Housing affordability is a big issue for young Australians. For those lucky enough to have parents able to help them into the property market, careful thought should be given to how that money will be treated if the recipient separates from his or her spouse or de facto partner.

In a family law property matter, if money has been received by one party from their parents, for example, the first question that must be answered is whether that financial assistance was a loan or a gift. When the recipient’s relationship breaks down, they will almost always want to argue that the money they received from their parents was a loan. The ex-partner will, in turn, usually want to argue it was a gift.

Why does it matter?

If the money was a loan, it will be considered a liability of the parties, reducing the net assets to be divided between them. Legally, there would be an expectation that the loan would be repaid by the party retaining the debt; however, in reality, the lending parents often allow their child to keep the money owing on the loan after the property settlement is finalized. This provides an additional windfall to that person.

If the money was a gift, then it, or whatever had been purchased with it, will form part of the net assets available for distribution between the parties. The gift will be treated as a financial contribution by the party whose parents gifted the money. Factors such as how long ago the money was received and the size of the gift compared to the parties’ overall net asset pool, will decide the extent of the gift’s impact on the parties’ respective contributions. The larger and more recent the gift, the greater impact it will have on the recipient’s percentage contributions.

How do you know if it was a gift or a loan?

The word of the recipient or their parents will not necessarily be enough to convince the Court that the money was a loan. The Court will have regard to all of the evidence surrounding the “giving” and receipt of the money, such as:

  • Conversations between the child, the ex-partner and the parents
  • Any relevant documents. For example, did the parents record the transaction in their bank account as something like “Loan to John/ Jane”? Perhaps one of the parties kept a spreadsheet of monies received entitled “Loan from mum & dad”.
  • Were any repayments made?
  • A formal loan agreement would be the best evidence in trying to resolve this question.

Unfortunately, when money and families become intertwined, things can become messy. If you are a parent wanting to help your child into the property market you should think carefully about whether the financial assistance is a loan or a gift and you should seek independent legal advice about the advantages and disadvantages of both.

If you would like to discuss this further or make an appointment for advice, please contact Kathy Matri on 02 4322 0251 or email us at [email protected]