Loan or Gift?

April 11, 2013

Tracy and Sam are a young newlywed couple on the search for their first home. After spending countless hours looking for the perfect home in their ideal price range, they realize that, like many young people, they are short of cash. So Tracy and Sam decide to call upon Tracy’s parents for assistance. Tracy’s mum and dad agree to loan some money to help Tracy and Sam buy the perfect home, and things are great. However, if after a while Tracy and Sam separate, will the loan given from Tracy’s parents be considered a loan or a gift?

As common as this scenario is, it is a complicated area and there is no clear legislation as to whether an advancement from a parent should be considered a loan or a gift. Fortunately there have been two recent Court cases in which the Court has had to determine a situation similar to the one above.

In Pelly & 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.

In Maddock & Anor (No 2) [2011] FMC, another 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.

Returning to our beginning scenario, if Tracy’s parents want the money provided for the property to be considered a loan, what could they do? While there is no clear rule, the following tips are suggested:

  1. Any loan from parents to children should be in writing;
  2. A duration for the loan should be specified;
  3. There should be a written/express intention that the money is to be repaid.

Please obtain our advice in relation to the above kind of matter before parting with your money.

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