You’re in a new relationship, with pockets full of optimism you’re seeing the world through rose coloured glasses until… you inevitably find yourself confronted by a prickly and unavoidable obstacle! How will you ever afford to buy your first home?
Then one night, whilst sitting at the dinner table, you realise the value of the equity tucked away in the bricks and mortar of mum and dad’s home! You have a light bulb moment, and before you know it, mum and dad are offering to provide you and your partner with money to help you buy your own home. With exciting times ahead, you accept the free cash and move out with your new partner/spouse.
Unfortunately, perhaps years down the track, your reserve of optimism dwindles and eventually so does your love for your partner. You separate, and with a heavy heart you drag your feet to your local lawyer to obtain some family law advice. To add to your angst, mum and dad have asked for their money back, or at the very least an assurance that your former partner does not get a share of it.
Was it a loan or a gift?
Was there ever an expectation that the money would be repaid to your parents? The answer to this question is crucial in determining whether it was a loan or a gift.
In the case of Sulo & Colpetti  a father gave to his married adult son two advances of $150,000 in the form of purported loans without interest and “repayable on demand”. The money was used by the husband and wife to purchase properties as joint tenants. The husband then received a further $230,000.00 from his father by way of an unsecured loan, used to discharge a mortgage. A loan document was drawn up by solicitors and signed by the husband and his father. The judge determined that although the advances were superficially set up as loans, “there is no evidence that the husband’s father intended to actively pursue a claim against the husband for the monies“. Consequently, the Court did not characterise the transaction as a loan.
What are the characteristics of a loan?
At a very minimum, you should consider the following:
- A loan transaction occurs at ‘arm’s length’.
- There needs to be agreement, either orally or in writing as to the terms of the loan and any formal loan agreement should include as a minimum:
- the term of the loan,
- the interest payable, and
- the minimum repayments.
In the case of Maddock & Maddock & Anor (No.2)  a father gave his son and daughter in law $240,000.00 , which they used to buy a house. There were no terms of repayment, no formality in the agreement, the parties had no capacity to pay and most importantly there was no demand of repayment until the family law proceedings began. The Court determined the father would never have requested that the funds be repaid had the parties not separated. Given that there was no expectation that the money be repaid, the advance was characterised a gift.
Beware of the Extra Hurdles!
Even if you have cleared the above hurdles, it is not yet smooth sailing. You must take note of the following:
- Presumption of Advancement – Where money is advanced by a parent to their child, at law it is presumed to be advanced as a gift unless there is sufficient evidence for the basis of an inference to the contrary.
- Limitation Period- A loan is essentially a contract. Parties to a contract have a period of 6 years from the date of any breach of contract to commence proceeding in an attempt to enforce the contract. A failure to make a repayment in accordance with the terms of the loan is an example of a breach. Upon the expiry of the 6 year period, the innocent party is statute barred from enforcing the loan.
Why is the difference between a loan and a gift important?
If the money advanced was a gift by the parent to their child, it will be treated as a financial contribution by the partner whose parent advanced the money, towards the acquisition, conservation and improvement of matrimonial assets. This means that the money will form part of the pool of assets that will be divided between the husband and wife. The weight allocated to that particular contribution will depend on many factors, including the length of the relationship.
If you are thinking about loaning your children money, or if you have parents you wish to borrow from, you should seek independent legal advice before any money is advanced. The advice you are given can impact upon whether that money is ultimately repayable.