Is it a Gift or a Loan? Protecting Family Money in Property Settlements

As per ABBA – money, money, money…

We live in challenging times. The statistics show about half of us will go through a marital separation (including de facto couples), once or maybe more in our lifetimes. In addition, most couples have more than one party earning an income and contributing to the assets acquired along the way, making the division of the asset pool upon separation a potential “battlefield”.

The biggest asset in most households is the family home. However, due to the significant increase in property values, many young couples cannot afford a deposit to acquire a home, or even a unit/apartment. To assist, parents often provide funds to support their children with the deposit, or even part payment of the purchase price.

Division of Property Settlement

When a couple separates, one of the critical steps in the legal process is the division of all the assets. This includes calculating the parties’ assets, liabilities and superannuation interests that form the total property pool available for division. However, complications may arise when there is a dispute over whether funds received from family members (in particular, parents), such as those described above, should be considered a gift or a loan.

The ‘Bank of Mum and Dad’

It is not uncommon for parents to offer financial assistance to their children, often after getting married. A survey conducted by UBS found that 40% of Australians are involved in what some call “the nation’s fifth largest bank”. Given the exorbitant cost of housing, it is not surprising that the bulk of reported transactions related to home purchase costs. Among payments ranging from $25,000 to $200,000, with an average value of $75,000, 28% were attributed to mortgage obligations, while 25% were connected to home purchases. These financial contributions can significantly impact the property pool of a couple when determining each party’s entitlements following separation.

Distinguishing Between a Loan and Gift

In deciding whether the funds are a loan or a gift, there are several factors that the Court may consider. The central issue to this is simply, a gift and loan are distinctive things and treated very differently in the family law landscape.

Upon the moneys being paid from the parents to the children, or the bank on their behalf, parties rarely enter into a written loan agreement. The reason is easy to understand. At time of the loan, no one considers the possibility of separation. Everyone is excited about “living the Australian dream” of owning their own home. However, strict “rules” are applied if questions are to be answered in the Federal Circuit and Family Court of Australia to determine the nature of the money provided, i.e. loan or gift.

Presumption of Advancement

At law, the relationship between parent and child establishes a presumption of advancement in these instances. This means that if an asset, such as a property, is purchased in the name of the child, but using funds of the parent, the asset is presumed to be a gift to the child.

The presumption can be rebutted with clear evidence that the transfer had a different purpose or intention, such as a loan, and that this was the intention at the time the transaction occurred. The Court will look at the requirement for repayment of the loan, not the motive of the parent in making the payment.

Is it a loan or a gift?

In determining if funds advanced by a parent to a child should be considered a loan and not a gift, the Court will consider all the evidence to determine whether, on the balance of probabilities, that it was the intention of the parties that the sum was paid by the parent to the child on the express condition that it should be repaid. The factors the Court may consider include:

• 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 an expectation of repayment
• Whether there was any security provided in respect of the loan, such as a registered mortgage
• Whether representations were made to outside agencies, such as banks or Centrelink, regarding the categorisation of the advance

If the Court considers the advance to be a loan, the next question is whether the loan is legally enforceable 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. However, if the Court is satisfied that the loan is repayable, the Court may order the parties to repay the loan from the matrimonial assets.

The Court is less likely to consider it a loan if it is vague, uncertain or unlikely to be enforced. Where the Court is not satisfied that the loan is repayable (or is statute barred), then it is likely to determine the advance to be a gift and treat it as a contribution made on behalf of the party whose parents advanced the funds.

Issues often arise where one of the parties does not acknowledge the existence of an unsecured or undocumented debt. If a loan lacks formal documentation, the Courts will generally consider the intention of the parties involved, any repayment history, and the nature of the loan. In one case, a loan between a mother and her married son lacked any formal agreement or clear repayment terms. As a result, the Court concluded that the funds were intended as a gift and considered the money a significant contribution from the Husband during settlement.  Therefore, what one party views as a loan may be deemed a gift by the Court upon consideration of all the evidence.

Obviously, if the monies are deemed to be a loan, they will need to be repaid and as such are identified as a liability in the asset pool. This will generally be treated as a joint liability in the property settlement. As a result, the loaned amount must be repaid from the property pool to the lender before the remainder of the assets are divided.

Effects on Property Settlement

If the Court determines that the funds were a gift, the amount will form part of the property for division, whereas if it is considered a loan, this will result in a reduction of the property pool.

If a gift is made by one spouse’s parents, it is generally taken that the gift is for the benefit of their child alone, unless evidence exists otherwise. Therefore, money which is considered a gift to one member of the separating couple is viewed as a contribution to the property pool on behalf of the party who received the gift. That party will therefore receive some “loading” in his/her favour. However, if there was an intention that the gift benefit both parties, it will be taken as an equal contribution by both parties to the property pool.

Protecting your Family’s Resources

Loans that are well documented, with clear terms and evidence of repayment, are more likely to be treated by the Court as genuine debts. Therefore, to avoid ambiguity, loans should be documented, registered correctly, and repaid in the normal manner. Additionally, parties should keep records of all repayments and correspondence related to loan transactions. Sometimes, parents may even register a mortgage against the property which was purchased with their funds, in order to secure their money prior to it being repaid.

Another potential way to “secure” monies advanced is by means of a financial agreement (BFA). A BFA between a couple is a good way to ensure that gifts (and any assets that may be acquired from those gifts) remain the separate property of the recipient in the event of separation.

The funds should be secured prior to the money changing hands. If parties attempt to do this at the time of separation, the chances are it will fail. If one party disposes of the money by repaying the loan after separation, this may be seen as an attempt to defeat the other party’s claim to part of the property pool.