5. Assessing the costs of children
There is no ‘fixed cost’ of children. The costs of children vary in accordance with the level of income of the parents. Estimates of the cost of raising children are therefore based upon evidence about patterns of expenditure on children, or the amount of money that is needed to attain a particular standard of living.
5.1 Three approaches to estimating the costs of children
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 all 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. Ultimately, the Taskforce made a considered judgment about the best estimates of the costs of children.
Research on the costs of children can only provide a broad estimate. For example, because it includes a proportion of the housing costs incurred by the family, the costs of children will vary depending on the location of the family. The costs of raising children are therefore much higher in most capital cities than in small regional centres or country areas. While the Taskforce considered housing costs in different locations, it was necessary to average out the housing costs for the purpose of the child support formula. The averages also take no account of the gender mix of children. There are likely to be greater economies of scale in a family with two children of the same gender than if the family has a boy and a girl.
5.2 Taking account of government contributions towards the costs of children
Estimates of the gross costs of children are based upon total household income, including government benefits. In order to assess how much the parents spend of their own incomes on children, it is therefore necessary to take account of those benefits.
Raising children in intact families is a partnership of both parents and the government. The government assists most families with the costs of children, especially through FTB A, which is paid on a per child basis. For lower-income families in particular, it provides substantial tax-free financial assistance. In order to work out the amount that it would be reasonable to expect a non-resident parent to pay in child support, it was therefore necessary for the Taskforce to take account of the FTB A that is paid to parents in an intact family at different income levels.
The estimates of the costs of children, less the amount of FTB A in an intact family at that level of household income, gave the Taskforce an estimate of the ‘net costs’ of children in intact families. Its recommendations concerning the level of child support that ought to be paid are based as far as possible on these estimates of the net costs of children.
5.3 Taking account of childcare costs
In order to take account of the costs of childcare or income forgone by being out of the workforce to care for young children, the costs of children aged 0–12 have been based upon the research evidence on the costs of 5–12 year-old children. These are substantially higher than the costs of children 0–4. Where childcare costs are particularly high, as they are in some parts of the country, the parent incurring this cost will be able to apply for a change of assessment to help meet this cost. This is an existing ground for a change of assessment under the Scheme.
5.4 A Costs of Children table not based upon fixed percentages of income
In the proposed new formula the costs of children should be expressed in a Costs of Children table (see Table A of this report) based upon the parents’ combined Child Support Income in two age bands, 0–12 and 13–17. This division reflects the fact that expenditure on teenagers is generally much higher than for younger children. Where there are children in different age bands in the one family, the costs of the children should be the average of the amounts applicable in each band, as expressed in Table A: Costs of Children.
However, these costs will not be expressed as fixed percentages across the entire income range. Since parents spend a higher amount on children the more money they have, but spend less as a percentage of their household income in the higher income ranges, the percentages applicable in this formula gradually decline as combined taxable income increases.
As a consequence, under the new Scheme a liable parent with a high income will pay much more in child support than a parent on a low income, but less as a percentage of his or her taxable income than the parent on a low income. Similarly, where the resident parent is earning a sufficient amount that the combined Child Support Income of the parents takes them into a higher bracket, then her or his income will reduce the amount that the non-resident parent has to pay. It will do so in a much more graduated way than under the current formula, which reduces liabilities more rapidly than is justified by the research on the costs of children. Under the proposed formula, child support obligations will be based upon the relative difference between the parents’ respective incomes.
As household income levels rise far above the community average, it becomes difficult to measure further increases in expenditure on children, and spending becomes increasingly discretionary. The Taskforce has recommended that the costs of children be capped at a combined Child Support Income of 2.5 times MTAWE (male total average weekly earnings, as reported by the Australian Bureau of Statistics). Where both parents have adjusted taxable income over the self-support threshold, this equates to a projected maximum combined income for 2005–06 of $160 386. As at present, this cap can be exceeded through the change of assessment process. The most likely situation for this would be to deal with very high private school fees. All other thresholds are expressed as a proportion of MTAWE above the self-support amounts, so that the formula is indexed annually.
The Taskforce gave consideration to the commonly advocated idea that child support should be based on after-tax income - but rejected this for a range of reasons, as previous inquiries have done. However, the recommendation that the Child Support Scheme should not be based on fixed percentages of income takes account of the impact of taxation in a different way. The costs of children that are the basis for the proposed new formula reflect the fact that higher-income families pay a greater percentage of their income in tax, and this is one reason why they spend a lower percentage of their income on children. 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.
5.5 Number of children
In the proposed formula the costs of children will be expressed for one child, two children and three or more children, rather than up to five children as it is at present. This simplification is possible because after taking account of the impact of FTB A, the Taskforce found that family spending on four or more children is little different from that on three children. FTB A is payable on a per child basis, and does not take account of the economies of scale that are possible for larger families. This means FTB A is proportionately more generous to large families. While families with higher incomes receive less FTB A, and may not receive any at all, their capacity to spend on each child is constrained as the number of children increases. Consequently, approximately the same proportion of income is spent on four or more children as would be spent on three.
5.6 An increased self-support amount
The Taskforce proposes that the current self-support amount, which is currently set at 110 per cent of Parenting Payment (Single) ($13 462 in 2005), be increased to one-third of MTAWE. In the 2005–06 financial year this is projected to be $16 883. This increase is justifiable because the Taskforce research shows that, after taking account of the numbers of children in the household, resident parents have significantly higher equivalised disposable incomes (that is, taking into account the size and composition of the household) as a result of government benefits than non-resident parents who are on incomes below the proposed self-support threshold. The self-support component should be the same for both parents.
The increased self-support component will improve workforce incentives for both parents. Parents on Newstart will be able to take on casual or part-time jobs to supplement their benefit, without it affecting child support until their earnings reach a level close to where entitlement to Newstart cuts out. Parents on other income support payments will also be able to keep some of their casual or part-time earnings without this affecting child support.
5.7 Second families
Children from first and second families ought to be treated as equally as possible. The Taskforce proposes that this should be achieved by taking the amount that the non-resident parent would pay for the new dependent child if he or she were paying child support based upon his or her income alone, and then deducting this amount from his or her available financial resources (together with the self-support amount) in working out his or her capacity to pay child support for the child or children in the first family. This method should replace the current approach of increasing the non-resident parent’s self-support component to 220 per cent of the partnered pension rate plus an additional amount depending on the age of the child or children in the new family.
While some parents with second families may receive a reduced allowance for the new child or children on the basis of this principle compared to the present provisions, the effect of this recommendation needs to be considered together with the impact of all the other recommendations, including a greatly increased self-support amount, fairer recognition of the costs incurred in contact, recognition that the same percentages of before-tax income should not be applied across the income range, and other changes to the way in which child support obligations are calculated. The availability of FTB to the second family should also be taken into account.
5.8 Child support children in different families
Where a non-resident parent is required to pay child support to children in two or more different households (having two or more child support cases), his or her contribution to the costs of these children should be calculated using his or her income only. The percentages applicable to the total number of children should be used. The resulting cost should be divided evenly amongst the child support children on a per capita basis. This is consistent with the principle recommended above in relation to second families.