Is it a Loan or a Gift?

 Wednesday, August 23, 2017

Loan from Parents in Family Law Property settlements- it can be a challenge!

Determining if a payment from a friend or a family member is a gift or a loan is a common challenge in family law property settlements. Pursuant to section 79 of the Family Law Act 1975 (Cth) if the payment is classed as a loan, it will be regarded as a liability and reduce the value of the property pool available for distribution. A gift however is considered as an indirect contribution and as such, will not form part of the property pool.

Is it a loan or a gift?

 Factors that the Court will take into account when determining whether a payment is a loan or a gift are:

  • Whether there is any formal loan documentation between the parties and when this was created?
  • What evidence is there of the loan being repaid? eg. Bank statements.
  • Whether any interest or principal payments have been made during the relationship on the loan?
  • Whether a caveat/charge or other security has been provided for the loan?
  • How long the loan has been outstanding?
  • What is the likelihood that the debt will be enforced?.

Has a parent said ‘it is a gift because we want to help you out’? Bear in mind that the Court will also take into consideration informal factors such as conversations about the nature of the loan.

Case examples

In Pelly v Nolan [2011] FMCA a father loaned his son $250,000 to help his son buy a property. After the property was sold, the father loaned a further $70,000 which the son used to purchase a new property. The son did not pay back any of the loan nor had been charged any interest, although the father had prepared a loan agreement. The Court found that even though no money or interest had been repaid, on the balance of probabilities, it was likely that the son would have repaid the loan. Therefore the sum of $320,000 was considered a liability of the marriage and was paid out of the matrimonial pool. The Court first considered the formality of the loan and how it was documented. E.g. there was a formal agreement allowing for interest and a repayment date, and the parties had begun to make some repayments. The Court is likely to view the loan as a liability given that the parties had the intention to repay the loan.

In Maddock & Anor (No.2) [2011] FMCAfam 1340 a father gave the parties $240,000 towards the cost of buying and building a house. The Court found that there had been no formality, no term of repayment, no demand for repayment until the family law settlement and no capacity to pay. On the evidence given to the Court it was decided that if the parties had not separated, the father would never have asked for repayment of the funds. Therefore, the sum of $240,000 was considered a gift and was not required to be repaid. There was no formal agreement or demand for the repayment of the loan prior to separation. The Court held that had the parties not separated, the parent would never have called on the loan to be repaid and as such considered the money to be a gift.

If you have separated or are thinking of separating from your spouse/partner, contact Ashlyn McCurdy at Cosgriff Lawyers to find out more or to arrange an appointment on (03) 5480 6344 or