When is a Loan a Gift and a Gift a Loan?

It is extremely common for parents to help their children out financially, whether to assist them to buy their first house, or to provide an advance on their inheritance. Also common, particularly in family law proceedings, are disputes as to whether these contributions constitute a gift, a loan, or an investment for which the parents acquired a proportional equity.

This can be a difficult question to answer, as often the circumstances surrounding these contributions of funds are quite nebulous, with the loan documentation often written up in inadequate terms, or not at all. Also common is the opposite scenario, where hefty documentation is prepared full of default clauses, interest calculations and the like, yet the terms of these contracts are ignored for the duration of the marriage, only to be dug up and sought to be enforced upon the breakdown of a relationship.

In Vadisanis & Vadisanis and Anor [2014] FamCAFC 97, the husband's mother intervened in the Family Court proceedings between the husband and wife. At trial, she sought and obtained Orders recognising debts owed to her by the husband and wife for loans she made to them throughout their relationship. The wife successfully appealed the decision, primarily on the basis of the trial Judge's failure to give adequate reasons, and the matter was remitted for rehearing.

In reaching their decision, the Full Court undertook an examination of the law that applies in relation to the treatment of funds contributed to the purchase price of an asset. The general rule is that where two people have contributed the purchase price in unequal shares, it is presumed that a resulting trust arises in the proportions in which they contributed the purchase money. For example, if one party contributes 20% to the purchase price of a property, they obtain 20% equitable interest, even if they do not have a legal interest in the property. However, this is subject to the exception created by the presumption of advancement, which applies in parent-child relationships. This means that where a parent makes a contribution of funds to a child, and in the absence of any evidence to the contrary, that contribution will be treated as a gift as opposed to a loan or acquisition of equity.

The Full Court emphasised that the correct time to determine the beneficial interests in a property, and to rebut the presumption of advancement, is at the time of acquisition. This is to be ascertained by evidence of the acts and declarations before or around the time of purchase. Thus, evidence of conversations had around the time of purchase and the conduct of the parties will all be relevant considerations. The terms of any written loan agreement at the time of purchase will also often be fairly compelling evidence of intention, however there are circumstances in which such loan agreements can be found to be void, voidable, unenforceable and/or invalid. This is, however, a topic for a separate Newsdesk item.