4. A new child support formula for Australia
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.
There are many factors that need to be taken into account in a child support formula. These include the economies of scale that apply in families with different numbers of children, or with children of different ages or gender, how income of the resident parent should be taken into account, how opportunity costs and childcare expenses should be treated, and how shared care should affect child support obligations. Such issues remain matters for judgment using the best available evidence.
In undertaking the review, the central concern of the Taskforce was the wellbeing of children after separation. However, the Taskforce also recognised the importance of balancing the interests of the parents and ensuring that the fundamental principles of the Scheme reflect community values about child support in Australia.
4.1 The basis for calculating child support obligations
Although a number of different factors were considered by the Consultative Group that proposed the formula in 1988, its starting point was that, wherever possible, children should enjoy the benefit of a similar proportion of the income of each parent to that which they would have enjoyed if their parents lived together. This includes not only the proportion of income spent on consumables such as food, but a proportion of the costs of all goods shared by members of the household, such as housing, running a car, and fuel bills.
This is known as the ‘continuity of expenditure’ principle. It has been the basis not only of the Australian Scheme but of many others around the world. It does not mean that children will necessarily be able to maintain the same living standards after their parents’ separation as they enjoyed before. Children’s living standards depend on the overall income of the households in which they spend their time. However, the Consultative Group considered that this principle was the best starting point for calculating an appropriate level of child support.
The Child Support Taskforce agrees that this remains the fairest basis on which to calculate child support. 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, and the financial needs of the children’s primary caregiver following separation are an important factor that courts consider. They 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, the provision of Family Tax Benefit (FTB) B for sole parents, Rent Assistance, special health care benefits and the Pensioner 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. For that reason, it is proper that child support obligations be based on the best available evidence of how much children cost to parents with different levels of combined household income.
4.2 The costs of children in separated households
The Taskforce was asked to consider the costs of children in separated households. Where there is regular contact between children and non-resident parents, the costs of children increase significantly because of the duplicated infrastructure costs of running two households. These costs include housing, furnishings and motor vehicles, the loss of economies of scale in the one household in terms of energy costs and other shared expenses, and the costs involved in exercising contact, especially transportation.
Both parents are likely to experience at least part of these increased costs of raising children if the children are spending significant amounts of time with both of them. How those additional costs are distributed between the parents depends on a number of different factors, including the division of property when the parents separate, and the transport arrangements for contact visits. The Taskforce has taken account of this research in its recommendations on how to factor the costs of contact into the formula.
4.3 Issues with the current formula
While the Child Support Taskforce agrees that the ‘continuity of expenditure’ principle remains the best starting point for considering an appropriate level of child support, it considers that the current formula is no longer appropriate as the basis for child support liabilities in 2005—for the following reasons.
Fixed percentages
The formula assumes that, across the income range, people spend the same proportion of their income on children. This justifies the fixed percentages above the self-support component based on the number of children being supported. However, the research of the Taskforce, and the preponderance of international research published since 1988, shows that, while the higher the household income, the more parents spend on their children in dollar figures, expenditure declines as a percentage of their income. The impact of marginal tax rates is one reason that spending on children does not increase in proportion to the increases in people’s taxable income. Furthermore, as income increases, expenditure becomes more discretionary. Parents who are already providing a comfortable standard of living for their children may choose to put more money into savings or to spend additional income in ways other than on their children.
These research findings make it difficult to justify the fixed percentages of taxable income under the present Scheme. 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, especially for one or two children under 13 years of age.
Set percentages, irrespective of age
- The current formula applies the same percentage of income irrespective of the age of the children and therefore is not sensitive to the difference in the costs of children as they grow older. Research suggests that expenditure on teenagers is two to three times as high as for younger children, and this pattern prevails at every income level. While the approach of averaging the costs of children over the entire age range has the merit of simplicity, it means that child support payments are likely to be inadequate at the time that the costs of children are at their highest, and too high when the children are younger.
The need to reflect two incomes
- The substantial increase in the part-time employment of women with children since the Scheme was introduced means that a majority of intact families with children depend on two incomes. The formula, however, is based only on the non-resident parent’s income for the great majority of families, since the resident parent’s income is only factored in above the threshold of average weekly earnings for all employees. It is therefore not obvious to child support payers that both parents are sharing in the cost of supporting their children according to their capacity.
Children of second families
- The way in which children of second families are taken into account under the current formula is of significant benefit to low-income non-resident parents but does not provide much relief for those on higher incomes who have new children to support. This is because payers with new biological children are given a dollar-figure increase in their exempt income before the relevant percentage is applied. This does not reflect the reality that expenditure on children increases with household income. For low-income payers, this figure represents a large increase as a percentage of their income, but it is proportionally only a small increase for higher-income payers. At both ends of the income spectrum, this results in unequal treatment of the children of the non-resident parent, as the amount allowed for the support of the new children may be much higher or much lower than the likely costs of the new children, and has unjustifiable effects on the level of the payer’s liability to the child support children. In some cases, the increased exempt amount may have the effect of reducing the payer’s child support obligation to a minimal level.
4.4 A new approach to the calculation of child support
To address these problems, the Taskforce proposes a fundamental change to the Child Support Scheme.
The essential feature of the proposed new Scheme is that the costs of children are first worked out based upon the parents’ combined income, with those costs then distributed between the mother and the father in accordance with their respective shares of that combined income and levels of contact (see section 6). The resident parent is expected to incur his or her share of the cost in the course of caring for the child. The non-resident parent pays his or her share in the form of child support. Both parents will have a component for their self-support deducted from their income in working out their Child Support Income.
This gives practical expression to the first objective of the Scheme, that parents share in the cost of supporting their children according to their capacity. The proposed Scheme is based upon the ‘income shares’ approach utilised in many other jurisdictions and reflects the notion of shared parental responsibility contained in Part VII of the Family Law Act 1975.