House of Representatives

Explanatory Memorandum

(Circulated by authority of the Minister for Family and Community Services, Senator the Hon Jocelyn Newman)

Chapter 16 - Assessment On Most Recent Taxable Income

Overview

16.1 Schedule 16 of the Bill will amend the Child Support (Assessment) Act 1989 (the Assessment Act) to enable child support assessments to be calculated using the most current taxable income available for each parent.

Summary of the amendments

Purpose of the amendments

16.2 The purpose of the amendments is to enable child support assessments to be based on current taxable incomes as they become available. This will address community concerns that the present assessment process, based on taxable incomes from a financial year ending two years beforehand, is not a true reflection of parents' capacity to provide child support.

16.3 The following measures will ensure administrative assessments more accurately reflect parents' capacity to provide for their children by:

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removing the alignment of the child support year with a financial year

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retaining taxable income as the starting point for calculation of child support payable but using the most current taxable incomes of both parents thereby removing the need to apply an uplift factor

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requiring the Registrar to issue a new child support assessment as soon as practicable after a new taxable income becomes available

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providing for a child support period to be up to fifteen months

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revising the estimate provisions.

Date of effect

16.4 Immediately after the commencement of "Adjustment of Child Support Income Base" amendments in Schedule 15 and will not apply in relation to the 1998-99 child support yearor any earlier child support year.

Background to the legislation

Taxable incomes used in child support assessment

16.5 An administrative assessment of child support is calculated according to a formula using each parent's taxable income as a starting point. Before the beginning of each child support year, which is currently the same as a financial year, an administrative assessment is raised and issued. The assessment lasts for the duration of the child support year, subject to variations where a person's circumstances change.

16.6 The taxable income used as the starting point in the calculation is up to two years old, and therefore an uplift factor is applied to the taxable income to update this figure (based upon a forecast percentage increase in Average Weekly Earnings). The Joint Committee received submissions relating to the uplift factor and proposed Recommendations 130 and 131 to address these concerns.

Estimate provisions where taxable income for child support purposes is estimated to have changed

16.7 If a person estimates that their income during the current year will be at least fifteen percent less than the income on which their child support is calculated, the person can elect that the estimated income amount be used as the basis for assessment. When an income tax return is subsequently lodged for the year of the estimate, the actual taxable income is reconciled against the estimated amount. If the actual taxable income is more than the estimated income amount, the child support assessment is recalculated using the actual taxable income

16.8 The Joint Committee received a number of submissions relating to the estimate provisions. Recommendations 124 to 129 were proposed to address these concerns.

Explanation of the amendments

How assessments are to be made

16.9 The amendments provide that where the Registrar accepts an application for administrative assessment the Registrar must, as quickly as practicable, assess an annual rate of child support payable by the paying parent to the carer entitled to child support. The initial child support period will begin on the day the application was made. [Item 22 - repeal subsection 31(2) and insert new subsection 31(2); insert note at end of subsection 31(2) to indicate that new Part 4A deals with later child support periods; Item 64 - repeal subsection 93(2) and insert new subsection 93(2)]

Taxable income

16.10 Under the proposed amendments, the Registrar will be required to calculate the annual rate of child support payable in subsequent child support periods. The procedure for doing so is outlined in a new Part in the Act. [Item 23 - insert new Part 4A that deals with assessments of later child support periods]

16.11 The Registrar will be required to make a new assessment as soon as the paying parent's new taxable income becomes available. [Item23 - insert subsection 34A(1) in new Part 4A]

16.12 As soon as practicable after the tax assessment is made the Registrar must assess the new annual rate of child support payable. The new child support period will start on the first day of the next named month. [Item 5 - insert definition of "named month"; Item 23 - insert subsection 34A(2) in new Part 4A]

16.13 If the carer entitled to child support lodges a tax return, but the new taxable income does not affect the amount of child support payable, then the Registrar will not issue a new child support assessment. [Item 23 - insert subsection 34A(3) in new Part 4A]

16.14 Where an agreement, determination under Part 6A, or court order provides that either the rate of child support payable or the parent's adjusted income amount has been worked out without reference to taxable income, then the Registrar will not be required to issue a new assessment upon a new taxable income becoming available. A new assessment reflecting the terms of the agreement, departure order, or court order will be made. [Item 23 - insert subsection 34A(4) in new Part 4A; Item 65 - insert paragraph 94(1)(d); Item 66 - after "such action" insert the words "(if any)" in subsection 94(1); Item 67 - insert note after subsection 94(1)]

16.15 The Registrar will not be required to raise a new child support assessment (giving rise to a new child support period) where a taxable return is lodged if the earlier child support period ends before the new period starts. [Item 23 - insert subsection 34A(5) in new Part 4A and insert a note]

16.16 If the Registrar accepts an agreement made in relation to a child which affects the rate of child support already payable under an assessment (or previous agreement) then the Registrar must assess the annual rate of child support payable. The child support period in this case will begin on the first day for which the rate of child support payable for the child is affected by the agreement. [Item 23 - insert section 34B in new Part 4A; Item 70 - repeal paragraph ^98U(4)(a) and insert new paragraph ^98U(4)(a) to include a reference to new section 34B]

16.17 The Registrar must assess the annual rate of child support payable by a paying parent before, or as soon as practicable after, the start of the child support period. The following exceptions apply to modify this general rule where:

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the period starts when an application is made under Part 4

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the period starts when parents apply for an agreement where previously an assessment was in place

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a new annual rate has been calculated as a result of a new taxable income

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the period starts on the first day from which an agreement would affect the annual rate of child support payable by the paying parent to the carer. [Item 23 - insert section 34C in new Part 4A and insert notes]

16.18 If a person fails to lodge a tax return so that a new taxable income is not available, the Registrar will review the assessment before the end of fifteen months from the commencement of the assessment. The Registrar will then issue a new assessment using an appropriate income amount, determined in accordance with the existing section 58.

16.19 A number of consequential amendments are required to reflect the change to the taxable income figure now used in assessments. [Item4- repeal definition of "last relevant year of income" in section 5 and insert new definition of "last relevant year of income"]

16.20 As a result of the amendments changing the taxable income, examples currently used to illustrate how a child support liability is calculated need to be updated. The new examples show that an inflation factor is no longer applied. [Item 31 - repeal the examples at subsection 54(2) and substitute new examples]

16.21 As the income figure on which assessments are based will be the most recent taxable income available no inflation factor will be applied to "update" that income. A number of consequential amendments are required to remove provisions that deal with or refer to the inflation factor. [Item 34 - repeal section 55 (Updating of taxable income); Item 40 - omit "(as multiplied by the inflation factor (if any) applicable to the child support year under regulations made for the purposes of section 55)"]

Child Support Period

16.22 The concept of a child support year aligned with a financial year will be replaced with a child support period not to exceed 15 months. The amendments define how and when a child support period will commence and end. [Item 14 - insert new section 7A(1)]

When does it start?

16.23 A child support period will start on the day:

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an application for an administrative assessment is made

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a child support agreement is made

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immediately after the period covered by the preceding application or agreement. [Item 14 - insert new section 7A(2)]

When does it end?

16.24 A child support period will end on the earliest of the following:

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the day on which the 15 month period expires

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the end of the month in which the Registrar makes a new assessment as a result of a person having lodged a tax return

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the day before an agreement is entered into where an assessment was already in place

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the day before an agreement is entered into which changes the rate of child support payable. [Item 14 - insert new subsection 7A(3)]

16.25 A series of examples are provided to illustrate the operation of the new rules. [Item 14- Insert new subsections 7A(4), (5), (6), (7) and (8)]

Consequential changes due to new term "child support period"

16.26 The concept of a "child support year" is replaced by a "child support period". This change requires a number of consequential amendments of provisions where the term "child support year" or "year" appears. [Item 1 - insert new definition of "child support period" in section 5 to refer to subsection 7A(1); Item 2 - amend definition of EAWE by omitting "year" and substituting "period"; Item 3 - amend definition of EAWE in section 5 to refer to "the calendar year in which the child support period started"; Items 6 and 7 - amend definition of AWE in section 5 to refer to the "calendar year in which the child support period started"; Item 8 - repeal example at the end of the definition of AWE amount and insert a new example; Items 9 and 10 - amend the definition of relevant partnered rate of social security in section 5; Items 11 and 12 - amend the definition of relevant unpartnered rate of social security in section 5; Item 13 - amend definition of yearly equivalent of the relevant AWE amount in section 5; Item 24 - omit "child support year" and substitute "child support period" in subsection 36(1), paragraphs 38(a) and 39(1)(a) and subparagraph 39(1)(b)(i); Item 28 - omit "year" and substitute "period" in section 42 and subsection 44(1); Item 29 - omit "child support year' and substitute "child support period" in section 45; Item 30 - omit "year" and substitute "period" in section 46, subsection 48(1), sections 49 and 51, subsection 52(1), subsection 52(2) (paragraph (b) of the definition of maximum possible child support liability) and subsection 54(1); Item 32 - omit "year" and substitute "period" in section 54B; Item 35 - omit "year" and substitute "period" in paragraph 56(4)(a); Item 36 - omit for "current child support year' and substitute "and supplementary amount for rest of current child support period" in subsection 56(4); Item 37 - omit "year" and substitute "period" in paragraph 57(8)(a); Item 38 omit "for current child support year" and substitute "and supplementary amount for rest of current child support period" in subsection 57(8); Items 39 and 41 - omit "child support year" and substitute "child support period" (first and last occurring) in subsection 58(1); Item 42 - omit "child support year" and substitute "child support period" in subsection 58(1A); Item 47 - omit year (wherever occurring) and substitute "period" in subsections 61(2), (3) and (4) and subsections 62(1A) and (3); Item 49 - omit "year" and substitute "period" in subsections 63(2), (3) and (4); Item 52 - omit "year" and substitute "period" in subsections 64(2), (3) and (4); Item 56 - omit "year" and substitute "period" in subsections 66(1) and (2) and 66A(1); Item 58 - omit "year" and substitute "period" in subsections 66A(3), 67(1) and 68(1) and section 69; Item 61 - omit "year" and substitute "period" in paragraph 77(a); Item 62 - omit "years" and substitute "periods" in subsection 84(4); Item 63 - omit "year" and substitute "period" in subsection 84(4); Item 68 - omit "years" and substitute "periods" in subsection ^98S(3); Item 69 - omit "year" and substitute "period" in subsection ^98S(3); Item 72 - omit "year" and substitute "period" in paragraph 117(3A)(b); Item 74 - omit "years" and substitute "periods" in subsection 118(2); Item 75 - omit "year" and substitute "period" in subsection 118(2); Item 76 - omit "years" and substitute "periods" in subsection 125(4); Item 77 - omit "year" and substitute "period" in subsection 125(4)]

Notional 12 month period

16.27 The substitution of a child support period in place of a fixed child support year requires a notional 12 month period to be applied in some cases. The 12 month period in these cases will start at the beginning of the relevant child support period. [Item 57 - omit "child support year" and substitute "12 months starting at the beginning of the child support period" in subsection 66A(2)]

Part child support period

16.28 In some circumstances an administrative assessment may be made for a part child support period. In these instances the annual rate payable will be calculated as if the beginning and end of the part period were the beginning and end of a whole period. [Item 59 - repeal subsection 71 and substitute new section 71 which deals with a part child support period; Item 60 - omit "year, or part of the child support year " and substitute "period, or the part of the child support period" in paragraph 75(2)(b)]

Care arrangements - calculation over notional 12 month period

16.29 The level of care parents have in relation to their children will be determined by reference to a 12 month period measured from the start of the child support period. [Items 15, 17 and 19 - omit "of the child support year" and substitute "in the 12 months immediately after the start of the child support period" in paragraph 8(1)(b), subparagraphs 8(3)(b)(i) and (ii) and subsections 8A(3), 8A(4) and 8A(5); Item 16 - omit "those days" and substitute "days in the child support period" in subsection 8A(3); Items 18 and 20 - omit "those nights" and substitute "the nights in the child support period" in subsections 8A(4) and 8A(5)]

16.30 The examples illustrating the treatment of care where there is contravention of a court order or parenting plan are repealed. However, the principles illustrated in those examples will still apply with lawful and factual care being calculated over the days in the child support period that a person would lawfully be entitled to have care of a child and limited by the days another person actually has care of the child in that child support period. [Item 21 - repeal examples 1 and 2 in subsection 8A(7); Item 33 - repeal examples 1 and 2 in section 54B]

Modified examples

Example 1: Level of lawful care less than required minimum for assessment

Pat and Chris separate on 28 August 1998. They have one child Alan (aged 9). A parenting plan is registered by them at the Family Court in Melbourne on 3 March 1999. The plan provides that Alan is to live with Pat at Pat's home in Brisbane. It also provides that Alan will stay at Chris's home in Adelaide for one half of the school holidays. Alan goes to stay with Chris for the last two weeks of the June school holidays. At the end of the holidays Alan does not return to live with Pat. Chris applies for child support for Alan on 14 December 1999.

To be eligible for an assessment of child support Chris must have lawful care that amounts to at least substantial contact. Chris is only entitled to receive child support to the level provided for in the registered parenting plan. If Chris were eligible for an assessment of child support, the care arrangements for Alan would be calculated over a 12 month period beginning on 14 December 1999 and running until 13 December 2000. Under the terms of the parenting plan Chris's lawful care over that 12 month period would amount to 102 nights. This works out to be 27.95% which is less than the requisite minimum of 30% of nights in the child support period. Chris therefore is not entitled to receive child support (unless a new parenting plan reflecting the changed care arrangements is registered.)

Example 2: Level of lawful modified by lawful and factual care

A court order provides that Alex and Kim are to have joint parental and residential responsibility for Stephanie (aged 7). The order provides that Stephanie is to live with Alex each alternate week commencing Monday 4 January 1999 and with Kim each alternate week commencing Monday 11 January 1999. The arrangement is to continue during the school holidays. Alex and Kim have an assessment that is based on care of Stephanie being shared. The care arrangements for Stephanie would be calculated over the 12 month period beginning on Monday 18 January (when the application was made) and ending on Monday 17 January 2000.

On 12 July 1999 Stephanie stays with Alex and does not go to live with Kim. Alex notifies the Registrar on 13 July 1999 that Stephanie will now be living with Kim every fourth week. Under the terms of the court order Alex would have had care of Stephanie for 183 days and Kim would have had care of Stephanie for 182 days.

Based on the actual care arrangements Alex will have care of Stephanie for 238 days over the whole child support period and Kim will have Stephanie for a total of 147 days. Kim's care over the child support period works out to be 34.79%. Kim is taken to have substantial contact with Stephanie and child support would be calculated on this basis. Only 183 of the 238 days Alex has care of Stephanie are lawful. Alex is taken to have shared care and Alex's entitlement to child support would be calculated on the basis.

[ Basis of Calculation: Kim - 6 weeks +1 day (43 days) until 17 January 2000 + 12 weeks (84 days) of care before 12 July 1999 = 127 days (actual). Alex - 21 weeks (147 days) actual care until 17 January 2000 + 13 weeks (91 days) of care before 12 July 1999 = 238 (actual).]

Relevant dependent child

16.31 An allowance for a relevant dependent child included in the paying parent's exempted income amount will be worked out based on the child's age 12 months after the start of the child support period. [Item 25 - insert a reference to the new subsection 39(5); Item 26 - omit "at the end of the child support year " and substitute "12 months after the start of the child support period" in paragraphs 39(2)(a) and (b); Item 27 - insert new subsection 39(5)]

How estimate provisions will work

16.32 The move away from the financial year means that an estimate of income lodged in respect of child support assessments commencing on or after 1July 1999 will generally be for a period other than a financial year. The estimated amount of income will no longer be able to be reconciled against the actual taxable income for that financial year and the amendments introduce a new method for testing the accuracy of estimates.

Election that child support income less than assessment income

16.33 A person will continue to be able to elect that, for the purposes of working out their annual rate of child support, their child support income is different to that which has been used or would be used in the assessment. However, under the proposal, an estimate of income will modify the assessment only for the remainder of the period of the assessment to which the estimate relates. If a person makes an estimate election, the person's child support income amount is taken to be the amount the person elected. This is then used for the purpose of assessing the annual rate of child support payable on or after the day the election was made. [Item 44 - repeal section 60 and insert new subsection 60(1); Item 46 - repeal subsection 61(1) and insert new subsection 61(1)]

Subsequent estimates

16.34 Where a person makes a subsequent estimate then the child support income amount for that person is taken to be the amount the person elected in that later estimate for the remaining period. [Item 48 - repeal subsection 63(1) and insert new subsection 63(1)]

16.35 A consequential amendment is required to the heading of Subdivision B to reflect the changes to estimates and the concept of a child support year. [Item 43 - repeal the heading for Subdivision B of Division 3 of Part 5 and insert a new heading]

Method Statement

16.36 The estimate of a person's income for the remaining days in the child support period is to be worked out according to a specified method. This will be referred to as a "Method Statement". The first step is for the person to work out the length of the remaining period. This will start on the day the estimate is made (or the day the child support period starts if this is a later date) and will end 15 months after the period started (or would have started). The next step is for the person to provide an estimate of their expected taxable income and supplementary amount for that remaining period. The total estimated income is then divided by the number of days in the remaining period (whether that is more or less than 12 months). The result is then multiplied by 365 to arrive at an annualised amount. [Item 44 - insert new subsection 60(5)]

Requirements for valid estimate

16.37 A person will be unable to make an estimate election if an income amount order is in place. [Item 44 - insert new subsection 60(5)]

16.38 An initial estimate election will need to show a reduction in taxable income of fifteen percent or more from that recorded in that person's child support assessment. [Item 44 - insert new subsection 60(3)]

16.39 A person may make another election at a later stage provided it is at least 2 months after the first and subsequent elections. Each later election must revoke the previous election and the amount worked out for each later election must be less than or greater than the amount in the first election. [Item 44 - insert new subsection 60(4)]

16.40 A person making an estimate is able to treat the period to be covered by the estimate as if the remaining period lasts for exactly 12 months, even though the period is longer than 12 months. [Item 44 - insert new subsection 60(6)]

Supporting evidence

16.41 An initial estimate election will need to be supported by appropriate evidence. It must specify:

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the amount the person elects to be their child support income amount

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an estimate of the person's taxable income for the remaining period as if that period were a year of income

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an estimate of the person's supplementary amount for the remaining period as if that period were a year of income

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whether the remaining period is to be treated as being 12 months.

[Item 44 - insert new subsection 60(7)]

Refusal of an estimate election

16.42 The Registrar may refuse to accept the person's election if the Registrar is satisfied that the amount the person has estimated in the "Method Statement" as either their taxable income or supplementary amount is likely to be less than their actual taxable income or supplementary amount. [Item 45 - repeal subsection 60A(1) and insert new subsection 60A(1)]

16.43 A person who lodges an estimate will be required to notify the Registrar (following a notice from the Registrar requiring the person to do so) when their income has changed so that the estimate is no longer accurate. The type of event contemplated will be a change in income. The Registrar will then be able to amend the rate of child support payable to reflect the change to the estimate. [Item 50 - insert new subsections 63A(1) and (2)]

16.44 If the person fails to notify the Registrar of a change in income as required, the Registrar may at a later stage amend the rate of child support to give effect to that change from the date the change occurred. [Item 50 - insert new subsection 63A(3)]

16.45 The Registrar may make a new assessment for part of the child support period. This amendment does not affect the operation of the existing notification requirements under section 160. Therefore, a person may be guilty of an offence punishable on conviction by imprisonment for 6 months. [Item 50 - insert new subsection 63A(4); insert note that provides that the new section 63A does not affect the Registrar's power under section 75 to amend assessments]

Amendment of assessment based on election

16.46 As it will no longer be possible to reconcile child support with the taxable income of a financial year the Registrar will require the person to confirm the accuracy of the estimate at the end of the period it covers. The proposed amendment provides for the Registrar to review an estimate from time to time and if necessary require the person who has lodged the estimate to provide such further information as is necessary to support the estimate.

16.47 The Registrar may amend a child support assessment if the person who made the election has complied with a notice under section 161 of the Assessment Act to give the Registrar information (either in person or by producing documents) which are relevant to determining the accuracy of an estimate. [Item 50 - insert new subsection 63B(1) and (2)]

16.48 If the person does not comply with a notice to provide information the Registrar may amend the assessment (and therefore the annual rate of child support payable). The assessment may be amended to the day the estimate was made or to the date a previous notice was given and complied with (if applicable). [Item 50 - insert new subsection 63B(3)]

16.49 This amendment does not affect the operation of the existing requirements in relation to a notice under section 161. Therefore, a person who fails to comply with a notice may be guilty of an offence punishable on conviction by imprisonment for 6 months. [Item 50 - insert new subsection 63B(4); insert note that provides that the new section 63B does not affect the Registrar's power under section 75 to amend assessments]

16.50 Where a person's estimate of income has been used as the basis of an assessment the Registrar will compare it with the person's real income for the period covered by the estimate. This will be calculated by adding up the person's real taxable income and supplementary amount for the period estimate, dividing it by the days in the remaining period and multiplying the result by 365. If the person's estimate is less than their real income then the income used in the assessment will be taken to have always been their real income. The assessment based on the estimate would be adjusted accordingly. [Item 51 - repeal subsection 64(1) and insert a new subsection 64(1)]

16.51 As a result of the new estimate provisions a number of consequential amendments are required to redefine the period over which an estimate is reconciled. [Item 53 - insert new subsection 64(5) which defines "real remaining period supplementary amount", "real remaining period taxable income" and "real remaining period"; Item 55 - insert new subsection 64A(8) which refers to "real remaining period supplementary amount" and "real remaining period taxable income"]

16.52 The proposed amendment retains the penalty provisions relating to underestimation of an estimate but modifies them to accord with the proposed revised reconciliation/confirmation provisions. (Item 54 - repeal subsection 64A(1) and insert a new subsection 64A(1)]

Consequential changes

Departure from formula assessment

16.53 The proposed amendment retains grounds for departure from administrative assessment where a parent incurs high costs in order to have contact with a child. Previously, the costs were high if during the year they totalled more than 5% of the parent's child support income amount. As a child support assessment is no longer for a fixed 12 month period, a consequential amendment is required to measure the costs over a notional period. [Item 71 - repeal subsection 117(3A) and substitute new subsection 117(3A))

16.54 The proposed amendment retains grounds for departure from administrative assessment where a parent incurs high child care costs for a child under 12 years old. Previously, the costs were high if during the year they totalled more than 5% of the parent's child support income amount. As a child support assessment is no longer for a fixed 12 month period, a consequential amendment is required to measure the costs over a notional period. [Item 73 - repeal subsection 117(3B) and substitute new subsection 117(3B)

Publication of figures in Gazette

16.55 The proposed amendments alter the requirement for the Registrar to publish AWE, EAWE and social security pension figures as soon as practicable after 1 January of each year. The figures will now be published before 1 January each year. [Item 78 - repeal section 155 and insert new section 155]

Transitional provisions

16.56 The new rules will apply to assessments of child support for periods commencing on or after 1 July 1999. The rules introduce a fundamental change from using the taxable income of two years before hand for assessment purposes to using the most recent taxable income as soon as it becomes available. Transitional rules are required. These rules will enable new child support assessments based on the parents' taxable incomes for the year ended 30 June 1999 to be issued as the taxable incomes become available from 1 July 1999 onwards. [Item 79 & 80]