Family law disputes: gift versus loan
It is a common feature in family law matters that one party’s parents have provided financial assistance, particularly to the acquisition of a marital home or other property during the course of a party’s marriage.
Treatment of funds contended to be a loan owing back to one party’s parents by the Federal Circuit and Family Court of Australia is a discretionary exercise based on the circumstances, supporting evidence – particularly of the party’s intentions – and compliance with any written loan agreement.
It appears that where one party contends an advancement of funds was a loan, which would have the effect of any outstanding balance being a liability, reducing the net pool of assets between the parties, the court will not readily accept this without sufficient supporting evidence, particularly regarding intentions of the lender and borrower. Is there a written document? Does it provide terms for repayment of interest? For the lender to secure the debt by way of a mortgage registered on title? Have repayments been made? Are there any further documents executed maintaining both party’s intention the funds are repayable?
Possible implications for lenders
Where a loan has been lent to a family member, with terms providing for a market comparable rate of interest to be repaid on the principal sum loaned, receipt of such interest may have tax implications where this is classed as taxable income. All repayments received should be recorded in writing with details of calculations, if the repayment is principal and/or interest or a combination, and the balance owing after the repayment has been applied. It is possible for a loan agreement to provide for interest to be repayable, however repayments may be comprised wholly of a principal amount only, and no interest, if there were to be adverse taxation issues for the lender.
Treatment of funds advanced upon death of the lender
Turning now to deceased estates: you may have loaned some funds to one child and wish for any unpaid amount to be fairly taken into account upon your demise when you have left your Estate equally between your children.
A formal loan agreement may arguably be treated as having to be repaid to your Estate, depending on the terms of any written document. Where funds have been advanced and are not subject to strict commercial terms, a written document acknowledging the debt may suffice to evidence the existence of a loan, any repayment required during the lender’s lifetime and upon their death, and any terms allowing for any amount owing to be adjusted, or offset, as part of entitlements as a beneficiary of the Estate.
John Steiner v Kenneth Ross Strang and Jason Tang [2014]
Dorothy in her Will included a clause directing her executor’s attention to an Acknowledgement of Loan between herself and her son John, requesting that her executor implement and observe the provisions of that Acknowledgement.
Interestingly, it was John who instructed a lawyer to draft the document, which acknowledged that the loan existed, that should Dorothy demand repayment during her lifetime, John would repay the loan; similarly he would repay the loan to her deceased estate on her death; and if Dorothy had not demanded repayment during her lifetime, and John is named as a residual beneficiary, so long as liabilities at the date of her death are able to be paid without demanding repayment of the loan to John, it could be repaid by John offsetting the loan amount against his entitlements as a residual beneficiary of her Estate. Both parties executed the document in front of witnesses.
The Supreme Court of NSW held that the Acknowledgement was post-contractual conduct: neither party intended that document to be the contract between them regarding the debt – such as a Loan Agreement – but the document acknowledged a loan (and contract) already entered into. The court was required to find out what had been agreed to in a contract only partially recorded in writing, therefore post-contractual conduct assists in determining the balance of the contract.
Conclusion
It is important that you discuss the purpose of any proposed advancement of funds with your lawyer, so they can advise you on options appropriate to your circumstances, regardless of whether funds have already been advanced or not. Properly documenting intentions of gifts and loans, and taking necessary steps in accordance with any documents, may assist avoiding costly legal arguments down the track.
Disclaimer: This is intended as general information only and not to be construed as legal advice. The above information is subject to changes over time. You should always seek professional advice before taking any course of action.
