2003-04, while only 20% of CSA Collect payers failed to pay any of their liabilities, only 43% paid all of their liabilities. Table 5.4 (also derived from unpublished CSA data) shows levels of compliance by CSA Collect payers over the period of a month (May 2004). This provides a better indication of the timeliness of payments made to payees than that which can be gained from rates of compliance over a 12-month period.

Note: The reason why some payers who reported zero Child Support Income may have met their child support liability is because they may have managed to pay arrears.

In contrast to the data in Tables 5.3 and 5.4, the CSA's published data on compliance (as provided in its annual Facts and Figures report) tells the compliance story in a less straightforward way. Because the CSA assumes 100% compliance by Private Collect payers, it collects compliance data only in respect of CSA Collect cases. It publishes this data either as representing CSA Collect cumulative credits and liabilities, or combined with the assumed 100%-compliant Private Collect cases, as representing overall compliance rates. This approach does not provide a clear picture of actual compliance rates.

As well, the CSA uses a cumulative collection rate (that is, the proportion of liabilities collected over the period since the inception of the Child Support Scheme) in its compliance reporting, rather than an annual figure. According to the CSA's Facts and Figures 2003-04 report, these cumulative collection rates increased gradually from around 70% (of liabilities collected since 1988) in the early 1990s, rising to above 85% in the late 1990s and to just under 90% by June 2004.

It is not clear from these published statistics on collection rates how the CSA has treated, in its reporting on cumulative collection rates, those who cannot be traced. This group ought to be clearly represented in the published statistics on collection rates.

Issues with the Current Scheme 

There are a great many issues concerning the Child Support Scheme that were the subject of comment or criticism in submissions to the House of Representatives Standing Committee on Family and Community Affairs, in the course of its Inquiry held in 2003, or that have been raised with the Taskforce since it began its work.

Many of these issues are perennial, such as the definition of income for child support purposes and the problem of how to assess the real capacity to pay of people who are self-employed. Others concern the operations of the Child Support Agency (CSA). Many of these perennial issues were considered in great depth by the Joint Select Committee on Certain Family Law Issues, chaired by Roger Price MP, which reported in November 1994. Other issues were dealt with in the House of Representatives Standing Committee on Family and Community Affairs report, Every Picture Tells a Story (December 2003).

From research in the course of this Review, the following major issues emerged as central to the Terms of Reference of the Taskforce.

Child support expenditure as a percentage of income

The Scheme assumes that, across the income range, people spend the same proportion of their income on children. This justifies the set percentages of 18% for one child, 27% for two children and upwards, above the exempt amount. Thus the idea is that the person on $30,000 will spend say, 20% of their income on child-related expenditure for one child, and so will the person on $80,000. That justifies using a common percentage for everyone.

However, the preponderance of international research shows that while the higher the household income, the more parents spend on their children, that expenditure declines as a percentage of their income. This is because as income increases, people may choose to put more into savings, or to use a greater proportion of income for purposes that do not involve expenditure on children. In the Australian context, the decline of expenditure as a percentage of income is also a result of our progressive taxation system, in that, due to marginal tax rates, disposable income does not increase in proportion to increases in taxable income.

This is borne out by the Australian research commissioned for this Review. Figure 6.1 looks at the costs of one child in an intact family as a percentage of total gross household income, based upon the National Centre for Social and Economic Modelling (NATSEM) costs of children research.

Figure 6.1: Estimated gross costs of two children aged 5 to 12 years as a percentage of gross family income

Note: The gross income figures have been rounded to the nearest $1,000. Taskforce Child Support Model.

This analysis makes the fixed percentages appear problematic. As a result of fi xed percentages, at the higher ends of the income spectrum the current child support liability is well in excess of levels of expenditure on children in comparable intact families, at least for one and two children under 13 years of age. Figures 6.2 and 6.3 illustrate this in relation to one child and two children aged between five and 12 years of age.

Figure 6.2: Estimated gross costs of children and current Child Support Scheme liabilities for a payer with one child aged 5 to 12 years

Note: The gross costs of children are calculated with reference to the gross costs that would have been incurred in an intact family if the payer at each level of private income had a spouse with zero private income.
Taskforce Child Support Model.

Figure 6.3: Estimated gross costs of children and current Child Support Scheme liabilities for a payer with two children aged 5 to 12 years

Taskforce Child Support Model.

These figures also show that current liabilities for low-income payers are often less than expenditure levels on children in comparable intact families. However, as will be discussed in Chapters 7 and 8, to work out whether child support obligations are adequate in relation to lower income families, it is important to take account of the (often substantial) level of government family benefits, from which households spend on their children.

The Child Support Scheme and capacity to meet the costs of children

The first objective of the Child Support Scheme states that parents are meant to share in the cost of supporting their children, according to their capacity. The assumptions underlying the existing Scheme are that:

• the percentages applicable after the liable parent’s exempt income is deducted are broadly commensurate with the expenditure that the parent would have been incurring if the two parents were living together, and to this extent represent an appropriate contribution to the costs of raising children;
• the resident parent is making an in-kind contribution proportionate to her or his capacity to pay.

The Child Support Consultative Group (CSCG) took as its starting point the proportion of family income normally devoted to children in a two-parent family. It then took account of a range of other factors in arriving at appropriate percentages after deducting the self-support component. What is unclear from the methodology is how the CSCG moved from the research findings on total family income to determine the proportion of the taxable income of the parent who is liable to pay child support. Total family income may include the earned income of both parents, together with government benefi ts payable to the intact family to support children. While the issue of the resident parent’s income was dealt with at length, it is not clear how, if at all, it was factored into the calculation of the percentages of the liable parent’s income payable in child support.

It is likely that the CSCG assumed that because expenditure on children rises as the family income rises, the inclusion of the resident parent’s income would not reduce the liability of the non-resident parent, except when family income reached a very high level. This was valid on the basis of the research evidence at the time. However, given the preponderance of research evidence now that expenditure on children falls as a percentage of total family income as that income rises, to translate the research evidence on total family income to a percentage of one parent’s taxable income, without taking account of the different components of that total family income apart from the liable parent’s income, is problematic.

The CSCG did include the resident parent’s income to a limited extent. Nonetheless, as the formula now stands, only a relatively small percentage of cases exist in which the recipient parent’s income operates to reduce the liable parent’s child support. The Taskforce research indicates that 12% of payees have income that counts in the application of the basic formula, that is, an income equal to or greater than the level of average earnings for all employees ($39,312 in 2005).

Thus the current approach looks mainly at the liable parent’s capacity to pay, not at the relative capacity to pay of both parents. While the payee is contributing to the support of the child in-kind, and there are significant indirect costs involved in parenting, especially when children are young, it is not necessarily obvious to the liable parent who is struggling to meet child support payments that the cost is being fairly distributed between the parents in accordance with their relative capacities to pay.

The results of a community attitude survey conducted by the Australian Institute of Family Studies (AIFS) in early 2005, and illustrated in Figure 6.4, showed strong support for both parents’ incomes being taken into account.

A further issue is the way in which the resident parent’s income is taken into account in the cases where it exceeds the disregarded amount of the level of average earnings for all employees. Dollars earned above that point reduce the liable parent’s Child Support Income by 50 cents in the dollar, with the consequence that the relevant percentages will apply to a lower amount than would be the case if the resident parent’s income is not factored in. The effect of payee income is capped, in that the liability cannot fall below 25% of the child support liability that would apply if the payee had no income.

Figure 6.4: Do you think the amount of child support that a father pays for his children should depend on how much he earns, how much the mother earns, or both their incomes?

Notes: GP nonsep = general population non-separated sub-sample; CFC sep = Caring for Children after Parental Separation sample comprising separated/divorced parents with at least one child under 18; χ2 (3) = 54.43, p<.001 (based on the two categories of responses: father’s income and both their incomes).
Smyth B. & Weston R., ‘A snapshot of contemporary attitudes to child support’, in Volume 2 of this Report, p. 31.

The effect of including the resident parent’s income can be seen in the Figure 6.5 where the non-resident parent’s income is $32,000.

Figure 6.5: Liability as resident parent income increases

As Figure 6.5 shows, the resident parent’s income has no effect at all until it reaches the disregarded level, even though it is rather higher at this level than the income of the liable parent, but as that income increases above that point, it has the effect of reducing the liable parent’s income quite sharply until the minimum 25% of the liability otherwise applicable, is reached. A more graduated approach to the inclusion of the resident parent’s income may be appropriate, taking account of the relative capacities of each parent to support the children.

Child support expenditure and the ages of children

Under the current formula, the amount of child support that a payee receives does not vary with the age of the children and therefore is not sensitive to the difference in the costs of children as they grow older. Australian research estimates that expenditure on teenagers is two to three times higher than for young children, and this pattern prevails at every income level. Figure 6.6 illustrates this in terms of the costs of children as a percentage of gross household income, based upon the NATSEM costs of children research—although it is important to note that these figures exclude the costs of childcare. Costs for pre-school age children vary significantly, depending on whether full-time childcare is required to support parental employment, and on the nature of that childcare. For example, other Australian research shows that the costs of a three-year-old child for a two-parent middle-income household varies from $6,500 to $17,620 per year.

Figure 6.6: Costs of children as percentage of gross household income, by age

Percival R. & Harding A., ‘The Estimated Costs of Children in Australian Families in 2005–06’, in Volume 2 of this Report, p. 11.

The difference in costs of children as they grow older was also an issue considered by the CSCG in 1988. It decided that to assess child support with reference to the increased costs as children grow older would make the formula unduly complex. It concluded that using a single percentage rate for all the years of a child’s dependence would achieve a reasonable and balanced result.

Whether a fair result is achieved in assessing child support over the course of childhood may depend, however, on the time of separation. If the parents never lived together, and therefore the child support liability began soon after the child’s birth, then the effect of having a fixed percentage of income throughout childhood is that the liable parent’s contribution to the costs of the child, relative to his or her income, would average out over time, being a higher proportion of the cost when the child is younger than when he or she is a teenager. However, if the children are 13 and 11 when the parents separate, the payee will not have had the benefit of the higher payments relative to cost when the children were younger and so will not benefit from this averaging.

Furthermore, the approach of averaging the costs of children over the entire age range means that child support payments are likely to be inadequate at the time that the costs of children are at their highest. Since people tend to spend their income when they have it, and savings among lower income families are not very high, it is unlikely in most cases that some child support paid in earlier years will have been saved to cope with the costs of raising teenagers. The consequence of averaging may be that separated parents caring for teenagers suffer relative disadvantage compared to those with younger children.

It is difficult to achieve the right balance between simplicity and fairness. The approach of averaging the costs of children across childhood may have been the right decision at the time, but now the system of administrative assessment of child support is well established, it may be that a different balance between simplicity and fairness can be found.

The results of the 2005 community attitude survey conducted by AIFS, in Figure 6.7, showed very strong support for child support payments being related to age.

This view was expressed by over 80% of non-separated men and women in the general population sample, and by 70 to 75% of resident and non-resident parents in the Caring for Children sample.

Figure 6.7: Do you think the amount of child support should depend on the children’s ages?

Notes: GP nonsep = general population non-separated sub-sample; CFC sep = Caring for Children after Parental Separation sample comprising separated/divorced parents with at least one child under 18; χ2 (3) = 17.91, p<.001.
Smyth B. & Weston R., ‘A snapshot of contemporary attitudes to child support’, in Volume 2 of this Report, p. 35.

The Child Support Scheme and the costs of contact

A parent has the same child support liability whether he or she has no contact with the children or has the children to stay overnight for 29% of nights per year. The Scheme therefore does not take proper account of the in-kind child support that is provided when children are staying with the non-resident parent.

This is not to say that regular contact was ignored when the Scheme was fi rst established. The CSCG indicated that the percentages chosen ‘recognise that while a non-custodial parent may not have high costs of access…he or she may have some costs of access.’ A similar approach was adopted in the United States in jurisdictions with a Scheme similar to Australia’s, for example, in Wisconsin.

However, because the great majority of payers pay the same amount whether or not they have the children staying regularly overnight, it is not at all clear to people that the costs of contact are recognised in the Scheme. Recognition in the formula only occurs once the level of overnight stays reaches 30% or 110 nights.

Taking account of the costs of contact is, however, problematic. If the liable parent has regular contact with the children, then the total family expenditure related to the children is necessarily much higher than it would be if the relationship had not broken down. There are duplicated infrastructure costs from having two households suitable for children to stay in, and there are transportation costs involved in seeing the children. The costs incurred by one parent are not necessarily offset by savings in the other household, other than in relation to food and entertainment costs during contact visits.

Research conducted for the Taskforce using the Budget Standards approach identified that the costs incurred by a middle-income non-resident parent having 20% contact represent 38% of the costs of raising the child by the sole parent if no contact were occurring or similar. However, the converse is that the resident parent with 80% contact incurs 99% of the cost borne had he or she been caring for the child 100% of the time.

Regular contact and Family Tax Benefit

The way in which contact and shared care arrangements affect entitlement to Family Tax Benefit (FTB) is quite different from the affects on child support payments under the Child Support Scheme.

Introduced in 1999, the provision for splitting FTB allows the parents to split FTB Parts A and B on the basis of the number of hours of care provided by each parent, subject only to the proviso that FTB cannot be paid to a parent who provides less than 10% of the care. By contrast, the Child Support Scheme formula only provides for a reduction in child support liability if the child spends 110 nights (which is 30%) or more each year with the paying parent. Whatever the logic might be underpinning these differences, it is not apparent to the parties concerned in family matters.

In the FTB system, the FTB is shared in direct proportion to the amount of time spent in the care of each parent, without recognition that expenditure on children is not typically proportionate to the hours of care provided, except in relation to food and other such day-to-day expenses.

A consistent approach is required that minimises conflicts over money in making contact arrangements, and that operates fairly to both parents.

The results of the AIFS survey, as shown in Figure 6.8, indicated strong support for contact being taken into account in setting child support payments. All groups most commonly believed that overnight stays should be taken into account in setting child support liability. Non-resident fathers were the most likely to feel this way (82%), but close to three quarters of non-separated men and women and 62% of resident mothers in the Caring for Children sample endorsed this view.

Figure 6.8: When children often stay overnight with their father, should this be taken into account when calculating his child support payments?

Notes: GP nonsep = general population non-separated sub-sample; CFC sep = Caring for Children after Parental Separation sample comprising separated/divorced parents with at least one child under 18; χ2 (9) =55.78, p<.001.
Smyth B. & Weston R., ‘A snapshot of contemporary attitudes to child support’, in Volume 2 of this Report, p. 53.

Numbers of payers who have a minimum assessment

Almost 41% (288,057) of all payers in the Child Support Scheme are paying the current minimum rate of $260 per year or less as at 30 June 2004. Only 138,725 (or about half) were in receipt of a Centrelink benefit (excluding those who receive FTB only). Only 9% of all payers had a minimum assessment and were in receipt of a Newstart Allowance. Unemployment is therefore not a major explanation for the substantial percentage of all payers with a minimum liability.

The CSA on behalf of the Taskforce conducted further analysis of the low-income group. It reported that of all minimum assessment cases:

• 22.4% of parents were in receipt of Newstart Allowance;
• 12.2% were receiving Parenting Payment (Single);
• 10.7% were in receipt of Disability Pension;
• 0.9% were receiving Carer Pension;
• 2.3% were receiving Partner Allowance; and
• 0.6% were receiving Age Pension.

A further 17,771 parents had relevant dependent children, meaning second families. In these cases the exempt income was a minimum of $24,842, reducing the child support liability to the minimum amount. Another 10,184 parents had major or shared care of their children, and in this situation are exempt from the minimum payment. There are also some other payers who have a minimum assessment by agreement with the other parent, or whose low income is explicable for other reasons. For example, a person may have no income because he or she is in prison.

However, this still leaves a substantial proportion of all payers who have a minimum assessment of $260, and for whom there is neither a ready explanation for their low income (generally less than about $13,000) nor an indication of how they manage to support themselves in the absence of Centrelink benefits or any other form of government help, such as Rent Assistance. This is probably around 15% of all payers. Some of these are payers who lodged a tax return showing either a negative income, or an income so low that they fell below the self-support exempt amount, even though they were not on any form of income support. A substantial proportion of payers with a minimum assessment (23.9% of all those with a minimum assessment) did not lodge a tax return at all and do not fall into any of the categories listed above which would provide a ready explanation for their minimum liability.

There are many ways in which people may legally organise their financial affairs so as to minimise their taxable income. They should not also be exempt from paying all but a minimal sum towards the support of their own children. There are also ways in which people may organise their affairs so that they operate illegally, either partially or wholly, in the cash economy.

The evidence that there is a significant proportion of all payers who have a minimum liability without any obvious explanation for their low income or their means of self-support, suggests that tax minimisation and avoidance are both signifi cant problems for the Child Support Scheme. There may be many more payers who have a liability above the minimum, but whose reported taxable income does not reflect their real financial capacity to support their children.

Non-lodgment of tax returns

The problem of working out a person’s taxable income for the purposes of assessing child support payments is exacerbated by the large number of payers who either do not file tax returns at all, or do so irregularly, in breach of their legal obligation to do so.

As has been seen above, nearly one quarter (23.9%) of all those with a minimum assessment and who were not on Centrelink benefits are people who did not lodge a tax return in the most recent tax year. This is 68,770 payers.

While payee parents with incomes below the tax threshold, or with income purely from Centrelink benefits, are not required by law to lodge a tax return, parents with a child support liability (payer parents) are specifically required to lodge a tax return, irrespective of the benefit or source of income.

Figures provided to the Taskforce by the CSA provide an indication of the proportion of payers who are in breach of this legal obligation. Data from the CSA as at 3 December 2004 indicates that nearly 20% of all payers had not lodged a tax return in the last four years. The figure provided for ‘multi-clients’ represents those who either have more than one child support assessment or who are both payers and payees.

According to Table 6.9, less than 60% of payers lodged in all four years between 2000 and 2003. Thus, while most payers do file tax returns, there is a substantial number who are either in serious default of their obligation or who do not file on a regular basis, even when late tax returns are included in the statistics.

Child Support Agency.

To calculate the child support liability of payers who have not lodged a tax return for the last full financial year the CSA seeks to determine a derived income from other sources. This income is calculated by accessing a taxable income figure for an earlier year and then using an uplift factor account for inflation. It may also be derived by accessing Centrelink data or through information from other Australian Taxation Offi ce systems, or employers. This is the primary default method used by the CSA.

Where a prior year’s taxable income is not available, and there is no other information on which to base an assessment, the CSA will use a default income related to the median income of child support payers. However, that default income may be reduced to zero if the liable parent fails to make any payments. The Guide, the CSA’s online law and policy guide, provides that:

If a payer has made no payments (either to CSA or to the payee) by the end of a child support period for which the assessment was based on a median default income, CSA will consider amending the assessment to a nil default income. CSA will not amend a default income to nil without contacting the payee and giving them the opportunity to provide any relevant information. If the payee has no information CSA will reduce the income to nil.

The consequence of this policy is that where a payer both fails year after year to lodge a tax return in breach of his or her legal obligation, then further fails to make any child support payments based upon the income that he or she is deemed to have, the CSA will deem them to have no income at all. The position is then reviewed every six months.

The effect of the current policy is that a payer can avoid the obligation to pay child support by first failing to lodge tax returns year after year, and secondly failing to make any child support payments based upon the CSA’s default assessment. Of the 68,770 child support payers who had a minimum assessment at 30 June 2004 and were: (a) not on Centrelink benefits (b) had not lodged a tax return in the most recent tax year, 13,159 were treated as having an income of nil. This was based on a range of methods of determination, some more reliable than others.

One outcome of this policy is that the CSA’s statistical record of success in child support compliance and debt recovery may not accurately reflect (and indeed overstates) the real levels of success in enforcing child support obligations, because this group of non-compliant parents is treated as having no income—and therefore debt of only the minimum liability—in relation to that child support period.

Second families

The CSCG that recommended the formula for child support in 1988 had a clear view of the relationship between first and second families. It wrote:

The fundamental precept of the Consultative Group is that all children of a parent share equally in that parent’s income.

However, that has not been the outcome of the Scheme as it currently operates. The way in which children of second families are taken into account under the current formula (increasing substantially the liable parent’s exempt income before the relevant percentage is applied) is of great benefit to low-income liable parents, but does not provide as much proportionate reduction to those on higher incomes who have new children to support. This is because the flat-rate nature of the increase in exempt income due to a second family represents a much higher proportion of the income of a low-income payer than of a high-income payer.

This can be illustrated by comparing the position of a payer with one new child to a payer without new dependants, both paying child support for two children of a previous relationship (as seen in Table 6.10). The figures given are percentages of before-tax (taxable) and after-tax (net) income.

As a proportion of net income, payers on the higher incomes get between 4.5 and 6 percentage points reduction in their child support for the new dependant, but they are still paying between 12.5% and 15.5% of their net income for each child for whom they are paying child support. By way of contrast, the liable parent with an income of $32,600 has an 11 percentage points reduction in the level of their net income paid out in child support and is paying only 4.5% child support for each child.

The proportionate benefit of the allowance for a new dependent child is thus much greater for the lower income liable parent and, in comparison, higher income liable parents don’t see a substantial decrease in their child support liability. This can be perceived as treating the children from the different families unequally. The effect of the allowance for a new dependent child of low-income liable parents is that it takes precedence over the children from the first relationship, whereas the converse is true for higher income liable parents.

The results of the AIFS survey of community attitudes showed people had mixed views about whether a second family should reduce a liable parent’s child support obligation to the first family. As shown in Figure 6.11, the majority in all groups, except the non-resident father group, maintained that fathers should not be permitted to pay less child support if he has a child with another partner (64–68%). Most non-resident fathers, on the other hand, felt that an allowance should be made for such children (62%).

Figure 6.11: Do you think that if the father has another child with a new partner (not step-children), he should be allowed to pay less child support for the children he does not live with?

Smyth B. & Weston R., ‘A snapshot of contemporary attitudes to child support’, in Volume 2 of this Report, p. 46.

Another issue related to second families is the issue of support of step-children. Generally, the Child Support Scheme only takes new biological or adopted children into account in determining a liable parent’s child support obligation to a child living elsewhere. In some circumstances, courts have been willing to make orders under S.66M of the Family Law Act, providing that a person has a legal obligation to support step-children, but these orders are not common.

The Child Support Scheme is predicated on the view that all parents should support their biological children. If the non-resident parent is paying child support, money will be coming into the family where there is a step-parent, and there is no need to take account of the step-parent’s financial support of those children in a way that reduces his or her financial responsibility to his or her own biological children.

As shown in Figure 6.12, the AIFS survey of community attitudes did not show strong support for the inclusion of step-children as relevant dependants for the purposes of reducing a liable parent’s child support obligation. Again, with the exception of non-resident fathers, most respondents in the various groups rejected the notion that a non-resident father should be allowed to pay less child support if he is living with step-children. Half the non-resident fathers believed that step-children should be taken into account, while 41–42% disagreed.

Figure 6.12: If the father has re-partnered and now has step-children to support, should he be allowed to pay less child support for the children he does not live with?

Notes: GP nonsep = general population non-separated sub-sample; CFC sep = Caring for Children after Parental Separation sample comprising separated/divorced parents with at least one child under 18; χ2 (6) = 68.38, p<.001.
Smyth B. & Weston R., ‘A snapshot of contemporary attitudes to child support’, in Volume 2 of this Report, p. 45.

The need for major change

The identification of these problems does not imply that the original design of the Scheme was deficient. To a great extent, the Child Support Scheme has achieved the objectives that successive governments have given for it over the last 15 years. The Scheme has also been successful in promoting community acceptance of the idea of child support obligations. Indeed for a ‘first generation’ scheme it has proved remarkably durable.

The changes that have been made over the years, although significant, have not involved major alterations to the fundamental design elements of the Scheme. The Scheme has, to a substantial extent, fulfilled its purpose in ensuring that, where possible, levels of child support are paid that provide children with an adequate standard of living and that allow them to benefit from the earning capacity of higher-income non-resident parents. Other aspects of the Scheme, including the administrative system for assessment of child support and for changes of assessment, and the measures put in place for collection of child support, have created a much better system than existed when courts were responsible both for the assessment and enforcement of child maintenance liabilities.

Nonetheless, the issues are significant. In particular, the problem that expenditure on children is not a consistent percentage of before-tax income across the income range is fundamental. While adjustments to deal with these issues could be made to the existing system, the level of change needed is considerable. Consequently, the Taskforce has concluded that redesign of the formula underlying the Child Support Scheme is a better option than making piecemeal changes to the existing model

Principles for a New Child Support Formula 

This chapter sets out the broad social context for revising the existing Child Support Scheme, and sets out the principles on which the proposed new formula is based.

No change to the fundamentals of the Scheme

The Taskforce does not propose any change to the fundamentals of the Scheme. There are many aspects of the current Scheme that work well in providing an adequate level of financial support for children. The Taskforce was not asked to re-examine these fundamentals and, in any event, considers that they remain appropriate.

Fundamentals of the Scheme that would not change with the recommendations of this Report are as follows.

• The use of a formula-based administrative system for the calculation of child support.
• The provision of a self-support component below which only a minimum rate of child support is payable.
• The principle that children should share in the standard of living of both parents with the consequence that child support levels depend on parental income.
• The system of being able to seek a change of assessment through a simple administrative process, if certain criteria are satisfi ed.
• Responsibility to pay child support based upon biological or legal parenthood.
• Assessment of child support based upon the parents’ individual incomes, disregarding the incomes of new partners.
• Collection and enforcement through the Child Support Agency (CSA) where the parents are unable to agree on their own arrangements for private transfers.

The Taskforce considered that its Terms of Reference did not invite it to engage in a re-assessment of these fundamental principles of the Scheme, nor did it consider it desirable to do so.

The results of the community attitudes survey conducted by the Australian Institute of Family Studies (AIFS), as seen in Figures 7.1 and 7.2 on the next page, showed a considerable level of support for the broad principles of the existing Scheme.

Figure 7.1: Do you think a father who does not usually live with his child or children should always be made to pay child support?

Notes: GP nonsep = general population non-separated sub-sample; CFC sep = Caring for Children after Parental Separation sample comprising separated/divorced parents with at least one child under 18; χ2 (6) = 44.23, p<.001.
Smyth B. & Weston R., ‘A snapshot of contemporary attitudes to child support’, in Volume 2 of this Report, p. 27.

Figure 7.2: Do you think a mother who does not usually live with her child or children should always be made to pay child support?

Notes: GP nonsep = general population non-separated sub-sample; CFC sep = Caring for Children after Parental Separation sample comprising separated/divorced parents with at least one child under 18; χ2 (6) = 13.50, p<.05. Smyth B. & Weston R., ‘A snapshot of contemporary attitudes to child support’, in Volume 2 of this Report, p. 27.

The majority in all groups felt that child support should always be paid, regardless of the gender of the non-resident parent. Of those who did not endorse this view, some felt that child support should not always be paid and others volunteered that payment should depend on other factors.

The two groups of women were less likely than the two groups of men to reject the idea that child support should always be paid by non-resident fathers (9–12% as against 20–26%), while only 2–9% rejected the notion of universal payment by non-resident mothers.

As shown in Figure 7.3, three of the four groups also supported the idea that child support payments should be relative to the income of the parent, rather than being set by basic costs of raising children.

Figure 7.3: Do you think child support payments should just cover the basic costs of children or should fathers who earn more pay more than this?

Notes: GP nonsep = general population non-separated sub-sample; CFC sep = Caring for Children after Parental Separation sample comprising separated/divorced parents with at least one child under 18; χ2 (12) = 48.37, p<.001.
Smyth B. & Weston R., ‘A snapshot of contemporary attitudes to child support’, in Volume 2 of this Report, p. 31.

The majority of non-separated women and men (57–61%) and resident mothers (69%) thought that the level of payment should depend on the father’s income rather than the basic costs of children. However, non-resident fathers were fairly evenly divided on this issue (41% opted for the ‘basic costs’ model and 42% opted for the ‘earning capacity’ model).

The survey showed gender differences regarding support for government involvement in the collection of child support, as shown in Figure 7.4.

Figure 7.4: Do you think most fathers would pay child support without any government involvement?

Notes: GP nonsep = general population non-separated sub-sample; CFC sep = Caring for Children after Parental Separation sample comprising separated/divorced parents with at least one child under 18; χ2 (3) = 54.67, p<.001.
Smyth B. & Weston R., ‘A snapshot of contemporary attitudes to child support’, in Volume 2 of this Report, p. 37.

Views on this issue varied according to gender and residency status. In terms of gender, women were more sceptical than men, with most women (61–74%) of the opinion that fathers would not pay without government involvement, while more than half the men said that they would pay without government intervention. This pattern was especially pronounced for separated parents: 74% of resident mothers thought that payment would not be forthcoming; 59% of non-resident fathers believed that it would.

Including both parents’ incomes in the calculation of child support

While endorsing the fundamentals of the Scheme, the Taskforce considers that there is now the need for a new approach to the assessment of child support obligations. This need arises from problems with the existing Scheme and from the significant social and demographic changes since 1988. In particular, the Taskforce considers that changes in educational attainment and patterns of employment for both mothers and fathers since that time mean that it is no longer justifiable to base the Child Support Scheme on the income of only one parent, as the current Scheme does in most cases.

Changes in educational attainment since 1988

The increase in levels of education is the first of several social changes justifying that both parents’ income should be taken into account by the Scheme. School retention rates have increased markedly since the 1980s. In 1984, the retention rates from Year 7/8 to Year 12 for females was 48% and 42.1% for males. In 2004, this has risen to 81.2% for females and 70.4% for males.

Women and men are now participating in higher education in record numbers. Overall numbers in tertiary education rose from 393,730 in 1987 to a high of 695,500 in 2000. Between 1987 and 2000, the rate of participation in higher education for women has nearly doubled, increasing by a multiple of 1.9 (and by 1.6 for men). In 1967, about one-quarter of students were female. Over the next two decades, the proportion of women increased rapidly to one-half by 1987. By 2000, the proportion of women had reached 55.2%.

In 1987 around two-thirds of students were male in the fields of: agriculture and animal husbandry; architecture and building; business, administration and economics; and science. Over 90% were male in engineering and surveying. In contrast, the fi elds of study including arts, humanities and social sciences, education, and health had around two-thirds female students. Only law and legal studies and veterinary science had a relative balance of male and female students. By 2000, the gender imbalance, while still evident, had improved in most of these fields. The exceptions were the fi elds of education where the gender imbalance increased (three-quarters female) and veterinary science where a gender imbalance emerged (two-thirds female).

These figures indicate that formal education levels are now generally higher for the whole population. Of particular relevance, less women today are held back from participation in the workforce by of a lack of appropriate educational qualifications.

Changes in patterns of labour force participation

The second aspect of social change justifying that both parents’ income should be taken into account is the change that has occurred in patterns of labour force participation. Labour force participation rates for women grew by one-quarter between 1983 and 2004, from 44.8% to 55.9%.

Particular groups of women whose rate of employment increased markedly were partnered mothers with dependent children and sole mothers. The proportion of partnered mothers with dependent children in employment rose by one-half (or 21.7 percentage points) from 42.1% in 1983 to 63.8% in 2003. The proportion of sole mothers in employment rose by 56.1% (or 18 percentage points) from 32.1% in 1983 to 50.1% in 2003.

Growth in part-time work

The strong growth in part-time employment is a major factor in the increase in labour force participation for women. Over the two decades to 2004, the proportion of the labour force in part-time employment increased markedly. For females, the increase was from 31.8% in August 1983, to 42.5% in August 2004. For males, the proportion increased from 5.4% to 14%. For both males and females, the proportion of the labour force in full-time work fell.

Women with children tend to have different patterns of employment from the average. Between 1983 and 2003, part-time employment for that group increased from:

• 22.3% of all partnered mothers with dependent children to 37.8%; and
• 11.8% of all sole mothers to 27.1%.

The rate of full-time employment for partnered mothers also increased from 1983 to 2003, but not as much as the rate of part-time work. Their rate of full-time employment rose by 7.6 percentage points from 18.3% in 1983 to 25.9% in 2003. In contrast, the rate of full-time employment of sole mothers fluctuated within a small range of between 20.3% in 1983 to 28.7% in 1988, then falling to around 23% in 2003.

Mothers’ workforce participation increases as children grow older

Not surprisingly, female workforce participation increases as children grow older, although there has been a significant increase in the workforce participation of women with preschool-aged children since the 1980s.

In 1986, just over a third (37.2%) of partnered mothers whose youngest child was under five were employed, compared to one-half of that group (50.7%) in 2003. Of these employed mothers, in 1986 two-thirds were employed part-time and one-third were employed full-time. Although participation rates are greater in 2003, the preference for part-time work has continued, with two-thirds of employed partnered mothers of preschool-aged children continuing to work part-time.

Although sole mothers of young children are also participating more in the labour force, their participation rates remain much lower than partnered mothers. This trend has persisted since the 1980s. In 1986, 21.8% of sole mothers with preschool-aged children were working (11.8% full-time and 10% part-time). In 2003, the employment rate of sole mothers with a preschool-aged child had risen to 32.9% (9.8% full-time and 23.1 % part-time).

Sole mothers tend to participate more as their youngest child reaches primary age, however, not as much as partnered mothers. In 2003, 20.3% of sole mothers of primary school-aged children were working full-time, while 32.9% were working part-time.

This is an employment rate of just over one-half. The figures for partnered mothers with primary school-aged children are 25.8% and 41.3% respectively, with more than two-thirds (67.1%) in the labour force in total.

Decreased labour force participation rates for men

Between 1983 and 2004, men’s labour force participation levels dropped from 76.7% to 71.5%. The biggest decrease has been for sole fathers. Full-time employment for sole fathers declined from 66.6% in 1983 to 50.2% in 2003. Full-time employment among partnered fathers declined less, from 86.7% in 1983 to 83.4 % in 2003.

Although the part-time rate of employment for men, as for women, has increased markedly, these figures indicate that while women have entered the labour force in record numbers, in contrast, there has been a sharp decline in the numbers of sole fathers in the labour force.

Changes in unemployment levels

he 1980s was characterised by higher average unemployment levels than today. In 1983, trend unemployment rate peaked at 10.3%. After that, it undulated, peaking again at 10.7% in 1992 and 1993, before following a gradual overall downward trajectory, reaching 5.1% in January 2005. Clearly, with very high levels of employment, there is a much greater chance of being able to participate in the labour force than in times of lower employment.

Two-income households

Many couples with dependent children depend on two incomes, if not two full-time incomes, in supporting the children in an intact relationship, and many separated parents caring for children have some income from part-time or full-time work. In most cases, the income of the separated parents caring for children is not factored into the assessment of child support payable by the non-resident parent.

Whatever the merits of minimising emphasis on the resident parent’s income back in 1988, changing patterns of workforce participation suggest that it is reasonable now to take account of both parents’ capacity to support the child.

Changes in patterns of parenting after separation

Another major social change since 1988 is the increasing recognition of the importance of both parents in bringing up children after parental separation. The principle of joint parental responsibility was given emphasis in the Family Law Reform Act 1995, which amended Part VII of the Family Law Act 1995. These reforms were intended to bring about a much greater emphasis on shared parenting.

The Family Law Reform Act, particularly in its statement of objects and principles, emphasised the equal responsibility of both parents after divorce, and the child’s right of contact with both parents, unless contrary to the child’s best interests. The concept of shared parenting has very widespread support in the Australian population, including in the divorced population. Research by the Australian Institute of Family Studies in the mid-1990s indicated that when parents are married, 78% think children should always be cared for by both parents, sharing the duties and responsibilities for their care, welfare and development and another 20% think this should mostly be the case. When parents are separated or divorced, support is still strong for this proposition, although somewhat more conditional—50% of Australians think this should always be the case and another 33% think this should mostly be the way parents care for their children. These were the views of respondents in the survey taken as a whole. But even among the subset of those who had experienced separation and divorce, the results were very similar.

These changes in the law and social attitudes towards parenting after separation have been accompanied by changes in attitudes towards post-separation parenting by non-resident parents, mostly fathers. Over time, there have been significant changes in the ideal of fatherhood, with a greater emphasis on emotional closeness and active involvement with the children. This has led to a greater involvement of men in parenting in intact relationships, which then affects fathers’ attitudes towards post-separation parenting.

As a consequence, child support policy can no longer just be concerned with determining and enforcing the financial obligations of reluctant non-resident parents. Ensuring the payment of child support is one part of a bigger picture of encouraging the continuing involvement of both parents in the upbringing of their children. Furthermore, since many children after parental separation, where there is regular contact or shared care, have two homes, often one for most of the time and another for a minority of the time, it is important that the infrastructure costs of both parents are reflected properly in assessing how much child support should be paid.

Assessing the fairness of a child support formula

In making its recommendations, particularly concerning the amount of child support that should be paid, the Taskforce considered that the basis of working out a fair level of child support is fundamental to this.

The Child Support Scheme aims to ensure that parents contribute financially, as far as they are able, towards raising their biological children, whether or not they live with those children. This now widely agreed principle encapsulates ideas of fairness:

• for the child (that he or she should share in the income and living standards of both of their parents);
• for the resident parent/payee (that he or she should not be required to bear all the financial costs of raising their child);
• for the non-resident parent (that his or her contribution must be commensurate with his or her financial capacity); and
• for the state/taxpayer (that the state’s contribution towards children in separated families should not replace the financial contribution of parents).

However, beyond these shared principles, there is a range of views about determining the fairness of child support. Some people argue that fairness requires that non-resident parents pay sufficient child support to ensure that their children are not fi nancially disadvantaged by separation. Others argue that fairness should ensure that non-resident parents only pay the basic costs of raising the child, surplus amounts being regarded as spousal support.

The four main and competing principles for calculating child support obligations are:

• the continuity of cost principle;
• the meeting child costs principle;
• the maintaining a child’s living standards principle; and
• the equivalent living standards principle.

Continuity of cost principle

The continuity of cost principle is based on the idea that fairness requires that a non-resident parent contribute the same amount towards the child after separation as they would if they were living with the other parent.

To put this principle into operation and assess it, it is necessary to identify the amount a non-resident parent would hypothetically contribute if living with the other parent and the child, and compare this amount with his or her child support obligation when in separate households. An important consideration is to take into account that the parents are not the only parties financially contributing towards the costs of raising a child. The Government supports families through a range of family benefits, and the child may also have an income.

Meeting child costs principle

The meeting child costs principle is based on the idea that fairness requires that a non-resident parent’s child support obligation be to ensure that the resident parent receives sufficient monies to meet the cost of raising the child after separation.

This principle recognises that costs of raising children in couple households can vary from those in separated households, all other things remaining constant. In particular, research has shown that sole parents caring for a child 100% of the time often face higher costs in raising a child, compared with parents in intact households. However, other research suggests that this is the case for middle- and high-income households, but not for low-income households, where access to a range of discounts and in-kind benefits can in turn reduce the costs of children as compared with costs for intact families.

To put this principle into operation and assess it, it is necessary to compare the costs of a child after separation with the contribution towards that cost coming from:

1. child support from the non-resident parent;
2. notional child support from the resident parent calculated on a similar basis; and
3. government child benefits.

Should the three items add up to more than the cost of the child, then it could be argued that either government family benefits or the child support formula are higher than what is needed to raise the child.

The above comparison might be relatively straightforward when a child is living solely with one parent and has no contact with the other parent, and if there were a fi xed cost involved in raising a child. However there is no fixed cost. Furthermore, in the common case when a child spends time with both parents, the comparison for both parents needs to be relative to the costs each of them face in raising their child when the child is in their care. Previous research and research conducted for the Taskforce indicates that when regular overnight contact occurs, the total costs of the child—that is, the addition of the costs of the child in both households—significantly exceeds the cost of caring for a child 100% of the time in one household, be it an intact couple or separated sole parent household.

The maintaining a child’s living standards principle

The maintaining a child’s living standards principle is based on the idea that fairness is achieved by ensuring that a child’s living standard does not suffer as a result of separation.

The principle is based on a desire to ensure that children are not financially (and thus socially) disadvantaged by separation. However, because living standards are usually regarded as being equally shared within a household (for example, a lounge room, a car, a refrigerator and televisions are all shared household items from which each occupant derives a living standard), this principle requires that all occupants in the household in which the child resides do not suffer a drop in living standard relative to their standard before separation. As a consequence, to achieve this aim, it is necessary for child support to have a component of ‘spousal support’ built into it, as the ex-spouse’s living standard will be necessarily underpinned by ensuring a child’s living standard is maintained.

This principle can be put into operation by comparing the living standard after separation with the living standard in the circumstance prior to separation (or under identical private incomes in an equivalent couple household). In practice this is usually unachievable, because of the increased costs in separated households, especially where there is contact or shared care.

The equivalent living standards principle

The equivalent living standards principle is based on the idea that fairness is achieved when sufficient child support is transferred to ensure both post-separation households have the same living standard.

This principle recognises that in an intact family, living standards achieved through income are evenly distributed within the family and that it should stay this way. However, like the previous principle, it implies a level of ‘spousal support’ and does not allow parents any financial separation from their ex-partners. Relationships of fi nancial dependency are maintained and there can be significant workforce disincentives.

This principle can be put into operation by calculating and comparing the living standards post-separation of each household. Accordingly, under this principle, child support would be regarded as insufficient if the (net) payer’s household maintained a higher living standard than the (net) payee’s household, and vice versa.

Taskforce view

Having considered these competing principles of fairness, the Taskforce concluded that the continuity of expenditure principle provides the fairest reference point for the Child Support Scheme. There is no fixed cost of a child. How much a child costs beyond providing for his or her basic needs depends on the incomes of the parents and the living standard they want the child to have.

The Taskforce also concluded that it was not a feasible basis for the Child Support Scheme either to maintain the child’s living standards or to equalise the living standards in each household. These objectives cannot be achieved without a significant degree of spousal maintenance when there is a disparity between the parents’ incomes.

It is also difficult to fulfil either of these objectives without taking into account the financial circumstances of new partners. If the objective were to maintain a child’s living standards despite the parental separation, it would first be necessary to work out whether the child was experiencing the same living standard as he or she would have if the parents were living together. If the child did not have that living standard, the next step would be to work out how much child support would need to be transferred to achieve it. If the resident parent has re-partnered, then the primary responsibility for the child’s support, on this principle, would rest with the resident parent and step-parent, with child support payments being used to ‘top up’ the child’s living standard if necessary.

If the objective were to give each household equivalent living standards, then the incomes of new partners in both households would have to be considered. To aim to do this would contradict one of the fundamental principles both of the existing Child Support Scheme and the Family Law Act 1975—that the two parents have continuing parental responsibility for their children, not step-parents. Section 61C of the Family Law Act encapsulates the principle:

1. Each of the parents of a child who is not 18 has parental responsibility for the child.
2. Subsection (1) has effect despite any changes in the nature of the relationships of the child’s parents. It is not affected, for example, by the parents becoming separated or by either or both of them marrying or re-marrying.

Furthermore, it is not possible to maintain the living standards of the child where there is regular contact, without one parent also bearing all the costs of contact.

For these reasons, the Taskforce concluded that it is proper for child support obligations to be based on the best available evidence of how much children cost to parents with different levels of combined household income in intact relationships, and for the costs of children in separated households to be considered in evaluating how to take account of contact arrangements and shared care in the formula.

In reaching this conclusion, the Taskforce was mindful of the evidence on the effects of relationship breakdown on living standards.

While the standard of living of many resident parents falls after separation, this loss in living standards may be ameliorated if they remarry, form stable de facto relationships, or manage to increase their workforce participation. The child support formula needs to apply generally until the children are 18 and the circumstances of parents can change considerably over this time. Part VIII of the Family Law Act 1975 gives the courts wide-ranging powers to divide the property of parents. The financial needs of the children’s primary caregiver following separation are an important factor that courts consider. Courts also have the power to award spousal maintenance in appropriate cases. Certain powers to alter interests in property and to award maintenance also exist under State and Territory laws concerning de facto relationships. Government benefits such as Parenting Payment (Single), the provision of Family Tax Benefit (FTB) B for sole parents, Rent Assistance, special health care benefits and the pension concession card also help cushion the effects of separation for parents.

The child support formula should provide a transparently fair basis for calculating child support. This requirement cannot be met if the Scheme aims to fulfil objectives other than sharing the costs of children equitably between the parents.

Gross or net income

The Taskforce also gave consideration to fthe question of whether the formula should apply to income before or after tax. The results of the AIFS community attitudes survey demonstrated very strong support for the use of after-tax income as the basis for the formula, as shown in Figure 7.5.

Figure 7.5: Should child support payments be based on a percentage of the parent’s income before tax (gross) or after tax (net)?

Notes: GP nonsep = general population non-separated sub-sample; CFC sep = Caring for Children after Parental Separation sample comprising separated/divorced parents with at least one child under 18; χ2 (3) = 15.05, p<.01.
Smyth B. & Weston R., ‘A snapshot of contemporary attitudes to child support’, in Volume 2 of this Report, p. 32.

Most respondents in all groups maintained that child support payments should be based on net rather than gross income. This view was expressed by 87% of non-resident fathers and by 71–79% of women and men in the other three groups.

The history of consideration of this issue was given in the House of Representatives Standing Committee on Family and Community Affairs’ Report as follows:

6.47 In devising the child support formula the CSCG recommended it apply to taxable income (before tax) rather than after tax (net income). This was done because:

• this was consistent with placing child support as a primary responsibility equivalent to paying tax;
• before tax income is readily identifiable during the year, thus allowing a non-resident parent to more easily predict their liability, compared with after-tax income that is not certain until after a tax assessment;
• a before tax base impacts less heavily on lower income earners because lower marginal tax rates apply at lower income levels;
• it is easier for the CSA to calculate;
• using taxable income would not add to the difficulties likely to be encountered in calculating more complex cases (such as self-employed persons); and
• administrative assessment under a formula which takes into account a tax liability could not apply to recent years of income figures for provisional taxpayers.

6.48 Subsequent reviews of the formula by the Child Support Evaluation Advisory Group in 1991 and the Joint Select Committee on Certain Family Law Issues in 1994 supported the use of taxable income.

The use of taxable income was also supported by the CSA. The CSA wrote:

The possibility of assessing child support on after tax income rather than taxable income has frequently been suggested. The main argument in support of such a change is that net income may better reflect a paying parent’s capacity to pay child support.

While this argument is acknowledged, it does not counter the strong rationale for using taxable income to calculate child support. This rationale includes:

• Using taxable income for child support purposes is consistent with other Government business requirements such as FTB, Medicare levy, superannuation surcharge, and child care rebate;
• Using taxable income retains benefits of administrative simplicity; and
• Using taxable income impacts less heavily on lower income earners.

All families, intact or separated, support their children using their taxable income.

The rationale that using taxable income rather than after-tax income impacts less heavily on lower income earners would not apply if the Child Support Scheme ceased to be based upon a standard percentage of income across the income range.

Other arguments do not withstand careful scrutiny. For example, it is not the case that PAYG taxpayers support their children from their taxable income rather than their disposable income, for tax is deducted before the PAYG earner receives it. Furthermore, the principles by which the Government calculates benefits and imposes liabilities for the purposes of its business requirements may not in all cases be directly relevant to child support, which is a private transfer between individuals (often through the CSA as intermediary), not a government benefit or tax. Nonetheless, the arguments about administrative simplicity remain.

The Taskforce also had other reasons for rejecting the use of after-tax income. As will be seen later in the Report, the methodology of the Taskforce has involved basing child support liabilities on the best estimates of how much the payer would be contributing if the two parents were living together, after taking account of government benefits.

Surveys of expenditure on children indirectly take account of the impact of income tax, because they provide an indication of how much of the parents’ disposable income is spent on children, while expressing this as a proportion of the total household income available.

The impact of marginal tax rates is one reason why expenditure on children declines as a percentage of taxable income across the income range. By reflecting this in the formula, account can be taken of the after-tax income available to support children. As will be seen, the Taskforce is recommending that child support obligations should no longer be expressed as a fixed percentage of taxable income. Rather, the percentages applicable in the formula should gradually decline as combined taxable income increases. As a consequence, a liable parent with a high income will pay much more in child support than a parent with a low income, but less as a percentage of his or her taxable income than the parent with a low income. Thus, although the proposed formula continues to be based on taxable income, the impact of income taxation on disposable income has been taken into account indirectly.

Principles for a redesigned Child Support Scheme

The Taskforce proposes that a redesigned scheme be based upon the following central principles and values. The principles provide a contemporary interpretation of the Child Support Scheme’s objectives, and have guided the development of the detailed proposals contained in this Report.

The key principles that have guided the Taskforce are as follows:

1. Children who do not live with both parents should have an adequate living standard and, as far as possible, should receive support from a non-resident parent commensurate with the amount that the parent would be likely to spend out of his or her taxable income if the two parents were living together, taking account of that parent’s direct expenditure on the children when they are in his or her care.
2. The formula should be so designed that it can be demonstrated that parents are sharing in the expenses of raising their children at a level appropriate to their combined incomes and in proportion to their capacity to pay.
3. In assessing the level of support the non-resident parent should provide, account needs to be taken of the contribution that the taxpayer provides in supporting all children, whether in intact or separated families, through government benefits.
4. The Government contribution to the expenses of raising children where parents are living apart should be no less than if the parents were living together. The Government is entitled to expect a contribution from the non-resident parent towards the taxpayers’ costs of supporting the children beyond this level of contribution.
5. The Child Support Scheme should take proper account of the costs to each household where children are spending time in the homes of both parents.
6. The Child Support Scheme should endeavour to treat children in first and subsequent families equally.

Explanation of the principles

1. Children who do not live with both parents should have an adequate living standard and, as far as possible, should receive support from a non-resident parent commensurate with the amount that the parent would be likely to spend out of his or her taxable income if the two parents were living together, taking account of that parent’s direct expenditure on the children when they are in his or her care.

This is the fairness to children principle. It combines two yardsticks by which the proper measure of child support may be assessed. The first is the need of the child for an adequate living standard. The approach that was once taken by the Family Court, for example, was first to consider the needs of the child and then to examine the parents’ respective capacities to meet that need. Children are entitled to an adequate living standard and non-resident parents should contribute towards meeting this in accordance with their capacity to pay. The Government provides considerable assistance towards providing that adequate living standard whether the parents are living together or apart. The non-resident parent needs also to contribute towards that adequate living standard.

The second yardstick is the continuity of expenditure principle, as noted above. The idea is that child support is not just about meeting children’s basic needs, and that children should enjoy a standard of living commensurate with their parents’ income level, in the same way they do in intact families. That justifies looking at the level of expenditure that, on average, parents in intact families spend on their children, as a way of working out what is appropriate for the non-resident parent to contribute after separation.

The continuity of expenditure approach needs to be qualified by the recognition that non-resident parents may not be able to afford to make the same level of contribution after separation as they might have done in an intact family. Separation and divorce increase expenses for the two parents. There are now two households rather than one, with duplicated infrastructure costs as well as costs associated with having contact, such as transportation between the two households. There is also direct expenditure on the children while they are in the care of the non-resident parent and in buying birthday and Christmas presents, for example, which modify the extent to which the child support formula can track the patterns of expenditure in an intact family.

2. Parents should share in the expenses of raising their children at a level appropriate to their individual income and in proportion to their capacity to pay.

This is the cost-sharing principle. It recognises that while there is no fixed ‘cost of children’—for this depends on the living standards of the family—the Child Support Scheme should take account of research on the costs of children at different standards of living and patterns of household expenditure on children, as a starting point in working out what is a fair allocation of those costs between the parents.

This principle is consistent with the first three objectives of the Child Support Scheme, that:

• parents share in the cost of supporting their children according to their capacity;
• adequate support is available for all children not living with both parents; and
• Commonwealth involvement and expenditure is limited to the minimum necessary for ensuring that children’s needs are met.

The cost-sharing principle makes transparent that there are significant costs associated with raising children and that if either parent is not contributing to the costs of children in accordance with his or her capacity to pay, then those costs have to be borne either by the other parent or by the taxpayer, or the children’s living standards will suffer.

3. In assessing the level of support the non-resident parent should provide, account needs to be taken of the contribution that the taxpayer provides in supporting all children, whether in intact or separated families, through government benefits.

In intact families with care of children under 18, the Government provides support for children, and this is substantial in the case of low-income households. It does so by supplementing the income of the parents through government benefits such as FTB.

The significance of family payments is much greater than it was in the late 1980s, since there is now much greater financial support given to intact families through family benefits. Comparing expenditure on family benefits now to those in the period when the Child Support Scheme was introduced is not straightforward, since the structure of family payments has changed significantly. Some allowances that are now payable as a benefit to families were formerly allowable deductions in the tax system.

Nonetheless, the Department of Family and Community Services has estimated that between the years 1993–94 and 2003–04, expenditure on family payments increased in real terms (after adjusting for inflation) by about 115%, from $7 billion to $15.3 billion in 2003–04 dollars. Much of this growth has been in payments to intact families.

Because of this growth in family payments no analysis of child support policy can ignore the significance of these government benefits in assessing how much of the parents’ own income is spent on children for child support purposes. Child support is payable from parents’ private income. In working out how much needs to be transferred from the non-resident parent’s household to the resident parent’s household, it is important to take account of the fact that the family benefits which formed part of the total household income of the intact family are paid mainly to the primary caregiver following separation. This level of support should be taken into account in assessing the relative contributions by the parents in accordance with their capacity to pay.

4. The Government contribution to the expenses of raising children where parents are living apart should be no less than if the parents were living together. The Government is entitled to expect a contribution from the non-resident parent towards the taxpayers’ costs of supporting the children beyond this level of contribution.

This is the neutrality principle. In many cases, total government support to the separated family is much higher than to the intact family, as a consequence of various benefits.

It follows that it is justifiable for the Government to seek some reimbursement from the non-resident parent towards the additional costs associated with supporting the household in which the children live with their primary caregiver after separation. This argument supports the principle of ‘clawback’ through the Maintenance Income Test (MIT), but the neutrality principle sets a limit to the total amount of clawback that is justified. In accordance with this principle and reflecting the requirement in the Terms of Reference of the Taskforce that the current balance between private and public contributions be broadly maintained, the Taskforce has examined whether it is possible to reconfigure the application of the MIT.

5. The Child Support Scheme should take proper account of the costs to each household where children are spending time in the homes of both parents.

This principle ensures that the Child Support Scheme takes proper account of the costs of shared parenting where this has been agreed between the parents or ordered by a court.

The principle is that the child support obligation should be lower where there are regular overnight stays with a non-resident parent. The Scheme needs to take into account the infrastructure costs of contact and the level of expenditure incurred during regular contact in a way that balances the interests of payers and payees fairly. This principle needs to be qualified by the recognition that where there is regular overnight contact, the infrastructure costs are duplicated rather than being shared. When a primary carer has less than 100% overnight care, there are cost reductions in caring for the children in consumables, such as food. However, this may be countered to some extent by increased costs in communication and transportation in coordinating contact between the two households.

The infrastructure costs for a non-resident parent are clearly incurred at a level below that of 30%+ overnight stays per year. It is arguable that once a child is spending on average one night per week or more with the non-resident parent (or 14% of nights), the increased infrastructure costs involved justify some recognition in the child support formula.

Because of the duplication of infrastructure issue, and because of wide variations in who bears the transportation costs of regular contact, it is very difficult to make allowance for the costs of contact in a scientific way. It may be best just to give recognition to the costs of contact in a general way, while taking account of the fact that the resident parents costs also may not be greatly reduced.

6. The Child Support Scheme should endeavour to treat children in first and subsequent families equally.

The principle here is that children should not be systematically more disadvantaged through the Scheme in one household than the other. Children should be treated equally, whatever the order of their birth to the liable parent. This view was shared by the House of Representatives Committee. This is, indeed, exactly the same view that the original Consultative Group reached back in 1988. It wrote:

The fundamental precept of the Consultative Group is that all children of a parent share equally in that parent’s income.

Whether the current Scheme has achieved that in practice is another matter. Achieving equality of treatment in the formula is very difficult, for the first family gets a sum of money and the second family can be given a deduction before the child support is calculated, but then has access to the liable parent’s remaining disposable income as well. Approximate equality is therefore an aspiration to guide us more than a destination to reach.

Trade-offs between principles

It is important to recognise, however, that translating these principles into practice inevitably requires broad judgments and trade-offs between the principles in the interests of arriving at a workable scheme.

A formula-based approach to assessing child support is administratively straightforward, transparent, and efficient by comparison with more discretionary alternatives such as relying on the courts. It provides the mechanism for the costs of children to be distributed equitably in accordance with the parents’ capacities to pay. Its outcomes are more predictable. Its administration is also more efficient and cost-effective.

However, any child support formula that is assessed administratively represents a series of compromises between competing objectives including fairness, simplicity, and cost-effectiveness. What an administrative formula offers in terms of simplicity and speed of assessment, it may lack in capacity to adjust to the individual circumstances of all parties affected by it. The principles therefore were used to guide the development of the Taskforce’s recommendations at a general level, subject to making the necessary trade-offs between principles in order to develop a workable scheme.

The Costs of Children 

Relevance of the costs of children

The aim of an administrative child support formula is to provide an effi cient and certain method of assessment that will be fair to most parents, most of the time. A formula-based approach to assessing child support is administratively straightforward, transparent, and efficient by comparison with more discretionary alternatives such as relying on the courts. It provides the mechanism for the costs of children to be distributed equitably in accordance with the parents’ capacities to pay. Its outcomes are more predictable. Its administration is also more efficient and cost-effective.

At the core of a child support formula are the percentages that determine how much a parent is required to pay or receive in child support payments from the other parent. In general, the amount of child support that is required to be paid varies according to the number of children, the proportion of the care the other parent has and parental incomes.

For a child support scheme to be successful, it must be seen as fair. Although the Australian Child Support Scheme could be characterised as one based on the sharing of living standards rather than the costs of children, the extent to which the child support formula percentages are considered not to reflect accurately the cost of children in varying family circumstances is commonly raised as a criticism of the Scheme. Liabilities in excess of the ‘reasonable’ costs of children are considered a form of spousal maintenance by some payers, while payments lower than the real costs of children are considered by some payees to represent a failure of the Scheme to ensure shared parental responsibility. Dissatisfaction with the formula percentages was raised in many submissions to the recent Parliamentary Inquiry into child custody and constitutes a recurring theme in Ministerial correspondence.

Child support percentages were identified as problematic by the Joint Select Committee on Certain Family Law Issues, which found that:

the formula percentages recommended by the Consultative Group are arbitrary and simply represent the Consultative Group’s judgement of the appropriate balance points for the Child Support Scheme.

The recent House of Representatives Committee reached a similar position:

After seven years the answers needed to evaluate the formula percentages are still not available.

The Committee considered it imperative:

that independent modelling of the cost of children in separated families […] be undertaken and published to establish what the impact would be if child support payments were based upon those results.

The second of the Taskforce Terms of Reference requires the Taskforce, inter alia, to evaluate the child support formula percentages in the light of research on the costs of children in separated households.

This chapter describes the approach that the Taskforce has taken in determining the costs of children, the different types of research on the costs of children commissioned for the Taskforce, how the results from differing methodologies have been integrated, and, finally, how the Government’s contribution to the costs of children in the form of family payments has been taken into account.

Equivalence scales and estimation of the cost of children

Research on the costs of children can be viewed as analysis of data on how children add to observed couple-household expenditure (the marginal cost approach) or about how much it costs couple households to meet the non-discretionary needs of children (the Budget Standards approach), holding living standards constant. A detailed discussion of the different approaches that have been taken to estimating the costs of children can be found in Matthew Gray’s chapter in Volume 2 of this Report. The costs of children are often expressed as equivalence scales. Equivalence scales show the ratios of incomes that are required to support a given living standard for households with differing numbers of children of differing ages.

The Taskforce has come to the conclusion that there is no ‘true cost’ of a child and that, in the end, it is a matter for judgment—but that this judgment needs to be informed by the existing empirical estimates and be evidence based. Many other reviewers have come to the same view, including the National Academy of Sciences Panel on Poverty and Family Assistance in the United States of America, which undertook a major study on how to measure poverty and equivalence scales (Citro and Michael 1995).

The Taskforce has taken the view that the formula percentages should be based on the best available estimates of the direct costs of children. For the reasons explained in Chapter 7, it considers that the fairest basis for the scheme is the costs of children in intact couple families, with the research on the costs of children in separated families informing the issue of how to take account of the costs of contact.

The Child Support Taskforce used three different methodologies to reach the best and most up-to-date estimates possible of the costs of children in intact Australian families. The Household Expenditure Survey was used to examine actual patterns of expenditure on children. The Budget Standards approach was used to assess how much parents would need to spend to give children a specific standard of living, taking account of differences in housing costs all over Australia. A study was also done of previous Australian research on the costs of children, so that the outcomes of these two studies could be compared with previous research findings. The Australian estimates were also benchmarked against international studies on the costs of children. The detailed findings are reported in the papers cited in this chapter and published in Volume 2 of the Taskforce’s Report. Summaries of the methods and the main findings are given below.

Expenditure Survey approach

The National Centre for Social and Economic Modelling (NATSEM) at the University of Canberra was commissioned to undertake a household expenditure-based study of the costs of children in intact and separated families. In their paper for the Taskforce, Percival and Harding of NATSEM echoed earlier observations about the diffi culties in arriving at a definitive estimate of the costs of children:

Estimating the costs of children is inherently difficult, as many items of family expenditure are often shared among all family members or incurred indirectly by parents. In practice, it is also likely that there are wide variations in the amounts that parents spend on their children, both as family incomes vary and as the sense of what it is proper to spend varies.

Using the publicly released unit record file from the Australian Bureau of Statistics 1998–99 Household Expenditure Survey, with both spending and incomes indexed to 2005–06 prices, the authors developed expenditure-based (or equivalent standard of living) estimates of the costs of children. Using econometric models of Australian household expenditure patterns, this method compares the calculated household expenditure of a couple with children with that of a couple of the same age without children who have an equivalent standard of living. The difference in the calculated expenditure of the two households represents the costs of the children.

It should be noted that this study differs from previous NATSEM studies in that expenditure on childcare was specifically excluded at the request of the Taskforce. This decision was made on the grounds that:

• the 1998–99 Household Expenditure Survey shows the out-of-pocket costs for childcare that parents incurred in that year, and there have been such major changes in childcare rebates since then that it seemed unlikely that 1998–99 spending would provide an accurate guide to likely out-of-pocket outlays in 2005–06;
• childcare costs vary widely between households, therefore including an average childcare cost would have made the percentages too high for families that spend little or nothing on childcare and too low for families that spend significant amounts; and
• childcare costs are a ground for departure from the formula through the change of assessment process.

Percival and Harding used the proportion of total expenditure devoted to a specifi ed basket of goods as their indicator of the ‘standard of living’. It is important to note that this approach attempts to measure what parents actually spend on their children today, rather than what they ‘should spend’ or would spend if they did not have a limited budget.

Costs of children in couple households

Consistent with previous research, the first key finding from this study for the Taskforce was that the dollar costs of children increased with the age of children. While the relationship between spending on children of different ages varied with income, on average older children aged 16 to 17 years were found to cost more than three times as much as children aged zero to four years, a shown in Figure 8.1 below.

The second key finding was that while the dollar costs of children continued to increase with rising family income, costs as a percentage of family income declined as family income increased. For example, for a five to 12 year-old child, costs declined from 18% of the gross income of a low-income family to 11% of the income of a high-income family, as shown in Figure 8.1.

This finding is consistent with the findings of other Australian studies. Almost without exception, these studies have found that the costs of children increase with age.

Figure 8.1: Estimated average gross costs of a single child in couple families, by age of child and family income, 2005–06

Percival R. & Harding A., ‘The Estimated Costs of Children in Australian Families in 2005–06’, in Volume 2 of this Report, p. 11.

A third key finding was that the marginal costs of children fell as the number of children increased, reflecting both economies of scale (such as shared toys or clothing) and the constraints imposed by family finances, with parents simply being unable to continue to afford spending at the same rate on their second and subsequent children. Thus, while the average cost of a child in single-child couple families was estimated at $188 a week, the average additional cost of the second child was estimated at $143, declining further to $115 for the third child as shown in Table 8.2.

Percival R. & Harding A., ‘The Estimated Costs of Children in Australian Families in 2005–06’, in Volume 2 of this Report, p. 14.

Costs of children in sole-parent families

In keeping with the Taskforce mandate, the researchers were also asked to analyse expenditure on children in sole-parent families. This involved comparing the expenditure of sole-parent households with those of single-person households at the same material standard of living. The findings generally followed similar patterns to those for couple households, with the costs of children in sole-parent families also increasing by age and income.

Percival R. & Harding A., ‘The Estimated Costs of Children in Australian Families in 2005–06’, in Volume 2 of this Report, p. 18.

A direct comparison of the costs of children in sole-parent and intact-couple households is hindered by the differences between the income of the two groups and their different household size. However, single-child couple families with a low income of $661 a week spent an estimated 17.2% of their gross income on that child, while sole parents with a single child and an average income of $583 a week spent 22.5% of their gross income on the child. While the income of the latter is about $80 a week less than the income of the former, and this in itself would lead to an increased percentage of income being spent on the child in the sole parent family, this might also be initially seen as suggesting that sole parents incur slightly higher child costs at a given income level than intact couples. However, any remaining difference would also reflect the fact that in couple households an additional adult has to be supported by the family income, which would reduce the amount that could be spent on the child.

Budget Standards approach

In contrast to the Expenditure Survey approach, which attempts to measure what households actually spend on their children, the Budget Standards approach attempts to measure what households need to spend on children to achieve a particular standard of living. The Budget Standards method involves calculating the cost of achieving a given standard of living for a given household type, by identifying and pricing the goods and services necessary for it to achieve that level of consumption at a particular place and time. The estimated costs of a child at a particular living standard level is the difference between a household with a child and that same household without a child. One advantage of this approach is that it identifies the costs of children as if income constraints did not hinder household expenditure.

Although the fundamental motivation behind the Budget Standards, or basket of goods, approach is to achieve a measure of scientific rigour in the estimation of ‘need’, for the construction of meaningful poverty lines or the costs of children, the method is not immune from the need for judgments. Research regarding current community expectations and behaviour can form part of the basis upon which certain items are included or excluded, as can research on nutritional requirements and on health and dental care needs, for example. Like the expenditure survey approach outlined in section 8.3, there are also commonly recognised limitations in the Budget Standards approach:

A budget standard must incorporate both normative and behavioural factors. The former may have an official or quasi-official status if they take the form of offi cial guidelines published by relevant authorities. Many countries, for example, have nutritional guidelines developed and endorsed by such bodies as the National Health and Medical Research Council (NHMRC) or its equivalent and these can be used to develop a food budget. In other areas, where there are no established social norms available, budget standards are based on expert recommendations which have no official status. …The normative standards must also to some extent reflect the actual behavioural patterns of the population if their relevance is not to be severely circumscribed. … The difficulty is how this can be achieved without undermining the ability of a budget standard to reflect normative judgments about needs, as opposed to the resource constraints that also influence actual patterns of behaviour.

Nevertheless, the Budget Standards approach has certain advantages:

A key strength of this approach is that it is sensitive to the circumstances and requirements of different household types, such as geographical location, the number of adults and their labour market status, the age and sex of the children, whether a child has a disability, and housing tenure. Because the estimates are based on a detailed list of goods and services, the assumptions are relatively transparent and therefore more readily open to debate and alteration. As the approach is normative, it also overcomes distortions in measuring the cost of children due to income constraint in low-income households.

The Taskforce commissioned Dr Paul Henman of the University of Queensland to produce updated costs of children estimates in each Australian capital city using the Budget Standards approach. The estimates represent an update and extension of those previously published by Henman and Henman & Mitchell, and refl ect changes in prices.

Household budget standards, and the resulting costs of children are calculated at two living standard levels rather than income levels:

• ‘modest but adequate’, representing middle Australia; and
• ‘low cost’, representing low-income households.

Budget standards for over 50 household types were constructed by varying household composition (the number of adults and the number, age and sex of children—girls aged three and six, and boys aged 10 and 14), and the employment status of adults. Private renting at the median price level was assumed. The annual gross costs of raising a child were estimated for each capital city using the June quarter in 2004 as the reference period. They were derived using the difference technique, that is, by subtracting the budget standard for a couple-only household from a couple-with-child household.

Costs of children in couple households

Like the Percival and Harding study, the Henman study for the Taskforce found that the gross costs of children (with childcare costs excluded) increased with age and family income. However, the differences between children of different ages were lower than found in the Percival and Harding study. For example, Henman estimated that the weighted average cost across the eight capital cities for a family at a ‘modest but adequate’ income level and with only one parent employed full-time and the other not in the labour force, varied from $6,500 a year for a three year old to $10,300 for a 14 year old. For a couple with the same labour force status but at the ‘low cost’ standard of living, costs varied from $4,910 for a three year old to $7,850 for a 14 year old.

While the budget standard costs can vary widely depending upon the precise circumstances of the families, this suggests that the gross costs of children are substantially higher but still less than double for older children relative to younger children, with budget standards thus producing less differences in cost by age than the expenditure survey approach used by Percival and Harding. The Henman results also suggested that a ‘middle income’ couple family spends about 30% more on a single child than a ‘low income’ couple. This relative difference between low- and middle-income families was again lower than the differences found by Percival and Harding.

Table 8.4 shows the gross costs of one child, including childcare, for couple and sole-parent households with various child ages and parental working arrangements. It also gives the childcare component of these total costs.

Henman cautions that it is difficult to draw firm conclusions about the extent to which the marginal costs of the second and subsequent children are lower than that of the first, as the Budget Standards approach is tied to specific ages for each child. However, his averaged costs for the first child equal 20.1% of household disposable income, while those for two children of specific ages equal about 33% of household disposable income, those for three children about 39% and those for four children about 45% of household disposable income. These percentages are, of course, different to the Percival and Harding percentages, as they relate to disposable income rather than gross income, but they are nonetheless suggestive of decreasing marginal costs as the number of children increases.

Note: The costs shown are the weighted average costs for the eight State and Territory capital cities (see Henman, 2005, Tables 1 and 5). The column headings to the left relate to the labour force status of the sole parent in sole parent families. In every case, in couple families one parent is assumed to be working full time and the other has the labour force status shown here for the primary carer. Key: F=parent in full-time employment; P=parent employed part-time; N=parent full-time carer and not in the labour force; MBA=Modest But Adequate living standard level; LC=Low Cost living standard level.
Henman P. , ‘Updated Costs of Children Using Australian Budget Standards’, in Volume 2 of this Report, pp. 7 & 13.

Costs of children in sole-parent families

The Henman study also examined the costs of children in sole-parent families. As with a child or children in a couple household, Henman found that the cost of one child in a sole-parent household generally increases with age, but this varies depending on the requirement for childcare services (which depend on the labour market status of the parent and the child’s age). For example, for a sole parent of a three year old at the modest-but-adequate living standard level, the cost of the child ranges from an average of $17,860 per annum when the parent is in full-time employment, to $5,740 when the parent is not in the labour force as a result of being a full-time carer. This is a signifi cant difference, due entirely to childcare costs of $12,630 per annum.

Sole parents at the low-cost level face annual costs of a lower bound of $3,500 for raising a three year-old to $6,850 for a 14 year old. For a similar ‘modest but adequate’ sole parent who is not in the workforce, the costs are from $5,740 per annum to $9,540 respectively.

Compared with couple adult households, sole parents face a range of different circumstances and expenditure concerns. Much previous research tended to fi nd that sole parents face greater expenditure costs when raising their children, relative to couple adult households. This results from greater needs for childcare and respite, and the purchase of household services to help manage the juggling of raising children with only one adult. The Australian Budget Standards research found that while this occurs for ‘modest but adequate’ households (where the parent is assumed to be employed), this is not the case in ‘low cost households’ (where the parent is assumed to be a full-time carer). This is due to the fact that low-income sole parents are able to access a large range of substantial savings using their pension card attached to receipt of Parenting Payment (Single). This saving is worth about $1,500 per annum.

The costs of children where contact occurs

One of the innovations requested by the Taskforce was that Henman examine the financial costs of contact. The above discussion of costs of children in separated families only relates to the situation when one parent has 100% care. However, in many situations both parents have care of the child, even if the level of care is significantly uneven.

Previous research has shown that non-resident parents who exercise regular contact with the child of 15% to 30% of the time face considerable costs for caring for the child, well in excess of the proportion of care exercised.In particular, a non-resident parent with 20% contact faces more than 20% of the costs of the child when cared for 100% of the time by either a sole-parent or a couple-parent household. This disproportionate cost results from costs in providing basic infrastructure for the child (such as a bedroom, some clothes and toys) as well as communication and transportation costs in coordinating and undertaking contact.

Henman found that a non-resident parent (at a modest-but-adequate living standard level, working full-time) with 20% care of a six-year-old child has average costs that amount to 38% of the cost of the child in 100% care with a sole parent. However, the converse is that the resident parent with 80% care incurs 99% of the cost borne had he or she been caring for the child 100% of the time. Altogether, in this separated household, the total costs of this child are, on average, 37% more than the total costs of raising the child completely in a single household.

Looking at the equivalent low-cost household, when regular contact occurs, the non-resident parent faces average costs that are 60% of the cost of raising a child in one household. Altogether, the total cost across the two households is 59% greater than the cost of raising the child in one household.

These results demonstrate that when contact occurs, the total costs of raising the child significantly increase. This occurs because of the need to duplicate infrastructure to support the care of the child in two households.

This increase is also evident in the case of shared care, where Table 6 in Henman shows that the costs are relatively equally distributed between both parents, but the costs borne by each parent with 50% care represent around 71% of the cost borne when 100% care is exercised for modest-but-adequate households, and 87% in low-cost households. Thus, when equal care occurs, the overall costs increase by 43% for modest-but adequate-households and 75% for low-cost households, relative to raising a child 100% in one household.

Literature review

Finally, to inform its thinking on the gross costs of children, the Taskforce asked Dr Matthew Gray of the Australian National University to undertake a literature review of the costs of children in earlier Australian and international studies. Gray took the approach of calculating the average of the majority of Australian studies of the costs of children published since 1985. This approach has previously been used by Whiteford, who calculated the average of all Australian studies published before 1985.

For the purposes of the Child Support Scheme, a useful way of presenting the costs of children is as a proportion of family income, and the costs for couple families with one, two, three and four children are presented in Table 8.5. The ‘average’ of the post-1985 studies is for an average-income family and is averaged across the ages of children. Couples with one child are estimated to spend 16% of their income on that child. Couples with two children are estimated to spend 28% of their income on their children, three children 37% and four children 40%.

Gray M. ‘Costs of children and equivalence scales: A review of methodological issues and Australian estimates’, in Volume 2 of this Report, p. 18.

Taskforce estimates of the costs of children

As can be seen from the preceding three sections, although the particular techniques and underlying assumptions used to estimate the costs of children affect the level of costs, both the household expenditure and the Budget Standards approaches (along with much other previous work) produced some consistent findings regarding the gross costs of children. These are that:

• the costs of a child generally increase with age;
• there are economies of scale, so that, in general, each additional child costs less than the last; and
• the dollar costs of children increase with family income but decline as a proportion of income.

Given the differences between the costs of children produced using the expenditure survey and basket of goods approaches, and informed by Gray’s research on earlier overseas and Australian estimates of the costs of children, eventually the Taskforce had to reconcile these different estimates and produce its own agreed costs of children estimates.

Informed by the evidence base that it had assembled, the Taskforce eventually adopted the following gross costs as a percentage of the gross income of families as reasonable estimates for middle-income families with around $50,000 to $60,000 in gross household income in 2005–06.

Note: ‘middle-income families’ means couple families with gross incomes in the vicinity of $50,000 to $60,000.

Use of two age groups

While the above ‘gross costs as a percentage of gross income’ percentages were originally calculated for four age ranges, as shown in Table 8.6, the Taskforce decided to recommend that only two age ranges be used in any revised child support scheme. While the current Child Support Scheme payment rates do not vary with the age of children, the Taskforce decided that the differences in cost between older and younger children were sufficiently great that some differentiation should be introduced within the system. However, the Taskforce decided that children under five should be grouped with those aged six to 12, and the percentages applied should be those of the older group, which are higher. This was to take into account the costs of childcare that can be faced by the parent who has major care of a child under five and wishes to undertake paid work, and the opportunity costs that resident parents face when children are very young. A further reason was administrative simplicity.

Given the modest differences between the costs as a percentage of income for children aged 13 to 15 and those aged 16 and over, and to enhance administrative simplicity, the Taskforce also recommended a single age band for children aged 13 and over. The fi nal gross costs as a percentage of gross income for middle-income families endorsed by the Taskforce are shown in the two right-hand columns of Table 8.6.

Costs at different income levels

The research by Percival and Harding demonstrated in detail how the costs of children decline, as a percentage of total household income, with increasing incomes (see Figure 8.1 in section 8.3.1). Using their research findings, NATSEM was able to develop a series of gross costs of children curves for the Taskforce, varying with the age and number of children and gross family income. The Taskforce accepted the relative differences between the costs faced by intact families at different income levels produced by the Percival and Harding expenditure survey approach, but all the gross cost curves were appropriately raised or lowered so that the gross costs as a percentage of gross family income for middle-income families aligned with the Taskforce agreed gross costs shown in Table 8.6. The resulting Taskforce agreed gross costs, both as a percentage of gross family income and in dollar terms, are illustrated in Figure 8.7 for a couple family with two children aged between zero and 12 years.

Figure 8.7: Illustrative Taskforce agreed estimates of the gross costs of children for a couple with two children aged 0–12 years, 2005–06

Note: The gross income figures have been rounded to the nearest $1,000.

The net costs of children

The costs of raising children have always been split between parents and the community, with the latter form of support effectively occurring through taxpayers funding the provision of cash transfers or services used by families with children.

During the period since the establishment of the Child Support Scheme in 1988, the Federal Government has sharply increased the real value of the cash transfers paid to families with children, with Family Tax Benefit (FTB) Part A now comprising the main form of cash assistance from the Federal Government. This means that the community as a whole now plays a much more substantial role in sharing the costs of children in all types of families, particularly those at the lower income levels. Indeed, for some very low income households, research presented to the Taskforce suggested that government benefits meet the full measured costs of children in intact households.

Consequently, and as explained in Chapter 7, the Taskforce believes that the fairness of child support liabilities must be based on the contribution parents normally make out of their own earnings in intact families towards the costs of raising their children, rather than the total costs. Such ‘net’ costs of children are the gross costs of children minus the contribution of Government through FTB Part A.

The Taskforce formed the view that the best way of recognising the contribution of government family benefits is to calculate the costs of children in a way that takes into account the contribution of FTB Part A. When the gross costs of children for intact families, described in the preceding section, are reduced by the amount of FTB Part A received by that family at their income level, this provides the net costs of children in intact couple families. The Taskforce recommends that the net costs of children percentages be used in the child support formula.

The Taskforce was required to make a range of assumptions to move from estimates of the gross costs of children at various gross family income levels for couples to the net costs of children at various taxable income levels for separated parents, as required for the implementation of a new child support formula. One of the diffi culties, for example, is that intact couple families at the same level of gross household income may have very different taxable and disposable incomes, because of differences in the labour force participation of the parents, with consequent effects upon their spending on their children.

In addition, any unadjusted net costs of children line is not a smooth curve, due to the impact of the withdrawal of more-than-minimum FTB Part A and then, subsequently, minimum FTB Part A. This occurs when increases in taxable income are not matched by commensurate increases in net spending on children, due to the income tests associated with FTB Part A and thus the withdrawal of this form of government assistance. The Taskforce accordingly smoothed the net costs curves, to provide greater policy and administrative simplicity, as well as greater certainty to parents about their liabilities.

It was also necessary to take account of the impact of the Maintenance Income Test. Furthermore, the Taskforce agreed net costs of children also needed to take account of other aspects of the child support policy, especially the self-support threshold, the minimum payment, and workforce incentives. Ultimately, the Taskforce decided that a self-support threshold with a series of subsequent income thresholds, and a reducing series of net child cost percentages, provided a sufficiently accurate and administratively workable representation of the net costs of children.

Figure 8.8 illustrates the Taskforce agreed net costs of children for two children aged 0–12 years, as embodied in its recommended new formula, and compares them with current payments under the Child Support Scheme. Figure 8.9 illustrates the agreed net costs for two children aged 13–17 years and compares them with current payments under the Child Support Scheme.

Figure 8.8: Taskforce agreed net costs of children as a percentage of taxable income compared with current Child Support Scheme liabilities for two children aged 0–12 years

Note: The estimates are for where there are two-child support children aged 0 to 12 years, the resident parent’s taxable income is below the self-support threshold, and there is no regular contact by the non-resident parent. All taxable income figures have been rounded to the nearest $1,000.

Figure 8.9: Taskforce agreed net costs of children as a percentage of taxable income compared with current Child Support Scheme liabilities for two children aged 13–15 years

Note: The estimates are for where there are two-child support children aged 13 to 15 years, the resident parent’s taxable income is below the self-support threshold, and there is no regular contact by the non-resident parent. All taxable income figures have been rounded to the nearest $1,000.

Larger families

FTB Part A is paid at the same rate for each child within a particular age range, with a large family supplement usually payable to families with four or more children. Thus, a family with three children aged less than 12 years receives three times as much FTB Part A as a family with one child. As a result, and according to the evidence on the costs of children examined by the Taskforce, FTB Part A does not reflect the reduction in average spending on children that occurs as family size increases. Because of this, at lower family income levels, FTB Part A meets a higher proportion of the gross costs of children in larger families than it does in smaller families. This means that the net costs of children—those costs which remain to be covered by the parents rather than the taxpayer—do not increase as rapidly as the gross costs of children as family size increases.

This discrepancy—between the uniform ‘per child’ rate of FTB Part A paid by Government and the declining average spending per child that apparently occurs in the real world as family size increases—explains why the net costs of children expressed as a percentage of taxable income after the exempt income for self support (see Table A: Cost of Children, in Chapter 9) look very different to the gross costs of children expressed as a percentage of gross income (shown in Table 8.6).

The marginal costs of the third, fourth and fifth child produced by Percival and Harding and shown in Table 8.2 suggested that, in low-income families, such children cost about $80 a week or less, with the picture being reasonably similar for the fourth and fifth child in middle-income families. As the maximum rate of FTB Part A in 2005–06 for children aged less than 13 years is about $80 a week, this indicates that for many families the net costs of four and five children are no higher than for three children. The key exception to this is for very high income families, who are not eligible to receive FTB Part A.

Given that the number of such large high-income families is relatively small, and that the differences between net costs for families with three children and those with more children were very similar at lower to middle-income levels, the Taskforce decided to recommend that a single child support rate be applied for three or more children.

Figure 8.10 illustrates the new Taskforce agreed net costs of children for one to three children aged 0–12 years. The smaller distance between the curves for three and for two children than for between the curves for two children and for one child graphically illustrates the estimated lower marginal net cost increases associated with second and subsequent children.

Figure 8.10: Taskforce agreed net costs of children, by number of children aged 0–12 years

Note: All taxable income figures have been rounded to the nearest $1,000.

Children in different age groups

There are cases where all of the child support children do not fall into one of the two age groups recommended by the Taskforce, namely 0–12 years and 13 years and over. In such cases, the Taskforce recommends that the rates applying within each of the income bands represent a simple average of the two rates. The Taskforce did examine the possible impact of using a weighted average rate (for example, with the applicable percentage being the result of the weighted average for two children aged 0–12 years and one child aged 13 years or over where there was a family with three such child support children). However, as there were relatively few such large child support families, and as the weighted average made only a small difference to the results, the Taskforce decided to opt for administrative simplicity and use a simple arithmetic mean. The resultant Taskforce recommended net costs of children percentages are shown in Table A: Costs of Children, in Chapter 9.

Very high income families

The NATSEM expenditure-based research for the Taskforce suggested that, at very high income levels, the growth in both the gross and net costs of children began to reduce. Thus, at income levels above around $130,000 a year, increases in taxable income resulted in lower increases in spending on children than for families further down the income spectrum. This reflected the falling percentage of gross income spent on children as income increased, which was discussed earlier (see Figure 8.7). Accordingly, the Taskforce decided that it was reasonable to impose a ceiling on the maximum level of child costs that any parent could be expected to meet. This is reflected in the proposed cap on liabilities once Child Support Income reaches $126,620 (which, if both parents have adjusted taxable incomes above their self-support amounts, equates to a combined adjusted taxable income of $160,386).

Costs for separated families

The research commissioned for the Taskforce does not clearly indicate that separation per se increases the costs of children.

The Terms of Reference required the Taskforce to consider ‘data on the costs of children in separated households at different income levels, including the costs for both parents to maintain significant and meaningful contact with their children’. This chapter has reported on those fi ndings.

As discussed in Chapter 7, the Taskforce concluded that the Child Support Scheme percentages should continue to be based upon the estimated spending upon children in intact couple families, giving preference to the ‘continuity of expenditure’ principle over any possible differences in costs in separated families. The lack of a clear evidence base for working out the costs of children in separated families was an additional reason for reaching this conclusion. The Taskforce concluded that the main rationale for looking at the costs of children in separated families was in terms of the combined increased costs where care is being shared or the non-resident parent is having regular contact.

Costs of contact

The research commissioned by the Taskforce did suggest that contact is associated with increased costs for the non-resident parent, allied with less-than-proportionate reductions in costs for the resident parent. In other words, the total costs of children were higher when their care was shared between two households, relative to spending all of their time in one household.

The difficult policy question is how to recognise these significantly increased total costs of children when being cared for in two households. One option is for the Government to provide extra assistance through a cash benefit in these situations, as the House of Representatives Standing Committee on Family and Community Affairs proposed. This is, of course, a matter for the Government; it was not one of the recommendations of the Committee on which the advice of the Taskforce was sought.

A second possibility is to inflate the total measured costs of children when contact occurs and distribute the costs between the two parents accordingly. This is done in some States in the USA. Although this approach visibly recognises the increased costs, it does so with greater policy complexity.

The third approach, which the Taskforce has recommended, is to apportion the costs of the child in a way that tries to reflect the relative costs each face in having contact. Accordingly, the recommendation is that the costs associated with care between 14% and 30% of nights be better recognised than in the existing system by reducing a payer’s child support liabilities. This is explained in the next chapter.