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, significant expenses for a new baby or study.
What are the legal differences between a Gift and a Loan?
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.
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.
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.
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.
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.
When is a Loan considered a Gift by the Family Court System?
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.
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.
What about Gifts from inheritance?
In relation to gifts that occur as part of an inheritance, the case of Gosper held that when the wife’s parents gave the property to their daughter.
In this case, the court found that this property transfer was clearly a gift intended to benefit the daughter even though the property was held in joint names of the husband and wife for more than a decade.
Post-divorce, the wife continued paying the rates and the court considered this contribution.
In Gosper, the court ruled that the property was a gift to the daughter, intended to benefit her, and ultimately ruled that this was to be a contribution on behalf of the wife only.
However, similar cases have produced different judgments and you cannot predict how a judge will treat inheritances in family law cases as they vary on a case by case basis.
The Family Court system will consider all the circumstances around the provision of any funds or property from an inheritance.
If there is any indication of a written loan agreement, then the court may define the funds/property to be a loan.
If no paperwork exists, then the court will consider the inheritance monies/land to be a gift.
There is also the potential during a contentious divorce that the parents who initially gave a gift of cash or property to a divorcing party (husband or wife) early on in a marriage, that this “gift” is actually a “loan” and they and they expect to be repaid.
This can also produce quite different outcomes in the Family Court system.
How Loans and Gifts are considered during Divorce and Property Settlement
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.
Confused about whether a Loan could be considered a Gift – seek expert advice
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.