Futurelearning

Splitting up hard enough without splitting income too

Victoria University of Wellington’s Dr Simon Chapple raises concerns about a radical Law Commission proposal, asking if we really need new reform providing lawyers with more work over couples' break-ups 

The Law Commission has recently released its issues paper on Review of the Property (Relations) Act 1976: Preferred Approach. The Commission proposes a radical change in this area, which involves introducing a Family Income Sharing Arrangement (FISA).

The proposal is that if a couple have a child together, or the relationship exceeds a decade in duration, or if in a relationship one person reduced paid work to support the education of the other, there would be a 50-50 sharing of post-relationship income for up to five years following the end of the relationship. The reason the Commission gives is “to share the economic advantages and disadvantages arising from a relationship or its end”.

Introduction of a FISA would be a significant break from our past treatment of relationship separation, which focuses on property sharing. Consideration of FISA goes radically beyond relationship property, property being a stock measured at a point in time, to consider income, which is a flow measured over time. A FISA would also depart from the current “clean break model” of couple separation, in the sense of continuing an ongoing economic relationship following the termination of the intimate relationship for up to five years. Because it would be such a significant departure from the current circumstances on these two counts, and will retrospectively apply to existing couples, the Law Commission recommendation needs to be carefully considered. Any change needs a strong weight of evidence.

Is there widespread public support for a FISA? Even on the Commission’s provided evidence, the answer is no. As evidence supporting a FISA, the Commission draw on public survey responses to a question arising from the following vignette. The vignette illustrates a problematic situation a FISA is centrally designed to address. The vignette is of a “breadwinner couple” where Person A earns the income and Person B puts their career on hold to care for their children. They separate after 10 years together. Person A has a good income, while Person B struggles to get work.

The question put to respondents is: should Person B receive additional support from Person A post-separation? Fifty-nine percent of respondents respond “definitely” (35 percent) or “probably” (24 percent) yes, which is a solid but not overwhelming majority of the population. However, only 29 percent of respondents in the sample said that this “definite or probable” additional support should take the form of a FISA (49 percent of the 59 percent who were asked this question). What's more, this 29 percent minority supported some form of general income-sharing, not necessarily the 50-50 income-sharing model proposed by the Law Commission.

Even in a circumstance for which a FISA is ideally designed, it does not command anything near majority public support. Many situations of couple separation will, of course, be different from this vignette. They are unlikely to command even this minority level of public support, since any apparent post-separation injustice to be addressed will be almost certainly more ambiguous. In addition, the breadwinner couples for whom reform is designed are increasingly becoming a minority. Consequently, applying a breadwinner one-size-fits-all FISA approach will be increasingly problematic over time.

Putting aside the lack of public support and one-size-fits-all issues, there are other reasons we should be wary of introducing a FISA.

A FISA will result in considerable disincentives to take up paid employment following separation. From every extra dollar earned, 50 cents will be deducted to give to the FISA ex-partner. The 50 percent amount, in conjunction with deductions for income tax, ACC levies and (possibly) child support, is a massive disincentive to do paid work for both parties for the duration of the FISA. The resulting disincentive – dubbed by economists a high effective tax rate – is likely to result in long-term adverse consequences for those who are encouraged by it to extend their time out of the labour market.

By removing the “clean break principle” in the current legislation and in combination with the creation of the high effective tax rate discussed above, the FISA provides another weapon for vindictive or uncaring people in the post-relationship phase. Post-separation, such a person could shift from full- to part-time or even zero employment, gain all the extra leisure and shift a large amount of the income loss on to an ex-partner. Experimental research confirms that people are prepared to pay a personal price to reduce the income of others under some circumstances. The FISA gives these people the opportunity, and at a low price. Equally strong incentives are created on both sides to avoid and evade the high effective tax rate by legally or illegally hiding income or shifting it into the post-FISA period. To the extent that these outcomes occur, the equity goals of the FISA system will not be met, even for the minority of breadwinner-style couples for whom the system is ideally designed.

The FISA presumes income-sharing during a relationship as the default standard for assessing economic disadvantages following a relationship. However, for a significant number of people, income-sharing may not occur in the relationship, and so may not be an appropriate benchmark for assessing post-relationship living standards. These people, however, unless they explicitly opt out, will be swept into the FISA system, creating inequity.

In considering the economic advantages and disadvantages following the end of a relationship, the FISA also fails to consider re-partnering and new children, of both parties. Re-partnering and new children can considerably change a person’s post-relationship economic situation for either good or ill. If the Law Commission’s proposal is accepted, it will create considerable economic inequity for those who re-partner or gain children within the FISA period.

Additionally, the FISA model fails to value unpaid domestic work in considering economic advantages and disadvantages resulting from separation. Yet loss of the fruits of unpaid work is a very real economic disadvantage of separation for those who specialise in paid work, and higher leisure from doing less unpaid work for a paid partner is a clear economic advantage. Again, by failing to acknowledge and value unpaid work post-relationship, further economic inequity is created by a FISA.

Overall, the extension of family responsibilities to support ex-partners, post-relationship, would likely be a significant backwards step, creating inefficiency and inequity that, even in the best-case scenario of the breadwinner couple, lacks majority public support.

Lastly, the Law Commission proposal involves opening an entirely new and substantial area for additional legal dispute at the end of a relationship. Do we really need a new lawyer-designed reform providing lawyers with more work at such a stressful point in people’s life-course?

This article is based on the submission by Victoria University of Wellington’s Institute for Governance and Policy Studies to the Government’s Welfare Expert Advisory Group and appears in the Institute’s latest newsletter (for which free subscriptions are available from igps@vuw.ac.nz with “Subscribe to newsletter, please” in the subject line).

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