While you can reach a private agreement in regard to child support, in most cases your child support entitlement/liability will be determined by Inland Revenue (“IRD”) using a formula assessment.
A formula assessment is the mechanism IRD uses to work out how much should be paid. Among other factors, the formula takes into account each party’s taxable income, and the number of nights the child(ren) spend with each parent.
Normally this process results in a fair outcome. However, that is not always the case and sometimes it is necessary to apply for a departure from the formula assessment.
This may be the case where a parent’s taxable income does not reflect their true ability to support their children or where a child has special needs or abilities that make their care more expensive. The formula assessment has limited ability to take account of factors such as these.
In such circumstances you can apply to alter the amount of child support payable. There are two ways you may do this. The first is through IRD and is called an administrative review. The second is through the Family Court and is called a departure order.
IRD: Administrative Review
The IRD process of administrative review requires you to complete an IR470 Application and an IR178 Statement of Financial Position. If you plan on completing these documents yourself there is a useful IRD guide (IR175) which details the process and requirements for an administrative review.
Essentially you need to rely on one or more of the grounds for an administrative review. These are:
- Ground 1 – You have a duty to maintain another child (or children) or person
- Ground 2 – It costs you extra to cover the special needs of another child (or children) or person you have a duty to maintain
- Ground 3 – You have necessary expenses in supporting yourself
- Ground 4 – You have necessary expenses in supporting another child (or children) or person you have a duty to maintain
- Ground 5 – Your contact costs are more than 5% of your adjusted taxable income
- Ground 6 – It costs you extra to cover the child’s (or children’s) special needs
- Ground 7 – It costs you extra to care for, educate or train the child (or children) in the way that was expected by either parent
- Ground 8 – The child support assessment doesn’t take into account the income, earning capacity, property and financial resources of either parent or child (or children)
- Ground 9 – The child support assessment doesn’t take into account that you have previously made payments, transfers and property settlements for the benefit of the child (or children)
- Ground 10 – You still have a financial interest in a property that the other person is entitled to live in
- Ground 11 – The child support assessment includes extra income earned from additional work to cover costs of re-establishment after separation
- Ground 12 – You would like your child support liability offset against child support owed to you
Once you file your application the other party will have some time to respond before the file is referred to a case officer to make a decision.
Family Court: Departure Order
In addition to the IRD process of administrative review you can apply to the Family Court for a Departure Order.
You can only apply for a Departure Order if
- You have gone through the IRD administrative review process and you are unhappy with the outcome; or
- There are already proceedings before the Court. This may be the case where you have filed for spousal maintenance or for a division of your property. In such circumstances you can bypass the administrative review process and apply directing to the Court.
The grounds for a departure are set out in s 105 of the Child Support Act. These include:
- The capacity of either party to provide financial support is significantly reduced because of their duty to maintain another child or person, or necessary commitments to support themselves or another child or person (i.e. debts or living costs).
- The costs of maintaining the child are significantly affected because of high costs incurred to have contact with the child (i.e. if you have to travel to have contact with your child), the special needs of the child, or because the child is being cared for, educated, or trained in the manner that was expected by either parent.
- The formula assessment would result in an unjust and inequitable level of financial support because of the income, earning capacity and financial resources of either parent or the child, or any division of relationship property or transfer of property, or the entitlement of either party to occupy a property in which both parties have an interest.
- The formula assessment would result in an unjust and inequitable level of financial support because the taxable income includes additional work undertaken to pay for re-establishment costs.
- The formula assessment would result in an unjust and inequitable level of financial support because each party owe money to the other which should be offset.
De Vere v Beavis
The recent line of cases in the matter of De Vere v Beavis illustrate how the departure order mechanism can be utilised.
In that case the mother alleged that the father had deliberately concealed his income and assets. She applied to the Family Court for a departure from the formula assessment.
The relevant factual scenario was that after separation the father had set up a trust to which he transferred all of his assets including the company from which he received his income. He then reduced his salary from an average of $120,000 per annum to $40,000 and caused all additional income from the company to be distributed to the trust.
The decrease in the father’s taxable income meant his child support liability under the formula assessment also decreased.
The father claimed that these arrangements were set up to minimise tax liability and for protection from creditors. He claimed that his is salary was unusually low because it was restricted by what the company could afford to pay him as the director.
Conversely, an expert witness concluded that the father’s financial arrangements must have been intended to avoid his proper child support liability.
The Family Court accepted the evidence of the expert witness and concluded that the amount of child support the father had paid was not just and equitable. A Departure Order was made.
However, that was not the end of the saga as the father filed an appeal in the High Court where he was partially successful and the amount he had to pay was significantly reduced.
The mother then appealed to the Court of Appeal which set aside the decision of the High Court and made findings similar to those of the Family Court.
The Court of Appeal held that the father had resources additional to his taxable income which meant he was able to pay child support at the maximum rate. The father’s trust was described as effectively being used as his personal bank.
The Court of Appeal noted that the father overlooked his financial obligations to his children when he undertook the development project. The mother was involuntary “investor” in the development project. It was successful so Mrs de Vere’s “return” on the investment was an entitlement to payment of retrospective child support.
The De Vere v Beavis case highlights how the Court will consider the true financial situation and will give priority to a parent’s obligations to support their children.
Departures from the formula assessment are available where a liable parent has artificially decreased their income for the purpose of decreasing child support liability.
However, where the decrease in income is justified, for example due to illness or restructuring, a departure may not be available. Each case will depend on their relevant facts.