Gift or Loan - What happens if you and your partner were to separate?
With housing prices in Melbourne at an all-time high, it is becoming increasingly common for children to look to their parents for assistance when purchasing a property.
If you are in this position, you should consider how this financial assistance would be characterised in a family law setting if you and your partner were to separate. Would the Family Court consider it to be a gift or a loan?
Why does it matter?
In Family Law, the Court will consider the nature of the funds advanced by parents to a party, and may either include or exclude those funds in the asset pool to be divided in the property division.
If the funds advanced are a genuine loan, it will be considered a liability of the relationship and your net assets available for division would reduce accordingly.
However, if there is no evidence to prove that it is a loan, the advance of funds from your family will be considered a gift. That will be considered a contribution by you to the relationship assets, and you will likely receive an adjustment in your favour in the property division.
The adjustment for a gift is just one step in determining the overall property division, but it is unlikely to result in a “dollar for dollar” allocation to enable you to repay your family. It is therefore generally more advantageous that the funds advanced are properly noted at the time of the advance as a loan rather than a gift.
When will the Court consider the money to be a loan?
When it comes to money advanced from parents to children, each case will turn on its own facts. The Court may take into account the following factors in determining whether the advance is a genuine repayable loan:
- Whether there is a written loan agreement;
- Whether there is an executed unregistered instrument of mortgage and if so, whether it was provided to the primary mortgagee;
- Whether a caveat has been lodged, and if so, when;
- Whether there have been any relevant statements made to Centrelink or the ATO;
- Whether there is a relevant limitation period;
- The terms of the repayment;
- Evidence of repayments;
- Whether there was there a genuine expectation of repayment; and
- Whether there has been a call for repayment of the loan, and if so when.
How we can help
When it comes to the treatment of money received from a family member, ideally you and your family member will seek legal advice before the money is advanced. However, we can always assist by formally documenting the loan, and where necessary, clarifying its treatment in a family law context by way of a Financial Agreement.
For further information, please call us for advice on (03) 9804 0035
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