Loan or gift? A Perennial Problem

During the course of a relationship, it will occasionally transpire that the family or friends of one of the parties to the relationship will provide the couple with money. This can be in the form of a gift, or it can be a loan.

Obviously, if the money is a gift, there is no expectation that it will be repaid. If the money is a loan, the reverse is true. Usually, in circumstances when money is loaned, a security is taken out by the lender to protect them against the possibility of default. In the family context, however, loans are rarely formalised – there is nothing in writing, no payment schedule devised and no interest is registered against property owned by the borrowers. This may be fine as long as the family relationship is harmonious, but it can become tricky if the Family Court gets involved following a relationship breakdown.

This is because the Family Court treats gifts and loans differently and a Judicial Officer will need to determine in to which category the money falls. The outcome can change the size of the asset pool and the amount a party may receive.

How then does the Court determine if money is given as a gift or a loan, particularly in circumstances where a loan may be unsecured? This comes down largely to a matter of evidence and the weight to be given to that evidence. In the case of Malcher & Malcher[1] for example, the husband claimed that $2.6 million given to him by his father was a loan, while the wife argued it was a gift. In reaching the conclusion that the money could not be characterised as a loan, Justice Le Poer Trench considered a number of matters, including [at 1508]:

whether there is any interest component, the comparison of any interest rate charged with what the market was offering to arms-length commercial borrowers during the currency of the loan, and whether the parties to the marriage were eligible for a commercial loan based on their financial circumstances…

This is by no means an exhaustive list. Other cases involving gifts and loans have considered:

  • Has the lender taken steps to secure the loan, for example by registering a mortgage;
  • whether or not an agreement was ever drawn up;
  • if it was, what were the terms of the agreement;
  • whether any other documents support the existence of a loan;
  • whether terms of repayment have been outlined or decided;
  • whether any demand for repayment had ever been made and, if it has been, was it made before or after a couple separated;
  • whether any steps have been taken to recover the money and if so, were those steps taken before of after a couple separated;
  • whether, in the circumstances of the case, it is likely that repayments will be expected;
  • the credibility of the parties and their evidence; and
  • the extent to which evidence regarding the provision of the money is challenged.

In summary, the Court looks at the circumstances surrounding the advance of the money. It will look at the relationship between the giver and receiver, their respective financial security and, if repayments have been made or demanded, or an agreement drawn up and the timing of these actions. No one factor will be determinative and the outcome will always depend on the facts of an individual case.

If the Court decides that money is a loan, it’s considered a debt of a relationship and needs to be repaid before all the assets can be distributed between a couple. If the Court finds that money was a gift, however, it is treated as a contribution to the assets of the parties by the person whose family or friend gave them the money. While the person who was given the gift is unlikely to receive the whole of the money back, they are likely to receive an adjustment in their favour when the Court is assessing their contributions because of the gift. If you would like more information regarding the process the Court undertakes in determining an appropriate property settlement, see our Property Settlement page.

What all this means is that a person who loans a family member or friend money without taking steps to formalise the loan may find themselves in a position where they have no hope of getting their money back. There are, however, steps you can take to minimise the risk of this happening. If you are a lender or have received a loan or a gift of money and would like more information, contact Carr & Co at contactus@carrco.com.au or 9322 8000.

 

[1] [2016] FamCA 1063

Categories: News & Alerts, Perth Family Lawyers Information, and Property Settlement.