Prime Minister John Key says he hopes that plans to write off $1.7 billion in penalty payments on parents who missed child support payments will encourage those who have moved overseas to start paying child support again.

Revenue Minister Todd McClay said the overly punitive system had resulted in "paralysing" debts for some parents which meant they had given up trying to pay and thousands had gone overseas.

About 120,000 people had child support debt which totalled $3.2 billion - about half of which was owed by people now living overseas. Only $700 million of the total was in child support while the rest was interest and penalty fees for late payments.

Mr Key said it was the responsibility of liable parents to make child support payments. "They have a legal obligation to pay for their kids and they have a moral obligation to pay for their kids, and they should be doing it."

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However, the Government had to take a pragmatic approach and recognise that many were simply failing or could not afford to meet those obligations.

"We need to breathe the hope into those 120,000 families and individuals who see a hopeless position.

"What we are saying to those people is to come back, start making the principal payments to those low-income families that you owe it to, and we will forgive the interest and we will forgive the penalties."

Mr McClay said 54,000 of those who owed child support were on incomes of less than $30,000 a year. Inland Revenue would apply a "fair and reasonable" test to write off debt in some situations. Others meeting payments by compulsory deduction would also have monthly penalties written off, likely to cost $1.7 million over four years.

"This is the legacy of a penalty system that was overly punitive and is now being changed. We need to get parents to start paying so that children, many of whom are in hardship, are better off."

He said about $827 million was owed by those living in Australia while a further $778 million was owed by those in other countries.

The penalty rates would be amended from 10 per cent to a two-stage process of 2 per cent for a late payment, rising to 10 per cent if the payment was more than a week late. Monthly incremental penalties will reduce from 2 per cent to 1 per cent.

Child support

• Total debt: $3.2b, of which $2.5b is penalty payments and interests.

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• Owed by: 120,000 people. $1.6b is owed by people living overseas.

• 54,000 of those are on incomes of less than $30,000.

• Total expected debt write-off: $1.7b over four years.