Treatment of Loans in Family Law Matters

11 February 2020

With the “Bank of Mum and Dad” being ranked as one of Australia’s top home lenders, both parents and their children alike should be mindful of how such “loans” may be characterised in the event of a relationship breakdown.

In family law matters, disputes can arise when loans from parents or family members have been insufficiently documented, or the intention of the advance is unclear.  This ambiguity can provide scope for a non-related spouse to argue that an advance was a gift, and therefore not a liability to be repaid.

Parents and children can best protect any advances made during a relationship in the following ways:

1.  Formality- Is there a written loan agreement between the parties? Has it been executed? 

2.  Content- What are the terms of the loan? Is there a repayment date? What are the triggers for repayment? Is there a schedule for  payment? Is interest payable?

3. Performance- Have any repayments of principal or interest been made? Is there a genuine expectation that the loan will be repaid or enforced? 

4.  Will a mortgage be prepared and registered on title?

5.  In the event that there is an unregistered mortgage, will a caveat be lodged? Will the first mortgagee be contacted to advise of the unregistered mortgage?

While this list is not exhaustive, the presence of these factors can be highly persuasive if a court is asked to determine whether an advance should be characterised as a loan or a gift.  In the alternative, an absence of documentation, terms of repayment or demand have been found to lack the requisite characteristics of a loan and therefore not a liability to be included in the property pool.

In addition to documenting the loan, another option is for the “children” to enter into a Binding Financial Agreement to confirm the intent of the parties.  

Legal advice is important at the time the funds are advanced to ensure that the intent of the parties is documented to create a legally enforceable document.