Parents and other family members financially supporting de facto or married partners during a relationship or marriage is becoming increasingly common.

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.

If on the available 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.

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