It is becoming increasingly common for parents (and other family members) to give de facto or married partners financial support during the relationship or marriage.

Parents and family members can find themselves enmeshed in family law proceedings where, after the breakdown of a relationship or marriage, a dispute arises between the parties as to whether monies received by one or both parties were a loan to be repaid or a gift.

The dispute often arises because there was a verbal or informal agreement between one party and their parents regarding the advancement of monies. Parents and their children may not consider it necessary to document or formalise the terms of the loan as there is an ‘understanding’ that the money will be repaid and is not anticipated that the relationship or marriage will break down.

Even if the ‘loan’ is documented and secured by a mortgage, it can still be challenged in the Supreme Court of NSW or the Federal Circuit and Family Court of Australia.

Evidence (including evidence from the parents) the court may consider in determining whether money provided by parents is a repayable loan or a gift include:

1. Whether there is a written loan agreement;
2. whether there was any expectation of repayment;
3. the terms of repayment;
4. whether any security was provided (e.g. a registered mortgage);
5. whether the parties made any loan repayments;
6. evidence of discussions between the parties regarding the existence and terms of the loan.

If, after reviewing the evidence, the court considers the money to be a loan, it then considers whether the loan is legally repayable and, if it is, the likelihood of it being repaid (e.g. a loan repayable on demand may be statute barred depending on when it was advanced). If the loan is repayable and is likely to be repaid, the court may order the parties to repay the loan from the asset pool. The court is less likely to make such an order if the loan is uncertain or vague and is unlikely to be enforced.

If the court is not satisfied that the monies advanced are a loan, repayable to a party’s parents or to another third party, it may determine the monies were a gift to the parties. In these circumstances the money is usually treated as a contribution made on behalf of the party whose parents gifted the money, which generally increases that party’s property settlement entitlements.

Whether money advanced by parents is treated as either a loan or a gift can significantly affect the outcome of a property settlement. Therefore, when parents wish to make a loan to children in a de facto relationship or married, which they expect to be repaid, it is important that:

1. Any loans from parent to child are in writing and signed by all parties;
2. The terms of the loan, including interest and time for repayment of the principal, are specified;
3. the parents obtain their own independent legal advice prior to advancing funds;
4. The borrowers (including the recipient child’s spouse or partner) also obtain independent legal advice;
5. Steps are taken to register the loan agreement, for example by lodging a caveat or registering a mortgage against the parties’ home;
6. Once the loan agreement is executed, the terms of the agreement are adhered to, for example by the payment of interest, and records are kept of repayments; and
7. Borrowers and lenders seek advice about the benefits of entering into a Financial Agreement (before or during their relationship) dealing with the treatment of gifts and/or loans received from family members.

A recent Court of Appeal decision in New South Wales, Chaudhary v Chaudhary [2017] NSWCA 222, involved a wife’s challenge to a mortgage secured over the matrimonial home in favour of her former father-in-law, including an assertion that the loan and the mortgage constituted an “unfair contract” under the Contracts Review Act 1980 (NSW).

The Court of Appeal considered whether the advances made constituted a gift or a loan by the wife’s father-in-law to the husband. The primary judge had determined that the mortgage was a gift, describing it as a “legal device to attempt to quarantine the money from the jurisdiction of the Family Court in the event of the breakdown of the marriage.” The Court of Appeal disagreed with this assessment and upheld the loan and mortgage.

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