IS IT A GIFT OR A LOAN? HOW THE COURT TREATS GIFTS AND LOANS IN FAMILY LAW

Although typically family law property disputes are between married or de facto partners, in an age where it is common for parents (and other family members) to provide financial support to the parties during the marriage, there is an increasing trend for these third parties to become enmeshed in the dispute between parties.

Parents and family members often find themselves involved in family law proceedings where an argument arises following the breakdown of the marriage or relationship as to whether the monies received by the parties (or one of them) were a gift or a loan to be repaid.

The dispute often arises because there was an informal or verbal agreement between one of the parties and their parents in relation to the advancement of monies.  In many circumstances, parents and their children do not consider it necessary to formalise or document the loan as there is an ‘understanding’ or expectation that the money will be repaid and it is not anticipated that the marriage or relationship may break down.

In other cases, the ‘loan’ is documented and secured by mortgage but it can still be challenged, in both the Family Court and the Supreme Court.

The question of whether money provided by parents is a loan or a gift can be a complex issue.  When determining whether the monies are a gift or a loan, the Court will consider all the evidence, including evidence from the parents, to determine whether there is a repayable loan.  There are a number of factors that the Court may consider in making its determination, including but not limited to:

  • the existence of any written loan agreement.
  • the terms of repayment.
  • whether any loan repayments were in fact made by the parties.
  • evidence of any discussions held between the parties as to the existence and terms of the loan.
  • whether there was any expectation of repayment.
  • whether there was any security provided in respect of the loan, such as a registered mortgage.

If after reviewing the circumstances of the case, the Family Court considers the money to be a loan, the next question is whether the loan is legally repayable and if so whether it is likely to be repaid.  For example, a loan repayable on demand may be statute barred depending on when the loan was advanced.  If these questions are answered positively, within property proceedings, the Court may order the parties to repay the loan from the matrimonial asset pool; however the Family Court is less likely to include the loan if it is vague or uncertain and if it is unlikely to be enforced.

If the Family Court is not satisfied that the monies advanced are a loan, repayable to a party’s parents or other third party, then it may determine the monies were a gift to the parties.  In these circumstances the money is generally treated as a contribution made on behalf of the party whose parents gifted the money. This will in turn generally increases that party’s property settlement entitlements.

Whether money advanced by parents is treated as either a gift or a loan can significantly affect the outcome of a property settlement.  Therefore it is important that where parents wish to loan money to children who are married or in a de facto relationship, which they expect to be repaid:

  • That the parents obtain their own independent legal advice at the outset.
  • There is an enforceable written loan agreement in place between all the parties. The loan agreement should set out the terms of the loan – when it is to be repaid, the interest to be charged etc.
  • The borrowers must obtain independent legal advice to protect against a claim that the contract is “unjust” within the meaning of the Contracts Review Act.
  • Whether there should be security for the loan, for example by the parents lodging a caveat or registering a mortgage against the parties’ home.
  • Once the agreement is entered into, the terms of the agreement are adhered to, for example by the payment of interest.

A recent Court of Appeal decision in New South Wales, Chaudhary v Chaudhary [2017] NSWCA 222, involved a wife’s challenge to a mortgage secured over the matrimonial home in favour of her former father-in-law, including an assertion the loan and the mortgage constituted an “unfair contract” within the meaning of the Contracts Review Act (NSW). The Court of Appeal considered whether the advances made constituted a gift by the father/father-in-law to the husband, or a loan to him.  The primary judge had described the mortgage a “legal device to attempt to quarantine the money from the jurisdiction of the Family Court in the event of the breakdown of the marriage.”  The Court of Appeal disagreed with this assessment and upheld the loan and mortgage.

One Judge of Appeal commented on the unaffordability of housing in Australia:

“There has been much discussion in recent times about the unaffordability of housing, particularly for young people, in many parts of Australia. One consequence of declining housing affordability is that young adults very often need and sometimes receive assistance from parents (or other benefactors) to enter the housing market. The occasion for providing that assistance may be that a young couple is in or about to start a relationship.

Some benefactors in these circumstances may be quite content to make a gift of money to assist with the purchase of the property. Others may be willing to assist with a purchase but approach the matter more circumspectly. For example, they may be willing to provide funds to assist with the purchase of a property without necessarily expecting repayment if all goes well. Yet they may also wish to protect the family’s resources in the unhappy event of the relationship breaking down.

There are a number of ways in which these objectives might be achieved.”

How we can help

If you are a parent considering loaning money to a child in a marriage or de facto relationship, please contact McLachlan Thorpe Partners.  We will be able to guide you through the process of protecting the family’s resources in the unhappy event of the relationship breaking down.

Vicki Kelly, Partner and the Family Law Team also have extensive experience with helping many clients through difficult family law matters.  If you have a family law matter, concerns about a loan or gift or questions about family law and you would like further information, please contact:

Vicki Kelly, Accredited Family Law Specialist, on vkelly@mtpartners.com.au

Renee Smith, Accredited Family Law Specialist, on rsmith@mtpartners.com.au

Emma Shuttleworth on eshuttleworth@mtpartners.com.au

 

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