Gift or Loan: Does it really matter?

Consider this Scenario

You and your partner / spouse are desperate to buy your first home. After months of going to open homes and searching the internet you reach the conclusion that you will be unable to buy a house anytime soon because you both just don’t have enough cash.

After several discussions with your parents about this issue, they offer to give you $70,000 to help you purchase your first home.

A year after you purchase your home, you and your partner separate and decide to sell the home and split the sale proceeds.

What about the $70,000?

Generally, the first question you should be asking in this situation is whether the $70,000 was advanced to you as a gift or a loan? It is important to determine the nature of the financial assistance at the outset as this will affect how it is treated in the property division.

Generally, gifts will not be repayable by the parties, while loans will be repayable by the parties and therefore will appear in the property pool as a matrimonial liability.

While financial assistance provided by a parent to a child to assist with the purchase of property is a common arrangement in families, the law dealing with this arrangement is quite complex. There is no clear legislation setting out whether an advancement from a parent is be a loan or a gift.

These matters are dealt with on a case by case basis.

Summarised below are two relevant cases that deal with the question of gift or loan.

Pelly & Nolan [2011] FMCAfam 530

In this case, a father loaned his son $250,000 to assist him purchase a property. A loan document was prepared by the father but was not registered. The son sold that property and the father loaned an additional $70,000 to the son for the purchase of another property. The son had not made any repayments to the father nor was he charged any interest.

The Court held at [148] that when the obligation to repay the principal sums of $320,000 arises, it is on the balance of probabilities, likely to have to be repaid by [the son] to [the father].

As a result, the $320,000 was included in the property pool as a matrimonial liability.

Maddock & Maddock & Anor [2011] FMCAfam 1340

In this case the father advanced the parties approximately $240,000 by way of 3 bank cheques to assist them purchase a property.

There was no written contract as to the loan.

There was no term as to the repayment of the loan and no demand for repayment was ever made until separation.

The Court held at [68] the moneys were simply advanced and nothing was said as to when they would be repaid and in what way.

The Court found that the money was not advanced as a gift and could not be properly described as a loan in the ordinary sense. It held the view at [72] that the complete absence of a term for repayment or a mechanism for it to occur means that the ultimate characterisation of the advances is that they are not repayable. They were repayable at will.

At [73] the Court held, ‘I am absolutely clear in my mind that if the parties had not been separated, the [father] would never had asked for his funds. They would have been repaid as and when they were able to be repaid.’

What should you do?

If you are providing your child with financial assistance and want this to be considered a loan we suggest that you have a Loan Agreement or written contract prepared.

Make sure the loan agreement includes:

1. The purpose of the loan;
2. The intention of the parties;
3. The duration of the loan; and
4. Terms of repayment.

Be Mindful

There is no requirement that the rights of an unsecured creditor or clam by a third party must be considered before the Court makes property orders.

It is common for the Court to find a situation where a parent has made a loan to a child which is in all respects legally enforceable, but which is not in fact enforced and would not really be expected to be enforced. In these instances, the Court has taken the view that these loans should not be taken into account.

 

Need Assistance?

If you are considering loaning funds to your child or are about to receive a loan from your parents it is highly recommended that you first obtain legal advice.

Call us on (02) 9281 5088 to speak with our Associate Family Law Solicitor.

This information is general in nature and is not intended to be relied upon as legal advice. We suggest that you obtain proper legal advice before acting upon anything you read in this article.