Child support is money paid by parents who do not live with their children, or who share care with someone else. The money is to help with the cost of raising a child.
Liable parents can manage their child support payments through Inland Revenue by using a formula assessment or voluntary agreement, or they can be arranged through a private agreement with the other parent or non-parent carer.
For child support managed by Inland Revenue, liable parent payments are passed to receiving carers to the extent that the receiving carer has not received a benefit from Ministry of Social Development. The withheld amount is the Crown entitlement and this is legally enforceable. Receiving carer entitlements are not recognised as revenue and any funds yet to be passed to the receiving carers are recorded in the Child Support trust account as presented in the ‘Schedule of non-departmental trust money’.
Schedule of non-departmental trust money
Penalties are imposed when there are defaults on their child support payments.
Child support receivables include the Crown entitlement and penalties. The Crown entitlement and penalties are presented as revenue in the ‘Schedule of non-departmental revenue’. Receivables are initially recognised at fair value and are subsequently tested for impairment at year end.
Schedule of non-departmental revenue
Allowances for amounts that Inland Revenue does not expect to recover are recognised when there is objective evidence that the asset is impaired. Impairments are included in the ‘Schedule of non-departmental expenditure’. Impairment losses can be reversed where there is evidence that the impaired value of the asset has increased.
Schedule of non-departmental expenditure
Child support valuation model, significant assumptions and uncertainties
At the end of the year, receivables are valued by an independent external valuer using predictive models. Inland Revenue provided data to the valuer on receivable balances and repayments. The data was up to 31 March 2021. The 30 June 2021 fair valuation is rolled forward from the 31 March 2021 results.
To calculate the impairment of receivables, assumptions are applied to future repayment behaviour, as well as economic factors such as discount rates. Key assumptions are explained below.
- The recoverable amount of receivables is calculated by forecasting the expected repayments based on analysis of historical debt data and then discounting it using an appropriate rate. If the recoverable amount of the portfolio is less than the carrying amount, the carrying amount is reduced to the recoverable amount. Alternatively, if the recoverable amount is more, the carrying amount is increased.
- From October 2021, child support services will transition into the START system. This system will automatically set up instalment arrangements for any customers who are employed and have child support debt. This will result in a significant increase in customers with automatic deductions. This change is expected to increase repayments.
- Recent legislative changes to the Child Support Act 1991 include that liable parents who are employees must have their child support deducted from their salary and wages. This is effective from 1 October 2021. This change is expected to increase repayments.
As noted by the valuer, it is not possible to assess with any certainty the implications of COVID-19 on the value of child support receivables.
There will be an impact on parents and it will affect their ability to repay child support. Repayment assumptions used for the valuation reflect a 3-year average period prior to the pandemic. As economic conditions progress to a post-pandemic normal in the coming years, there is additional uncertainty in our projections of fair value as past experience may not be exactly indicative of the future in a post-pandemic economic environment.
Changes this year
There have been a number of changes for child support this year:
- Unpaid Crown entitlement has been recognised on the ‘Schedule of non-departmental assets’ at fair value in accordance with PBE IPSAS 23 Revenue from Non-Exchange Transactions. Previously this was not recognised. This change has increased the carrying value of child support receivables by $155 million (nominal value: $257 million). For the 2019-20 comparative, this is estimated to be $141 million (nominal value: $234 million). The comparatives have not been restated.
Schedule of non-departmental assets - An independent external valuer was engaged to value the receivable as at 30 June 2021. In previous years, the valuation was conducted by Inland Revenue.
- A significant number of child support penalties have been written off this year.
- Incremental penalties will no longer be charged following recent legislative changes to the Child Support Act 1991, effective 1 April 2021.
The fair value of child support receivables at 30 June 2021 is $228.050 million, an increase of $148.492 million from last year. This increase is largely due to the recognition of past due Crown entitlement.
|
Actual 2020 ($000) |
Actual 2021 ($000) |
|
|---|---|---|
| Receivables - child support | ||
| $1,553,491 | Gross receivables | $982,540 |
| $(1,473,933) | Impairment | $(754,490) |
| $79,558 | Carrying value receivables | $228,050 |
| Current and non-current apportionment | ||
| $8,320 | Receivables - current | $71,000 |
| $71,238 | Receivables - non-current | $157,050 |
| $79,558 | Carrying value receivables | $228,050 |
| Ageing profile of gross receivables1 | ||
| $23,485 | Not due | $15,212 |
| Past due | ||
| $3,804 | Less than 12 months | $11,150 |
| $8,308 | 1-2 years | $19,189 |
| $1,517,894 | Greater than 2 years | $936,989 |
| $1,530,006 | Total past due | $967,328 |
| $1,553,491 | Total gross receivables | $982,540 |
| 98% | % Past due | 98% |
| Receivables - impairment | ||
| $1,525,335 | Opening balance | $1,473,933 |
| $189,978 | Impairment losses recognised | $290,739 |
| $(241,380) | Amounts written off as uncollectable | $(1,010,182) |
| $1,473,933 | Closing balance | $754,490 |
1 Balances as at 30 June 2020 have not been restated in line with the 2021 methodology.
The estimated recoverable amount of this portfolio and the significant assumptions underpinning the valuation of the carrying value receivables are shown below.
|
Actual 2020 |
Actual 2021 |
|
|---|---|---|
| $15,391 | Recoverable amount of receivables not due - Crown entitlement ($000) | $13,553 |
| – | Recoverable amount of receivables past due - Crown entitlement ($000) | $155,345 |
| $64,167 | Recoverable amount of receivables past due - penalties ($000) | $59,152 |
| $79,558 | Total carrying value | $228,050 |
| N/A | Discount rate | 4.00% |
| N/A | Impact on the recoverable amount of a 1% increase in discount rate ($000) | $(13,800) |
| N/A | Impact on the recoverable amount of a 1% decrease in discount rate ($000) | $14,700 |
Credit risk
The Crown does not hold any collateral or any other credit enhancements over receivables for child support which are past due.
Receivables for child support are widely dispersed over a number of customers and as a result the Crown does not have any material individual concentrations of credit risk.