8.1 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
153, 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.154
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.155
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.156
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.
8.2 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.
157 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.
158 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.
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8.3 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.159
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.
8.3.1 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.
160 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.
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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.
Table 8.2: Estimated average weekly marginal costs of children in couple families, by number of children and weekly family income, 2005–06
| |
|
Number of children |
| Level of income |
Average income |
1 child |
2 children |
3 children |
4 children |
5 children |
| Low income |
$661 |
$114 |
$209 |
$290 |
$362 |
$427 |
| Middle income |
$1,330 |
$179 |
$317 |
$428 |
$522 |
$605 |
| High income |
$2,662 |
$285 |
$492 |
$651 |
$779 |
$888 |
| Average |
$1,473 |
$188 |
$331 |
$446 |
$543 |
$627 |
Percival R. & Harding A., ‘The Estimated Costs of Children in Australian Families in 2005–06’, in Volume 2 of this Report, p. 14.
8.3.2 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.
Table 8.3: Estimated average weekly gross costs of a single child in sole-parent families, by age of child and weekly family income, 2005–06
| |
|
Age of child |
| Level of income |
Average income |
0 to 4 |
5 to 12 |
13 to 15 |
16 to 17 |
| Low income |
$284 |
$77 |
$81 |
$94 |
$179 |
| Middle income |
$459 |
$102 |
$106 |
$125 |
$220 |
| High income |
$1,169 |
$184 |
$186 |
$218 |
$345 |
| Average |
$583 |
$115 |
$119 |
$140 |
$240 |
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.
161 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.
8.4 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.162
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.163
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
164 and Henman & Mitchell
165, and refl ect changes in prices.
166 Household budget standards, and the resulting costs of children are calculated at two living standard levels rather than income levels:
167
- ‘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.
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8.4.1 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.
168 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.
169 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
170, 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.
171 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.
Table 8.4: Gross costs of one child, including childcare, for couple and sole-parent households (June quarter 2004, $’000/year)
| |
Couples |
Sole parents |
| Household type |
Weighted average |
Weighted average |
| |
Total costs |
Childcare |
Total costs |
Childcare |
| 3 year old |
| F+3yo MBA |
17.62 |
12.63 |
17.86 |
12.63 |
| N+3yo MBA |
6.50 |
0.56 |
5.74 |
0.56 |
| N+3yo LC |
4.91 |
0.00 |
3.50 |
0.00 |
| 6 year old |
| F+6yo MBA |
11.71 |
3.36 |
10.36 |
3.24 |
| P+6yo MBA |
7.57 |
0.56 |
8.28 |
0.56 |
| N+6yo MBA |
7.01 |
0.00 |
7.39 |
0.00 |
| N+6yo LC |
6.02 |
0.00 |
5.49 |
0.00 |
| 10 year old |
| F+10yo MBA |
13.10 |
3.36 |
11.73 |
3.24 |
| P+10yo MBA |
8.95 |
0.56 |
9.65 |
0.56 |
| N+10yo MBA |
8.38 |
0.00 |
7.62 |
0.00 |
| N+10yo LC |
6.74 |
0.00 |
5.75 |
0.00 |
| 14 year old |
| F+14yo MBA |
10.30 |
0.00 |
10.54 |
0.00 |
| P+14yo MBA |
10.30 |
0.00 |
10.54 |
0.00 |
| N+14yo MBA |
10.30 |
0.00 |
9.54 |
0.00 |
| N+14yo LC |
7.85 |
0.00 |
6.85 |
0.00 |
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.
8.4.2 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.
172 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.
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8.4.3 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.
174 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.
175 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.
8.5 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.
176 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%.
Table 8.5: Expenditure costs of Australian children (percentage of family income spent on children)
| Post-1985 studies |
Number of children |
| 1 |
2 |
3 |
4 |
| 16 |
28 |
37 |
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.
8.6 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.
Table 8.6: Taskforce agreed gross costs of children as a percentage of gross family income, for middle-income families, 2005–06
| |
Detailed Age Ranges |
Broad Age Ranges |
| Number of children |
0 to 4 years |
5 to 12 years |
13 to 15 years |
16 years and over |
All aged 0 to 12 |
All aged 13+ |
| 1 |
10 |
14 |
19 |
20 |
14 |
19 |
| 2 |
16 |
22 |
29 |
30 |
22 |
29 |
| 3 |
20 |
28 |
36 |
37 |
28 |
36 |
| 4+ |
24 |
33 |
42 |
43 |
33 |
42 |
Note: ‘middle-income families’ means couple families with gross incomes in the vicinity of $50,000 to $60,000.
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8.6.1 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.
8.6.2 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.
8.7 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.
177 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.
178 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.
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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.
8.8 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.
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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.
8.9 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.
8.10 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).
8.11 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.
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8.12 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.
179 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 Chapter 9.