This article will explain when is a loan considered a gift and how that distinction is treated by Australian Family Law Courts.
Confusion can easily arise in families particularly when one person gifts another an expensive item, piece of land, or amount of money.
It is not unusual for parents to seek to help their children out with first-home deposits, house renovations, and significant expenses for a new baby or study.
Legal Differences
The key to understanding when is a loan considered a gift is defined by what the terms of the loan were, and if they were then followed by the parties.
Gift
The Family Court system in Australia will make the legal presumption that money, real estate or physical items (such as a car) given by a parent to a child or a husband to his wife, is a gift unless there is some form of documentation underpinning that transfer.
For big-ticket items (such as real estate) or precious jewelry, it is good practice to have some paperwork explaining the nature of the transfer – even if it is a gift.
Now if a person gives another family member or spouse a motor vehicle, a house, or a large sum of money, and then casually says in the course of conversation, “this can be repaid at some future time”, with no strict deadline, some could later interpret that transfer to be a gift.
Loan
Whenever money, real estate or items are given to another person and there is an expectation of repayment at some time in the future, then that transaction is considered a loan under Australian applicable laws.
The court will ask questions like: Was there a commercial interest rate on the loan? Were the terms of the loan commercial in nature? Were any repayments made? Was the loan document signed?
This is where it is crucial to define at the outset how the transfer of money or property to another family member is defined.
It is always good practice to prepare a written agreement describing a significant transfer of money, property, or assets to eliminate confusion or disputes in the future about the arrangements behind such a transaction.
Loan Written Agreement
For a loan to exist there needs to be a written agreement that documents the terms and conditions of the loan. The written agreement should include at a minimum:
- the amount being borrowed;
- repayment arrangements and frequency;
- an indication of whether interest will be applied;
- any security for the loan.
In one Canberra family law case, a mother gave the husband a loan which was expressed only verbally.
There was no formal written agreement.
The court found that this was a gift and considered it a significant contribution from the husband in the split of the marital property between the parties.
This is a good example of when a loan is considered a gift and part of a section 79(4) element of deciding entitlement in a marital property settlement.
Gift or Loan: Factors Considered
Australian law differentiates between a gift and a loan primarily based on the parties’ intention during the transaction and the presence or absence of a contractual obligation to repay.
For a transaction to be considered a loan, there must be a legal agreement, either verbal or written, that the money or property transferred will be repaid, potentially with interest, within a certain timeframe.
Conversely, a gift is understood as a voluntary transfer of money or assets from one person to another without the expectation or requirement of repayment.
- Existence of a Formal Agreement: A documented agreement indicating the repayment terms, interest, and other conditions is strong evidence of a loan. The absence of such documentation can, in some contexts, imply a gift; however, this is not a determining factor on its own.
- The Behaviour of the Parties: Regular repayments or actions demonstrating an understanding that the money or property needs to be returned can reinforce that a transaction is a loan. In contrast, the lack of repayment efforts may suggest a gift, though not conclusively.
- Verbal Agreements or Understandings: While these are often harder to prove, verbal indications at the time of the transfer, witnessed by others or followed by consistent behaviour, can be significant. Courts will consider this evidence in understanding whether a transaction was meant as a gift or a loan.
- Nature of the Relationship: The relationship between the parties (e.g., family, romantic, or business) can influence the context within which the transaction is understood. For instance, money given during a family event may be considered a gift, while a business transaction is more likely to be viewed as a loan.
- Circumstances of the Transaction: The situation during which the transfer occurred can also be indicative. Special occasions, like birthdays or weddings, are more conducive to gifts, whereas a personal financial crisis might imply a loan.
In cases of dispute, Australian courts will assess these factors in light of the evidence presented to ascertain the true nature of the transaction. It’s also important to note that the burden of proof may depend on the specific claims of the parties involved.
Given these complexities, consulting with a knowledgeable property settlement lawyer for advice or representation is often advisable.
Proof Needed To Establish Something As A Gift In Australia
A Deed of Gift is Australia’s most common proof of a gift. A Deed of Gift is a legal document that states that the donor is giving the gift to the recipient voluntarily and without any expectation of repayment. It should be signed by both the donor and the recipient, and it is important to have two witnesses sign the document as well.
Other evidence that can be used to establish a gift includes:
- Bank statements: If the donor transfers money to the recipient’s bank account, the bank statements can be used as evidence of the gift.
- Receipts: If the donor purchased a gift for the recipient, the receipt can be used as evidence of the gift.
- Other documentation: Any other documentation that shows that the donor intended to give the gift to the recipient can be used as evidence, such as letters, emails, or text messages.
Legal Actions to Take If Someone Claims The Gift Was A Loan
If someone claims that a gift you received was actually a loan, you have a few legal options available to you.
Defend your position in court
If the person claiming the gift was a loan takes you to court, you can defend your position. You can present evidence that the gift was intended to be a gift, such as Deeds of Gift, bank statements, and receipts.
You can also testify about your relationship with the person who gave you the gift and why you believe they intended it to be a gift.
Negotiate a settlement
If you do not want to go to court, you may be able to negotiate a settlement with the person who claims the gift was a loan. This may involve agreeing to repay some or all of the money or property that you received.
File a counterclaim
If you believe that the person who claims the gift was a loan is acting in bad faith, you may be able to file a counterclaim against them. This may involve alleging they are trying to defraud you or breach a contract.
Gift or Loan Case: Gosper v Gosper [1981] FLC 91-108
Background:
In Gosper v Gosper, a dispute arose between family members regarding the financial contributions towards a property.
The central issue was whether the contributions made by the parents to their child and their child’s spouse were gifts or loans.
This distinction would affect the property settlement after the child and the spouse decided to separate.
Court’s Consideration:
The case revolved around several critical points that the court scrutinised to determine the nature of the financial contributions:
- The lack of a formal loan agreement: No formal documents suggested that the money provided should be repaid at any specific time or any written agreement outlining the terms of a loan, such as interest to be charged and security over the property.
- Family relationship and typical behavior: The court considered the nature of family relationships, where financial transactions often don’t involve formal agreements and are based on trust and the mutual understanding of assistance.
- Conduct of the parties: The behaviour of the family members before, during, and after the transactions took place was examined to see if there was any implied or explicit understanding of repayment.
- Communication between parties: Any discussions or correspondence referring to the money were analysed to understand the context in which the transactions were made.
Decision:
In its decision, the court leaned on the principle that the transaction’s character is determined by the parties’ intention at the time of the transaction, with a particular emphasis on the evidence (or lack thereof) of an agreement for repayment.
In “Gosper v Gosper,” the court found that the money provided was a gift, not a loan. The court made this decision based on the overall circumstances, including the lack of formal loan documentation and the parties’ conduct, which did not indicate an expectation of repayment.
Implications:
This case is notable for setting a precedent in family law matters, emphasising that the Family Court will look beyond just written agreements to determine the nature of financial transactions.
It highlighted that in familial settings, money is often given more informally, and the intention behind the transaction will be thoroughly examined through various forms of evidence.
“Gosper v Gosper” continues to be cited in family law disputes, underscoring the importance of clear communication and the value of having explicit agreements when exchanging significant sums of money or assets, even among families. It’s a reminder that a court will consider all aspects and evidence of a transaction within its context.
How are Gifts and Loans Treated in a Divorce Property Settlement?
The Australian Family Court system will usually consider that a gift is part of one party’s contribution to the marriage and will adjust the settlement to reflect this.
Financial orders in property settlements are made by the court to describe how the division of property between the parties will be made.
The general principles around property division are described in detail in the Family Law Act 1975 and asset division is determined by the financial circumstances of each couple.
In the event that one of the spouses has received a significant sum of money or property item as a loan, this will likely result in a reduction of the available property for division in the settlement.
This is because a loan must be repaid and if the item has money owing on it, this will form part of the couple’s joint liabilities which must be paid back to the lender.
Loans and Gifts During Divorce Property Settlement Example
The distinction between a gift and a loan is particularly relevant to Family Court property settlements for obvious reasons.
If for example, a husband bought a holiday home for his wife and the property was in her name, then that transaction would be considered a gift at law.
However, that property would be counted as part of the combined assets of the divorcing couple and would be divided in the usual way.
Smaller items that are gifted by say a husband to a wife such as jewelry, luxury goods, electronics, and so on, will be considered personal possessions of the wife in the combined property pool of the husband and wife.
Courts base their decisions in family law property proceedings upon the nature of the gift and the circumstances surrounding this, including the intention of the donor.
Need Help on How To Prove It Was A Gift Not A Loan?
Don’t let misunderstandings strain your relationships and peace of mind. At Justice Family Lawyers, we specialise in resolving disputes regarding financial transactions.
Whether you’re facing a family disagreement or a formal legal challenge, our experienced team is here to support you. We’ll help gather the necessary evidence, provide expert guidance, and passionately advocate for you.
Contact Justice Family Lawyers today and take the first step towards securing your financial future and emotional well-being.
Principal of Justice Family Lawyers, Hayder specialises in complex parenting and property family law matters. He is based in Sydney and holds a Bachelor of Law and Bachelor of Communications from UTS.
