Interfamily Loans- When is it a gift and when is it a loan?
As a result of the Royal Commission into banking a few years ago, the banks tightened their lending to customers. Since this time, we have seen a rise in the number of parents lending money to their children to assist their children with the purchase of real estate and often along with a partner.
Whilst things might be rosy at the time of purchase, what happens if your child breaks up with their partner? Will you get your money back or will the court consider it to be a gift? We will answer these questions below:
Will the court consider it to be a gift?
There is a long line of court cases which debate this very topic and relates to the doctrine of the presumption of advancement. The presumption of advancement states that in relation to transfers of money or property amongst a certain class of people (ie mother or father to their child), that in the absence of contravening evidence (often written evidence), the law presumes that money has been advanced as a gift. When it is held to be a gift, there is no requirement for the child to return the money. This can be particularly troublesome if there is a relationship breakdown for the child.
It is therefore very important that if money has been advanced with the intention of it being repaid, there must be a written loan agreement in place.
I have a written loan agreement in place, will the money be repaid?
It is not enough to have a written agreement and label it a loan. It needs to meet the same basic terms of a loan agreement that can be comparable to one drawn up by a bank.
It would need to state the following;
- The amount being lent
- The terms of repayment (weekly, monthly etc)
- The date of repayment
- The interest payable
If the agreement is unclear on any of the above points, the court may decide that this agreement is only enforceable for a period of six years after the date in which it was entered into. If the agreement is unenforceable, the court may view the amount as a gift and the partner you were trying to exclude may lay claim to funds. You may also need to consider how to secure the loan.
It is also important that the terms of the agreement are followed and repayments are actually paid.
It is therefore of the utmost importance that any funds advanced is evidence in writing with an enforceable loan agreement.
To avoid this curly situation, please do not hesitate to contact Chris Henderson at our office to discuss seek advice on how to structure loans to children.
At Phillips & Wilkins, Chris practices in the areas of Property Law, Conveyancing and Family Law. Chris has grown up in the Northern Suburbs and continues to be a part of the local community as being a member of the Old Paradians Amateur Football Club and the Mill Park Cricket Club.