Loan arrangements between family members and why evidence of intention is so important

People can be unpleasantly surprised when loan arrangements between family members, particularly between parent and child, are not enforceable at law.  If you are lending money to your children (and who isn’t in this property market), there are no shortcuts, and you must be prepared to document, document, document… 

In the realm of financial transactions, the enforceability of loan arrangements between family members can be surprisingly difficult. When it comes to these transactions, the legal concept of ‘presumption of advancement’ often plays a crucial role. This presumption can have a significant impact on the nature of the loan, its enforceability, and the potential implications for all parties involved. 

Understanding the Presumption of Advancement 

The presumption of advancement is a legal doctrine that operates under certain circumstances in loan arrangements between family members. It essentially presumes that when a family member provides financial assistance or a loan to another family member, the intention is not to create a legally binding contract but rather to merely benefit the recipient.  There is a presumed lack of intention to be legally bound and therefore the financial assistance is deemed to be a gift.  This presumption exists for several relationships including a parent transferring property or loaning money to their child.  

In simpler terms, if a parent provides financial support or loans money to their child, the law may presume that it was done without the expectation of repayment. This presumption can be crucial in determining the enforceability of the loan and whether it can be recovered through legal means. 

Are you thinking about providing your adult child with some help getting into the property market? Have you considered a secured loan agreement?  If you want our advice or assistance with documenting a loan, please call us on 1300 654 590 or email us at wehelp@andreyev.com.au.

When Does the Presumption Apply? 

The presumption of advancement is not an absolute rule, and its application depends on the specific circumstances of each case. Generally, this presumption is more likely to apply in the following situations: 

  1. Parent-child relationships: The presumption is most associated with transactions between parents and their children. In these cases, it is often presumed that a parent’s financial support is motivated by a desire to benefit their child rather than to create a legally binding debt. 
  2. Gifts vs. loans: When there is ambiguity about whether the transaction was intended as a gift or a loan, the presumption of advancement may be invoked to resolve the uncertainty. 
  3. Lack of formal documentation: If there is no formal loan agreement or clear documentation outlining repayment terms, the presumption of advancement may come into play. Courts may infer that the absence of such documentation indicates an intention to provide assistance rather than create a legally enforceable debt. 
  4. Evidence of familial support: The presumption may also be applied when there is a history of financial support or assistance within the family, suggesting a pattern of helping one another without the expectation of repayment. 

Are you thinking about providing your adult child with financial assistance? Do you want to ensure you receive your money back in the event of Family Court Proceedings or bankruptcy? If you want our advice or assistance with documenting a loan, please call us on 1300 654 590 or email us at wehelp@andreyev.com.au.

Impact on Loan Arrangements 

The application of the presumption of advancement can have significant implications for loan arrangements between family members in Australia: 

  1. Enforceability: If the presumption applies, it may be challenging for the lending family member to enforce repayment of the loan in court. The courts may be more inclined to view the transaction as a gift rather than a loan. 
  2. Rebutting the presumption: To overcome the presumption of advancement, the lending family member may need to provide strong evidence that the transaction was indeed intended as a loan and not a gift. This can include written agreements, records of repayments, or other relevant documentation. 
  3. Tax implications: Depending on whether the transaction is considered a loan or a gift, there may be different tax implications for both parties involved. It’s essential to consult with a tax professional to understand the tax consequences of the transaction. 

Intention to be Legally Bound 

Your takeaway is this: if you are lending money to a child and intend that an equivalent amount is to be repaid to you at some point in the future, you must exhibit a clear intention to create legal relations.  The onus will be on you to prove the loan is a ‘real’ one.  Think about how the Family Court or Trustee in Bankruptcy might view your financial assistance to your child – you do not want any finding other than you have made your child a genuine loan, and therefore expect to have the legal right to demand the money back. 

The Court will consider such factors as: 

  1. Is there a written agreement or record of a loan being made? 
  2. Has security been provided for the loan, such as a mortgage? 
  3. Is there evidence of communications, in person or in writing, about the existence of a loan/gift? 
  4. What are the terms of repayment? 
  5. What were the expectations of repayment at the time the money/assets were given? 
  6. Were any loan repayments actually made by the borrowing party? 
  7. Have the parties acted in accordance with the terms of the agreements governing the relationship, or have they just ignored them for a significant period? 

Seeking our assistance to help you to document the transaction with a formal loan agreement on commercial terms, ideally with formal security, will help you to show the loan is intended to be repaid. 

Conclusion 

Loan arrangements between family members in Australia can be complex, especially when the presumption of advancement comes into play. While this legal doctrine is rooted in the idea of familial support and benevolence, it can also create challenges when it comes to enforcing loan agreements. 

What should you do? Seek our advice or assistance to documenting your loan arrangement. Call us on 1300 654 590 or email us at wehelp@andreyev.com.au. 

For more on this topic read this article. 

 

The information contained in this post is current at the date of editing – 5 October 2023.

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