Gift or Loan? What It Means for Your Family Law Property Settlement

Gift ot Loan?

Written by Lily Palasia

In family law matters, it is increasingly common for parents, friends and family to assist loved ones financially by contributing towards house deposits, renovations, business ventures, private school expenses, braces or other major expenses. 

Understandably, money is often advanced on the basis of trust, with an informal understanding that it will be repaid at a later date. Unfortunately, these informal agreements can become complicated if a relationship later breaks down. 

One of the most common disputes in a family law property settlement is whether money advanced by friends and family should be treated as a gift or a loan. 

For many families, the answer seems obvious. However, unless the monies advanced looks, smells and feels like a loan, the answer is not always so clear.

Why Does It Matter For Your Property Settlement?

If money is found to have been a gift, it generally will not be treated as a liability of the parties. As a result, it will not be considered when determining the net asset pool for division. 

If the money advanced is found to be a legitimate loan, it may instead be recognised as a liability and considered when determining a party’s entitlement.  

The distinction can have a significant impact on the outcome of a property settlement.

What Does A Genuine Loan Look Like In Family Law?

Simply calling something a "loan" is not enough.

The Court looks at whether the arrangement genuinely operated like a loan. In other words, does it look, smell and feel like a loan?

While every case is different, the following factors are often persuasive:

• A written loan agreement signed by the parties; 

• The loan was documented by a solicitor before the funds were advanced; 

• There is a repayment schedule, and regular payments have been made; 

• Interest is payable; 

• The lender has kept records of repayments; 

• There is security for the loan e.g. by way of mortgage; 

• The loan is treated consistently in tax records, financial statements or balance sheets (if relevant). 

Parties to a family law dispute should remember that, if their matter proceeds to a Final Hearing, their matter will ultimately be determined by a Judge who is not privy to the informal arrangement, and who can only make decisions based on the evidence before them. 

The more these factors are present, the more likely the Court is to accept that the money was genuinely intended to be repaid, and is legitimately a loan. 

On the other hand, the Court may conclude money was a gift where:

• There is no written agreement; 

• No repayments have ever been made; 

• No interest is charged; 

• The party only begin describing the money as a loan after separation; 

• There is no fixed payment date. 
  

In these situations, it can be difficult to persuade the Court that there was ever an obligation to repay the money.

Get Advice On Your Family Law Property Settlement

If you are involved in a family law dispute involving an informal advance of money from family or friends, getting legal advice early can make a significant difference to your property settlement outcome. 

Contact Pippa Colman Family Law team today to discuss how we can help you.

Important Disclaimer

The above information is general in nature and provided for educational and informational purposes only. It is not legal advice and should not be relied on as such. Every situation is different, and you should seek independent legal advice before making decisions about your own circumstances.