14.1 The issue of re-establishment costs
The Terms of Reference require the Taskforce to examine, inter alia, ‘the costs for both parents of re-establishing homes for their children and themselves after separation’ and how these should be reflected in the Child Support Scheme.
One of the issues lying behind this aspect of the Terms of Reference is to examine whether and how the Scheme can take account of the transitional difficulties for parents in the first few months and years after separation. Depending on the circumstances, one parent or both may need to find a new house to live in. If they were renting the house before the separation, one will have to find new accommodation. If they were owner-occupiers, then often, as a consequence of the breakdown of the relationship, the house will have to be sold. In other situations, the property settlement may provide for one to keep the house, with or without a mortgage, while the other one has to start again in building up capital assets.
The circumstances of parents after separation are infinitely variable. What is common is that one or both has re-establishment costs and for the first year or two after separation, there are particular financial pressures. New furniture and appliances have to be acquired and there are many other costs associated with the transition from one household into two.
14.2 Taking account of re-establishment costs under the formula
It is not easy to take account of re-establishment costs under the basic formula, for two reasons.
First, the costs of re-establishment vary enormously from one situation to the next, and cannot easily be factored into a generic formula which is applicable across the population. Where children are born to parents who have never lived together, re-establishment costs do not apply in the same way as they do when parents who have lived together split up.
Secondly, the most severe financial pressures arise in the aftermath of the separation. A formula must be applicable from the time of separation until a child reaches 18. It is difficult to take account of re-establishment costs in the first months and years after separation in a formula which is applicable for all children whenever their parents separate.
The Taskforce considered a mechanical way of factoring re-establishment costs into the formula. A suggestion had been made to increase the allowance for each parent’s own living expenses for the first 12 months of their child support assessment by, say, $3,000.
The Taskforce did not adopt this approach for two reasons. First, although it may appear to treat the parents equally, the payer’s increased living allowance would reduce his or her child support at the expense of the payee. Given that signifi cant re-establishment costs may arise for either the payer or payee (or both), it would not appear to be just and equitable in every case for one to get an allowance for re-establishment costs at the expense of the other. Secondly, the taxpayer might also be affected, if as a result of the increased living allowance, less money was recovered through the Maintenance Income Test (MIT) than would otherwise be the case.
258 The Taskforce considered that it was preferable to make re-establishment costs a ground for change of assessment. In Chapter 12, it is proposed that a parent may request that overtime or a second job not count in the assessment of income for the purposes of the formula for up to five years if this represented a new pattern of work in order to meet re-establishment costs.
The Taskforce also considered that it would be desirable to create a lot more fl exibility for parents in making property settlements to balance the division of the property under the Family Law Act with the sharing of income through the Child Support Scheme in appropriate cases. In particular, the Taskforce recommends that much more fl exibility should be allowed to parents to make their own agreements about this than they can at present. This could have benefits for both parents.
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14.3 Re-establishment costs and the use of lump sum child support
One way in which parents can balance their need for capital against their need for income, particularly in the first few years after separation, is to have a lump sum cash payment as part of the property settlement, so that the payee receives more of the capital, while the payer’s income is freed up to rebuild assets after the separation. While only a minority of separating families may be in a position to take advantage of this interaction, there is nonetheless great value in making this option more available to those able to use it.
14.3.1 The utility of lump sum child support
There may be a number of different situations where it is in the interests of both parents to be able to pay child support in advance as a lump sum, either in lieu of periodic payments entirely, or in exchange for lower child support payments for a period.
One example is where the children are going to live primarily with the mother, and she is very keen to keep the matrimonial home either without a mortgage at all or with modest mortgage payments that she can afford on her existing income. For example, the situation may arise that following negotiations between the parents, they agree that the mother should receive 65% of the net assets and that each should keep their superannuation entitlements. However, this is insufficient to allow her to keep the matrimonial home.
In this situation, it may well be worthwhile to the mother to have less ongoing child support for five years than the formula would produce, given the father’s current and expected future income, so that in return she can remain in the matrimonial home. This could be done if the parents could agree that the father would pay some child support out of the property settlement as a lump sum. This sum could then be credited against his child support assessment in the ensuing years. If she did not need any ongoing child support at all for five years, then the lump sum could displace the obligation. Alternatively, it could reduce the child support payable by a percentage, such as 50%.
Such an arrangement may be in the interests of both the payer and the payee. It would allow the payee to keep the home and help the payer to afford to purchase a house with a new mortgage by reducing his ongoing child support liabilities. Lump sum payments may also be advantageous in a range of other circumstances, for example where there may be problems with compliance with periodic payments or the liable parent is planning to move overseas.
The issues involved go beyond the financial circumstances of the parents. How property and child support issues are sorted out in the aftermath of separation may have a material effect on the arrangements for maintaining the involvement of the non-resident parent with the children, including the feasibility of shared care arrangements. If one parent keeps the matrimonial home and the other can afford to buy or rent in the same locality then it may make possible much closer involvement by the non-resident parent than if one parent is forced by their financial situation to move some considerable distance from the other to an area where housing costs are lower.
14.3.2 The problems in making lump sum child support arrangements
The difficulty with making lump sum agreements or orders is that the existing child support legislation acts as a deterrent to such an arrangement. The current child support legislation demonstrates a preference for child support in periodic form. Freedom to make agreements about lump sum child support (or to obtain orders that achieve such outcomes) is constrained by legislative provisions which have their origin in the need to ensure that periodic child support is not reduced at the expense of taxpayers.
The objective of ensuring that the support of children does not fall unduly on taxpayers remains as important as it was when the Scheme was introduced. Parents should not be permitted to make agreements about child support that have the effect of giving one of them an entitlement to more government support than he or she would otherwise be entitled to receive, and courts should not make orders to this effect without considering the interests of taxpayers. However, some of the legislative provisions that were designed to achieve these objectives are no longer either necessary or appropriate in 2005. There are simpler ways now of protecting the interests of taxpayers.
14.4 Overcoming the obstacles to lump sum child support
14.4.1 The problem of section 128 of the Child Support (Assessment) Act 1989
The most significant obstacle to private agreements or orders that allow for the payment of child support as a lump sum arises from the operation of s.128 of the
Child Support (Assessment) Act 1989. One effect of this provision is that if a court orders the provision of child support by payment of a lump sum in substitution for periodic payments under s.124 of the Act, and subsequently the payee becomes entitled to an income-tested pension, allowance or benefit, then the situation may arise that the lump sum paid reduces the child support he or she receives by no more than 25%. Section 95(3) of the Act extends the same rule to agreements.
This makes the payment of child support in a lump sum risky for the payer. While the parents may want to agree that five years’ worth of child support, based on current income, should be capitalised into a lump sum so that the resident parent is able to keep the matrimonial home, if the resident parent’s circumstances change then the operation of s.128 may have the effect that only 25% of the value of the lump sum paid can be credited against the periodic assessment based on the formula.
There are ways around this provision. The Child Support Agency (CSA), in conjunction with the Family Law Council and the Family Law Section of the Law Council of Australia, publishes a Guide for legal practitioners, which discusses this issue.
259 It remains the case nonetheless that the legislation deters lump sum payments of child support rather than facilitating them.
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14.4.2 Is section 128 still required?
It would appear that while s.128 was necessary at the time the Child Support Scheme was introduced, the objective of protecting government revenue can now be achieved by more than one means without the need for s.128.
Section 128 was included in the original child support legislation for reasons linked to the social security regime at that time. An amendment to social security legislation was introduced as part of the child support package. Prior to the amendment, in-kind and capital maintenance were treated in the same way as other forms of income of a social security beneficiary, and such income had not consistently been taken into account. The amending Act (
Social Security and Veterans’ Entitlements (Maintenance Income Test) Act 1988) provided for a maintenance income test which applied to maintenance income separately from the general income of the recipient, and covered all forms of maintenance income. Both the general income test and the maintenance income test were applied to the basic income support of the recipient.
The amending Act singled out special maintenance income, which was treated differently from other forms of maintenance income. Special maintenance income included all in-kind maintenance received in the first six months of separation, maintenance in the form of housing, and maintenance intended to cover costs arising directly from the needs of a child with a disability. Special maintenance alone could not reduce the benefit or pension below 75% of the maximum rate of the pension or benefit.
This operated in parallel to s.128 of the Assessment Act, so that a carer parent in receipt of an income-tested pension allowance or benefit would always be entitled to at least 75% of the assessed rate of child support by way of periodic amounts (provided this did not result in the parent no longer being entitled to the pension, allowance or benefit).
A fundamental change occurred from 1 January 1993, after the passage of the
Social Security (Family Payment) Amendment Act 1992. This Act substantially restructured family payments, bringing together all social security payments for children into the categories of ‘basic’ and ‘additional’ family payment. The maintenance income test now applied exclusively to additional family payment. It no longer affected pensions or allowances, and could not reduce a recipient’s entitlement below base rates of Family Payment.
However, anomalously, the restrictions upon the effect of ‘special maintenance’ remained, so that recovery by the Government remained limited in cases of housing or other in-kind maintenance. This was subsequently addressed by the
Further 1998 Budget Measures Legislation Amendment (Social Security) Act 1999, which removed the ceiling on the effect of non-cash maintenance, allowing such maintenance to reduce a carer’s entitlement to additional family payment to nil.
The full reduction of additional family payment flowing from receipt of non-periodic maintenance now applies, without restriction. While the processes for imputing capital or lump sum maintenance as income for family payment beneficiaries are complex, processes nonetheless exist to translate non-periodic amounts into periodic equivalents, where parties have not agreed as to the periodic rate of maintenance a lump sum or capital payment represents. Hence, there is no need any longer for government revenues to be protected by means of s.128.
The proposal discussed in Chapter 13 (at 13.5) provides a simpler way of protecting the taxpayer. The proposal is that wherever periodic child support liabilities are reduced as a consequence of the operation of an agreement, the parties’ entitlement to Family Tax Benefit (FTB) should be calculated on the basis that the person who is in receipt of the agreed child support is receiving the amount to which he or she would be entitled under the statutory formula. The same rule could readily be applied to agreements for lump sum child support, and to court orders that provide for lump sum payments in lieu of periodic child support.
14.4.3 Child support based on current capacity to pay
Another reason for placing constraints upon the use of lump sum payments is the principle embedded in the Child Support Scheme that parents should contribute to the support of their child according to their capacity to pay.
260 This, by implication, means current capacity to pay, and that capacity will vary with changes in the situation of each parent over time.
261 Consequently, child support ought to allow children to share in the standard of living of each parent in any given year. Lump sum payments made in relation to child support for a number of years into the future are likely to be based upon the earning capacity of the liable parent at the time of the lump sum arrangement. Unanticipated changes to those circumstances may at times seriously disadvantage the payer and at other times it may disadvantage the payee.
However, these problems do not need to arise. It depends upon how the lump sum amount is credited against the assessment. If, for example, the lump sum payment operates to give the payer a nil assessment for a period of five years, this may work unfairly to the payer or the payee depending on whether the actual amounts of money earned during those ensuing years were more or less than anticipated at the time of the agreement. Where, however, the lump sum is merely expressed as representing an annual sum to be credited against the assessment, then the same difficulties of having to anticipate future earnings do not arise.
262
14.5 Lump sum child support as providing a credit balance
In order to make lump sum payments more available to parents as an option if it is appropriate in their circumstances, the Taskforce proposes that there should be a set of default statutory rules that would apply in the absence of a binding agreement to the contrary. These default rules would treat the lump sum child support payment as giving the payer a credit balance from which the assessed annual periodic child support amount would be deducted until the credit is exhausted.
14.5.1 The use of default rules
The value of a default statutory rule is that it is easy for parties to adopt as a way of managing a lump sum payment. Many things are possible under the existing legislation if people are properly advised and agreements or orders are carefully drafted. However, the Act does not facilitate such arrangements. Rather, it is an impediment to sensible arrangements and there are many traps for the unwary. With default rules expressed in legislation, people can be readily advised, at a modest cost, about how to structure a lump sum arrangement effectively and about possible alternatives to the default provisions. Similar default rules are used in other areas of private law, for example, the rules governing trusts under Trustee Act legislation in the States and Territories.
263 Such rules operate unless the parties make different arrangements.
It would remain open to the parents to make an agreement concerning the crediting of lump sum child support in a way that departs from the default rules. The agreement could make provision for a lump sum payment by way of capital transfer to be credited against future child support liabilities in ways similar to the options available under the current legislation (as adapted in the light of the proposed new formula).
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14.5.2 The operation of the credit balance
The default statutory rule should be that the lump sum should act as if it were a fund, which is drawn upon each year by being credited against the child support obligation of the liable parent for that year in full. The annual value would not need to be specifi ed in advance. If the agreement or order is that the lump sum payment should operate to extinguish the child support liability for as long as the ‘fund’ is in credit, then the position will be that the child support liability will continue to be assessed annually based upon the current circumstances of the parents, but the liability considered satisfi ed as soon as it is raised, until the total available credit is exhausted.
264 If it is preferable that the lump sum payment be credited only to a certain percentage of the annual assessment so that there remains an entitlement to ongoing periodic support, then the order or agreement would stipulate that the appropriate fraction (say 50%) would be taken as having been provided from the virtual fund with the remaining 50% payable as periodic support. In the absence of such specification, it will be assumed that the full annual child support liability is intended to be treated as paid out of the fund.
14.5.3 Recognising the opportunity costs in making lump sum payments
In order to create an incentive for the payer to pay child support in advance as a capital sum, there ought to be a default rule, in the absence of agreement to the contrary, that the fund should be increased by a rate which is expressed in Regulations. The annual increase in the value of the fund ought to be commensurate with the after-tax value of what would be obtainable if instead the money had been invested rather than paid out as a lump sum. That increase should be applied on every anniversary of the date of the order or agreement.
The purpose of such an automatic increase is to recognise that if the lump sum payment had not been made, and the payer had retained the use of the monetary value of the asset, then he or she might have invested it for gain. While the after-tax value of an investment will vary depending on the tax circumstances of a taxpayer, the rate ought to be set at a level appropriate to give recognition to the opportunity costs of providing a lump sum payment.
14.5.4 What if the fund is not exhausted by the time child support ceases to be payable?
The circumstance may arise, perhaps because of the death of a child, because of a change in the residential arrangements which lasts until the time the child reaches 18, or because of the paying parent’s ongoing low income over a number of years, that there remains credit in the fund at the time the child support ceases to be payable.
The Taskforce proposes that in order to address this issue, the credit balance in the fund should create a statutory charge which is registrable under the laws of the States and Territories. The charge should crystallise when a terminating event occurs within the meaning of the
Child Support (Assessment) Act 1989, that is, when something occurs that brings the payer’s child support obligation to an end.
If the credit balance is not registered as a charge against property to which the payee has title, then the proposed default rule is that there is no obligation to return the balance of the lump sum fund.
14.6 The need for legal advice
14.6.1 Availability of lump sum child support payments
While the availability of lump sum child support payments may assist some parents in some circumstances to resolve their financial affairs following separation, the risks and benefits need to be clearly understood and the agreement or orders tailored appropriately to the circumstances of the parents. In particular, if a payee’s entitlement to FTB is to be calculated on the basis of the amount of periodic child support that would be payable under the formula, disregarding the agreement or order for lump sum child support, then parents ought to realise this. Appropriate provisions can be included in the agreement or court order for some periodic support to become payable, and therefore for the capital sum to be eroded more slowly, if a payee is unable to work or if in some other way the parent’s financial circumstances necessitate the payment of some periodic child support.
For this reason, the Taskforce proposes that the same conditions should apply to agreements or orders concerning lump sum payments as to capital transfers and other aspects of property settlements under the
Family Law Act 1975. That legislation provides for financial agreements to be binding without the involvement of a court if both parties have independent legal advice about the agreement. Property and maintenance matters may also be resolved through court orders made by consent, and this is the usual way in which property matters are resolved. If both parties have independent legal advice, then there is a simple procedure for having the agreement translated into consent orders. If one or both parties do not have legal advice, then it is probable that the court will scrutinise the draft consent orders and may ask questions of the parties concerning their understanding of what is agreed.
In order to ensure consistency between the child support legislation and the
Family Law Act 1975, and to provide appropriate protection to parents, the Taskforce proposes that lump sum arrangements or capital transfers that exceed the current year’s child support assessment and are to be credited against future years should only be made by binding financial agreement or by court order. It would be expected that if such arrangements were enshrined in consent orders, and one or both parents did not have legal advice, then the court would exercise its independent responsibility to be satisfied that the proposed orders were just and equitable.
265 This still allows smaller scale capital transfers to be subject to a child support agreement that does not require legal advice subject to the safeguards stipulated in Chapter 13. Parents would also not need to have legal advisers in order to obtain consent orders from a court. The Taskforce considers that this provides an appropriate balance between the freedom to make agreements without needing legal advice, and the protection of parents from entering into disadvantageous agreements involving substantial amounts of money or property without a full appreciation of their consequences.
Binding financial agreements for lump sum child support ought to be capable of being varied or set aside on the same grounds as an agreement under the Family Law Act.
266 This includes the provision that ‘since the making of the agreement, a material change has occurred in the circumstances of either parent or the child and as a result of the change, either parent or the child will suffer hardship if the court does not vary the agreement or set it aside’. A similar variation power ought to be included in relation to orders of the court, whether made by consent or otherwise.
14.7 Administration of agreements or orders for lump sum payments
The parties would need to lodge any agreement or court order with the CSA for it to be given effect. The lump sum would then operate rather like a mortgage account does, with debits and credits being calculated formulaically and an account given to the parents of the state of the credit balance.
An annual child support assessment should continue to be made, and all administrative adjustments normally available to parents to maintain the currency of the assessment should be available. This includes the ability for parents to update income as it changes, including lodging and updating estimates of income. Change of assessment, general short-term agreements and court-ordered variations should also be available, unrestricted by the existence of the advance lump sum payment.
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14.8 Jurisdiction to make lump sum child support orders
If one of the objectives of making it easier to pay child support in a lump sum is to allow a trade-off between capital and income as part of a property settlement, then consideration needs to be given to the issue of jurisdiction of state courts. Most property matters are dealt with in the District Court or County Court of the states, with some matters being dealt with at Supreme Court level. If jurisdiction for the limited purpose of making lump sum child support orders as part of a property order is not conferred on all state courts whether or not they can otherwise exercise family law jurisdiction, then it will be necessary for litigants to go to two courts to resolve their affairs unless they can make an agreement about the child support aspect of their dispute.
Consideration should therefore be given to allowing state courts to make lump sum child support orders when exercising any of their powers under Acts which would be specifi ed in Regulations. These Acts would be those governing the division of property of de factos such as the
Property (Relationships) Act 1984 (NSW). The problem of jurisdiction may be resolved over time if more States refer their powers over the property rights of de factos to the Commonwealth, and the Commonwealth enacts legislation to give effect to such a reference of powers.
14.9 Crediting of other in-kind payments by consent
There is already facility within the Child Support Scheme for parents to agree that particular payments should be credited as child support, known as Non-Agency Payments. The crediting of such payments is always against 100% of the ongoing liability, until the credit is exhausted. Parents may wish to use some more minor payments of child-related expenses even when they have already allocated a substantial capital or lump sum amount as credit against child support. For example, the lump sum credit may only be against 50% of the ongoing liability, and the remaining 50% is to be paid on a periodic basis. In this case, the parents may prefer to agree that a payment, for example, of a child’s music lesson fees, is to be credited only against 25% of the liability, to retain some ongoing cash fl ow. This flexibility should also be included in the Scheme.
Recommendation 18
18.1 Parents should be able to make agreements for lump sum child support payments only by means of a binding financial agreement or by consent orders if the payment of lump sum child support exceeds the total of the annual assessment of child support and is to be credited against payments for future child support years.
18.2 Agreements or orders for lump sum child support should have effect on the condition that entitlement of the payee to FTB Part A shall be assessed on the basis of the amount of child support that would be transferred if the agreement or order had not been made.
18.3 Section 128 of the Child Support (Assessment) Act 1989, permitting a carer parent in some circumstances to seek an assessment of child support for up to 75% of the then formula liability, despite an agreement or order to the contrary, should be repealed.
18.4 Default rules for the treatment of lump sum child support payments that exceed the total of the annual assessment of child support and are to be credited against payments for future child support years should be included in the child support legislation, and these default rules should apply in the absence of provisions of an agreement or court order to the contrary.
18.5 The default rules shall be as follows:
- The parents should continue to have an annual assessment of periodic child support made based upon their then current income and circumstances.
- The lump sum should be treated as providing the payer with a credit balance, to be credited against the periodic child support assessment as each annual assessment is made.
- 100% of the annual assessed rate of child support should be credited annually from the balance of the lump sum, until the balance is exhausted.
- The balance in the fund should be increased annually upon the anniversary of the creation of the fund, by a rate that is expressed in Regulations, to produce a value commensurate with the after-tax value if the money had been invested.
- If there is a balance remaining to the payer after the child support liability has ended, then there should be no obligation to repay this amount unless the balance is registered as a statutory charge.
18.6 The balance of a lump sum child support payment should create a statutory charge that is registrable under the property legislation of the States and Territories.
18.7 Section 60 of the Child Support (Assessment) Act 1989 (concerning ‘income amount orders’) should be amended to allow payers to be able to provide estimates of their income in relation to a child support period when their obligations for that period are affected by an agreement for lump sum child support.
18.8 Sections 71A and 71B of the Child Support (Registration and Collection) Act 1988 should be amended to allow in-kind payments to be credited by consent against less than 100% of the liability in the child support period.