Was it a loan or a gift? - Big difference!
Housing affordability is a big issue for young Australians. When discussing that issue recently, the Prime Minister infamously remarked that the solution is for parents to “shell out” to help their children buy a home. But for those lucky enough to have parents able to assist them financially in adulthood, whether by helping them into the property market or otherwise, could that “solution” be creating more problems than it solves?
How might that money be treated if the recipient separates from his or her spouse or de facto partner? Almost certainly, the parents who had “shelled out” to help their adult child won’t want the child’s now ex-partner to benefit from or keep some of that money.
Family law property settlement - the basics
The Family Law Act sets out the steps that must be followed to divide up a separating couple’s property. If the court considers it necessary to alter the legal ownership of the parties’ property in order to reach a just and equitable property division, then all of the parties’ assets and liabilities, whether owned jointly or separately, must be identified and valued.
The court then assesses each party’s financial and non-financial contributions to the acquisition of those net assets and to the welfare of the couple or family unit before, during and after the relationship. Having determined respective contributions, the parties’ future needs are compared and taken into account, in order to reach a just and equitable property settlement.
Was it a loan?
If money had been received by one or both parties from parents, for example, the first question that must be answered is whether that financial assistance was a loan or a gift. When the recipient’s relationship breaks down, he/ she will almost always want to argue that the money he/ she received from his/ her parents was a loan. The ex-partner will, in turn, want to argue it was a gift. How do you tell which it was?
The word of the recipient child and his/ her parents will not necessarily be enough to convince the Court that the money was a loan. The Court will have regard to all of the evidence surrounding the “giving” and receipt of the money, such as:
- Conversations between the child, the ex-partner and the parents
- Any relevant documents. For example, did the parents record the transaction in their bank account as something like “Loan to John/ Jane”? Perhaps one of the parties kept a spreadsheet of monies received entitled “Loan from mum & dad”
- Were any repayments made?
- A formal loan agreement would be the best evidence in trying to resolve this question.
Unfortunately, when money and families become intertwined, things have a remarkable propensity for becoming messy. Notwithstanding that, unfortunately few people take the trouble to properly document loans between family members. The lack of clear documentation can turn a messy situation into an ugly one.
If it was a gift, to whom was it given?
Having successfully argued that money received from the ex-partner’s parents was a gift not a loan, that person may now want to argue that the money was gifted to both parties, not just the parents’ child. He or she might bring evidence of conversations where the parents said things such as “We want you both to have this money because we’re all family now”. Or she or he might claim that the money was given in recognition of, for example, the care provided by a child-in-law to her/ his parents-in-law.
While the Court will take into account all of the relevant evidence and each case will turn on its own facts, it is usually the case that the Court would find that money gifted by parents was a gift to their child, not to the parties jointly.
How is this relevant to a property settlement?
The characterisation of whether money received from a parent or someone else was a loan or a gift can be very important to a property settlement, especially if large sums are involved.
Firstly, the money would be taken into account when ascertaining the parties’ assets and liabilities. If the money was a loan, that will be a liability of the parties, reducing the net assets to be divided between them. Legally, there will be an expectation that the loan would be repaid; however, in practice, the lending parents often allow, even want, their child to keep the loan money after the property settlement is finalised, providing a windfall to that person.
If the money was a gift, then it (or whatever had been purchased with it), will form part of the parties’ net assets available for distribution between them.
However, it doesn’t end there. The money would be taken into account in determining each party’s contributions. If the money was a loan, it may have little or no impact on the Court’s determination of who contributed what. Although, the recipient of the loan could be given credit for having contributed the benefit of, for example, a low- or no-interest loan.
If the money was a gift, then, except in the unusual circumstances of the Court finding that it was a gift to both parties, it will be treated as a financial contribution by the party whose parents gifted the money.
Factors such as how long ago the money was received and the size of the gift compared to the parties’ overall net asset pool will decide the extent of the gift’s impact on the final determination of the parties’ respective contributions. The larger and more recent the gift, the greater impact it will have on the recipient’s percentage contributions.
Whether money received by a couple from parents or others is properly characterised as a loan or a gift can have a considerable effect on the separating couple’s final property settlement. People’s memories can fade, even change, over time, and it can later be difficult to determine if the money was intended as a gift to one or both parties or a loan requiring repayment.
If parents want to take the Prime Minister’s advice and “shell out” to help their children into the property market, those parents should think very carefully about whether they intend to gift or lend the money, and should seek advice about the pros and cons of those options and the proper documenting of any loan.
If you or someone you know wants more information or needs help or advice, please contact us on (07) 5443 4866 or email email@example.com.