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Was it a gift or a loan? Understanding the difference between the two concepts in Family Law proceedings.

Jessica McKinley & Amanda Doring

It has become increasingly difficult to enter into the property market due to the decline in housing affordability in Australia. This in turn has resulted in many people seeking assistance from “the bank of Mum and Dad”.

Many parents do not feel the need to formalise any arrangement whereby funds are given to their children. It is important to understand what the ramifications are from a Family Law perspective, particularly in the event of a relationship breakdown

In many cases, when couples separate, the party whose parents advanced the money will argue that the funds were intended as a loan, thus creating a debt of the parties that must be repaid. In response the other party may argue that the funds were in fact a gift, so there nothing to repay. 

To avoid there being any doubt that the funds advanced are a loan as opposed to a gift, a written loan agreement should be entered into between all parties which clearly sets out the following terms:

  1. The amount of funds which are loaned;

  2. When the funds are to be repaid and on what terms, for example, in weekly or monthly instalments;

  3. Whether interest is payable;

  4. Whether security is to be given for the loan, like a mortgage or caveat that can be registered on the title of a property; and

  5. What are the consequences of non-payment of the loan.

Without a written Loan Agreement, there is a greater risk that the funds advanced will be classified as a gift, which will be recognised as a contribution of the recipient, but it is highly unlikely that those funds will be repaid. The weight of this contribution varies in each individual case.

How we can help

If you, or someone you know is considering advancing funds to their children to assist them with entering into the property market, please contact Amanda Doring or Jessica McKinley in our Family Law team on (02) 8987 0000 to discuss the best way to protect you and your children.

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