Loan or Gift in Property Settlement

Loan or Gift?

During a relationship, it will occasionally occur that the family or friends of one of the parties to the relationship will provide the couple with a substantial amount of money. This can be in the form of a gift, or it can be a loan.

The Family Court is skeptical when a claim of a loan arises in property settlements where there is no solid evidence to support the claim.

Unfortunately, without substantial evidence to support the claim, the Court is unlikely to accept the money was a loan.

Obviously, if the money is a gift, there is no expectation that it will be repaid. If the money is a loan, the opposite is true. Usually, in circumstances when money is loaned, a security is taken out by the lender to protect them against the possibility of default. However, in the family context, loans are rarely formalised, there is nothing in writing, no payment schedule devised, and no interest is registered against property owned by the borrowers. This may be fine if the family relationship is harmonious, but it can become problematic if the Family Court gets involved following a relationship breakdown.

This is because the Family Court treats gifts and loans differently and a Judicial Officer will need to determine into which category the money falls. The outcome can change the size of the asset pool and the amount a party may receive.

How then does the Family Court determine if money is given as a gift or a loan, particularly in circumstances where a loan may be unsecured? This comes down largely to a matter of evidence and the weight to be given to that evidence. In the case of Malcher & Malcher for example, the husband claimed that $2.6 million given to him by his father was a loan, while the wife argued it was a gift. In reaching the conclusion that the money could not be characterised as a loan, Justice Le Poer Trench considered several matters, including:

• Whether there is any interest component,
• the comparison of any interest rate charged with what the market was offering to arms-length commercial borrowers during the currency of the loan,
• and whether the parties to the marriage were eligible for a commercial loan based on their financial circumstances

This is by no means an exhaustive list. Other cases involving gifts and loans have considered:

• If the lender had taken steps to secure the loan, for example by registering a mortgage;
• whether or not an agreement was ever drawn up, and when;
• if it was, what were the terms of the agreement;
• whether any other documents support the existence of a loan;
• whether terms of repayment have been outlined;
• whether any demand for repayment had ever been made and, if it has been, was it made before or after a couple separated;
• whether any steps have been taken to recover the money and if so, were those steps taken before or after a couple separated;
• whether, in the circumstances of the case, it is likely that repayments will be expected;
• the credibility of the parties and their evidence; and
• the extent to which evidence regarding the provision of the money is challenged.

No one factor will be determinative, and the outcome will always depend on the facts of an individual case. If the Court decides that money is a loan, it is considered a debt of a relationship and needs to be repaid before all the assets can be distributed between a couple. However, if the Court finds that money was a gift, it is treated as a contribution to the assets of the parties by the person whose family or friend gave them the money.

LIMITATION PERIOD

Each State in Australia has legislation in place which imposes strict time limits (known as limitation periods, or statute of limitations) within which civil actions must be commenced in court. If a limitation period expires, it may be difficult, or even impossible, to commence legal proceedings. In every State and Territory in Australia, a person or party has six years from the date on which a cause of action arose to commence court proceedings over a breach of contract; with the exception of the Northern Territory, where the period is three years.  This limitation period can be relevant where claims are being made by a related party for the repayment of asserted loans.

In 2014, in the case Vadisanis and Vadisanis, the wife argued that many of the loans alleged by the intervener were unenforceable or statute barred, because six years had expired from the date of the loan.

In this case the husband’s mother sought leave to intervene in the proceedings and asked the Court for declarations that the husband and wife owed her $330,000. If the Court made that declaration the property pool for division between the husband and wife would be reduced by about half so that any payment the husband had to make to the wife would be correspondingly reduced.

 The loan agreement of one of the loans stated the sum was payable upon demand, while another loan agreement stated that the loan was payable upon “the expiration of three months’ notice”. Referring to commercial cases, the Full Court held that there is a difference in the treatment of loans depending upon whether they are repayable on demand or upon an event, for example, “repayable two days after a demand”. The Full Court restated that where a contract is simply payable on demand the general rule is that the cause of action, or the limitation period, begins from the date of the contract, meaning the borrower is overdue every day of the loan. 

The Full Court found that the loan from the intervener to her son payable upon demand was unenforceable on the basis that six years had passed before the intervener made a demand for the sum to be repaid.  As for the loan payable upon “the expiration of three months’ notice”, the Full Court held that the limitation period commenced upon the expiration of three months’ notice, and therefore was not statute barred as six years had not expired from the date of the intervener’s demand. 

In Property Mediation, if parties are in dispute about whether something was a gift or a loan, they should both be encouraged to seek independent legal advice regarding the circumstances of the loan or gift. Parties should also be encouraged to exchange documentation that supports their claim of gift or loan, and keep in mind that a Family Court trial to decide if an amount of money was a loan or a gift might exceed by many times the value of the loan or gift.