Many couples rely on the ‘Bank of Mum and Dad’ to help purchase a house, assist with mortgage repayments, utilities or simply to counteract the increased cost of living.

Typically, parents will loan money to their children and their partners/spouses as part of an informal agreement.  If couples separate, there can often be dispute as to whether the funds were expected to be repaid and the terms of repayment.  It is essential that there is a record of the parent’s and the couple’s expectations and agreement so that the loan can be enforced.  If there is no evidence of it being a loan, the Federal Circuit and Family Court of Australia (the Court) may consider that it is a gift which has a range of consequences to the outcome of a property settlement.

Is it a loan or a gift?

A gift is a non-contractual gratuitous transfer of property and is made without legal consideration. It is something that is given willingly to someone without the expectation of repayment. Gifts can take the form of cash, property, vehicles, or jewellery. By contrast, a loan is something borrowed, typically a sum of money, that is expected to be repaid and usually with interest and on terms.

Presumption of advancement

When the Court is determining payments as a loan or a gift it must consider the presumption of advancement. Simply put, it exists when a parent-to-child transaction is made; the legal presumption is that the transaction was intended as a gift.

The presumption of advancement may be rebutted in circumstances where evidence is made of actual intention for the transaction to be classified as a loan.

Where the advanced money is considered a non-repayable gift, it becomes a contribution to the asset pool by the party who received it and is available for distribution. It becomes part of the myriad of factors that a Court must consider when making a determination as to a just and equitable property settlement.  It is not included as a liability of the parties that needs to be repaid as part of the final settlement.  It is also not usually treated as an asset that is quarantined from the other party. 

Loans in property settlements

Loans are liabilities to the parties which are considered in the determination of the value of the property available for adjustment.  They are required to be repaid by either or both parties on a dollar-for-dollar basis just like any arms-length loan to a bank or lending institution.

The legitimacy of a loan in a property settlement is dependent on the evidence that is produced.  Best case scenario is that there is a loan agreement signed by all parties, however if there is no loan agreement there may be other evidence to point to it being a loan such as a history of repayments being made, or an acknowledgement in writing that the money is expected to be repaid.

How can you protect yourself and the money from your parents?

When you want to protect yourself and the money that you were given by your parents, the two best options are either to enter a loan agreement or a Binding Financial Agreement (BFA).

Loan agreement

Loan agreements will be in writing and include details of the lender and borrower’s contact information, as well as a copy of the repayment plan, the amount of the loan, and what would happen if the borrower cannot make the repayments. It should contain a clause as to when final repayment is required. It is best practice to have both parties sign the loan agreement and date it, so that a party cannot deny knowledge of the loan in the future and in the event of separation.

Binding Financial Agreement

A BFA is a legally binding document agreed upon and signed by two parties outside of court proceedings  and made pursuant to provisions in the Family Law Act 1975. Such an agreement can be made before during or at the conclusion of a marriage or de-facto relationship.  In situations where a party’s family has and will continue to offer significant financial assistance to them, a BFA can provide clear terms as to how the property and liabilities are to be divided in the event of separation so that there is no dispute as to the treatment of that financial assistance.  Lump sum gifts can be quarantined in a BFA.

Nicholes Family Lawyers have expertise advising and representing parties in family law property matters including advising as to just and equitable property settlements and Binding Financial Agreements. Please contact our office at 03 9670 4122 to arrange an initial consultation.