The presumption
In Australia there is a legal presumption that advances of money for another are a gift (and not a loan) when made:
- from a parent to their child;
- from a husband to their wife (archaically not the other way around).
The presumption stems from reasons contained in old English cases, like a recognition of legal duties to maintain, natural love and affection between the parties and the probability that a husband or parent would intend such transactions to be a gift.
Other Commonwealth countries have similar presumptions but differences have emerged. For example, in Canada the presumption no longer applies between parent and adult child and in New Zealand the presumption has been abolished between spouses.
This article looks at the presumption that a monetary advance made from a parent (or parents) to a child, where there is no evidence to the contrary, will be presumed by a Court to be a GIFT and not a LOAN.
Why does it matter?
It may not matter if a monetary advance is a gift or a loan, but it may, depending on (1) the amount that is provided, and (2) if the parents are concerned about the money not being repaid if one of the following occurs:
- the child divorces their spouse or separates from a de facto partner – and the spouse/partner seeks a share of the matrimonial assets that includes a share of the gift;
- the child goes bankrupt – perhaps due to a failed business – and the trustee in bankruptcy considers the amount advanced a gift and not a debt of the child to be repaid to the parents with other creditors;
- the child dies before the parent – and the child’s widow inherits the child’s estate in full including the benefit of the gift;
- other siblings are unhappy with the amount advanced and it hasn’t been discussed with them either during the parents’ lifetime or accounted for adequately in the parents’ Wills to adjust for any perceived inequity.
Evidence of intention from parent to child
If there is no record of whether an advance was a loan or a gift when the advance was made – either in writing or orally – the presumption is that any monetary advance was a gift.
It is too late for example, when the child’s divorce proceedings are in motion to say that the advance was a loan.
This is illustrated in the case of Vadisanis & Vadisanis and Anor in the Family Court of Australia in 2014 where the husband received several advances including $100,000 from his mother. The wife appealed the Court’s original decision that all the money provided by the husband’s mother were loans and had to be repaid. The husband and his mother argued that the $100,000 was a loan and not a gift and should be returned to the husband’s mother. It was held by the appellant Court that there was insufficient evidence at the time the advance was made to hold that the presumption was rebutted and the advance of $100,000 was classified as a gift.
There was also a lot of discussion in the case with other advances from his mother about whether a loan agreement had been statute barred and ineffective due to its drafting.
The time to decide if an advance is a loan or gift must therefore, be made when the funds are advanced and not later.
A loan agreement:
A solicitor can draft the loan agreement. The parents and child will need to sign the agreement. Payments of principal and/or interest will be determined by agreement between the parents and child. However, it is not necessary that the loan is made on commercial terms, that is, there need not be re payment of principal or payment of interest by the child.
Care needs to be taken to ensure it doesn’t become statute barred down the track that is, if it is repayable on demand, there must be a notice period before the loan is due and payable. This is a matter for a solicitor to consider when drafting the agreement.
A mortgage:
A mortgage on the property purchased by the child with the advanced funds provides additional security for parents. The parents can be repaid when the property is sold, if they wish at that time.
Other evidence which may assist to rebut the presumption of a gift:
An email exchange
A simple email exchange between parent and child is better than nothing and provides some evidence, if needed, to show that funds advanced are a gift or a loan.
A conversation
When the parents have a conversation with their child about the advance, it’s best to record a summary of the conversation in an email. It is much better the conversation is in writing to show intention of the parents at the time rather than trying to recollect a conversation from often, years ago.
Forgiven by Will or anytime:
A loan can be forgiven in the parents’ Will if the parents don’t want it repaid on death. It can also be forgiven at any time during their lifetime.
Take Away Points
- Talk with your spouse or partner so that you are on the same page before you talk to your child about an advance.
- Tell your accountant if it is a loan or a gift.
- Make it clear with your child on what basis you are lending money.
- Get any agreement documented.
Disclaimer: Not to be relied on as legal advice, the article is general in nature. More specific legal advice should be sought if required.