Third-Party Loans in Family Law: How are they treated in a property settlement?

When a relationship breaks down, dividing property is rarely straightforward, especially when family or friends provide financial assistance to assist with purchasing a property, paying living expenses or starting a business.

Family, friends or others who provide such financial assistance (or ‘contribution’) are often referred to as a ‘third party’ for the purposes of family law matters. It is often required to be determined whether that contribution by the third party should be considered by the Court to be treated as a gift, or as a loan. There are important differences between the two, including the effect that the distinction may have upon the ultimate division of relationship assets in circumstances of separation.

This article will provide general information about the difference between a gift and a loan and what the Court would consider when determining the intention of the financial assistance.

Loan or Gift?

In Family Law proceedings, the Federal Circuit and Family Court of Australia (“the Court”) must start with identifying the parties’ assets and liabilities.

If there is a third-party loan, then the Court is required to determine the intention of the transfer.  If the Court deems that the transfer was intended to be a gift, then the parties are not required to repay the lender. However, if it is found to be a loan then the parties are required repay the lender and as a result, it will reduce the parties’ asset pool.

The third-party contribution can have a significant impact on the parties’ overall asset pool and the property settlement.  As noted, if the Court determines that the transfer is a loan, then there will be less assets available to distribute between the parties. Conversely, if the Court determines that the contribution is a gift, then it will generally be classified as a financial contribution on behalf of the party of that family member or friend who provided the assistance.

It is often presumed that where a parent transfers an asset to their child, such as money or an interest in a property, that the parent intends to ‘gift’ the asset to the child, with no expectation of being paid back. This is known as the presumption of advancement. The presumption can be rebutted if the person who made the advancement can provide evidence that the parties did not intend to treat the advancement as a gift, but rather, as a loan. The intention of the transfer will be assessed by the Court as at the date the advancement was given.

What the Court Considers

The Court will need to consider the evidence as a whole to determine if the third-party loan should be treated as a gift or as a loan, this includes looking at the timing of the evidence and what the parties and third-party did or said at the time.

The following factors that may indicate that the money was a loan, includes but is not limited to:

  1. Existence of a written loan agreement, signed by all parties to the agreement;
  2. There was a clear expectation that the money would be repaid;
  3. Repayments had been made or were scheduled to be made;
  4. Interest was payable on the loan;
  5. A repayment date or repayment terms were agreed upon;
  6. The lender has requested or taken steps to recover the money; and
  7. The parties consistently treated the money as a loan.

On the other hand, the following factors may indicate that the money was intended to be a genuine gift can include but is not limited to:

  1. There was no written agreement;
  2. There was no discussion about repayments;
  3. No repayments were ever made or expected;
  4. The lender did not charge interest;
  5. The lender never sought repayments and would not have asked to be repaid had the parties never separated; and
  6. The overall circumstances suggest that the money was intended to benefit the parties rather than create a legal obligation.

Key Considerations

If you are considering loaning money to, or borrowing money from, a family member or friend, it is important to document the transfer from the third-party, for instance, drawing up a formal loan agreement signed by all parties.

If you are seeking to rely on an advancement as a loan, it is important to consider your ability to prove that the loan was real, taking the above factors into account. The Court may otherwise characterise the advancement as a financial contribution from you, and not a liability to be shared with your former partner. Independent legal advice should also be obtained as proper documentation of financial arrangements can be the difference between whether a loan is recognised or classified by the Court as a gift.

Next Steps

If you or someone you know wants more information or needs help or advice with their family law matter, please contact our Intake team on (03) 8415 5600 or email us at reception@hartleyslawyers.com.au.

This article is intended to provide general information only. You should obtain professional advice before you undertake any course of action.

 

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