In light of the dramatically increasing property prices of today, it has become common practice for young people to receive financial support from their parents when purchasing a property. In many of these occasions, the parents advance the deposit, after which the young person will pay for the balance by way of mortgage repayment from the bank.  

This deposit, however, may become an issue of dispute in later stages of life, such as when the young person encounters an irretrievable breakdown of their relationship with their partner. In this case, whether the deposit paid by their parents is treated as a gift or as a loan may hugely affect the results of their property settlement.

In the event of a gift:

Where parents clearly show intention to give money as a gift to their child, they do so by giving up their rights for repayment, or, without expectation for any repayments of the sum. Such a gift will be included in a party’s contribution to the relationship, and in Family Law proceedings, contributions have a certain amount of influence on the proportion that each party receives from the results of property settlement. 

Such a contribution may have a more significant influence on a short-term relationship than in a long-term one. If such a gift is given before the relationship starts, or at the early stages of the relationship, it will be counted as an initial contribution of one party to the relationship. However, the longer the relationship is, the less influence it will have in relation to the initial contribution, as the initial contribution erodes with time passing by. 

When making a property order, the Court must first consider whether it is just and equitable. Then, the Court will draw attention to both financial and non-financial contributions from both sides during the relationship, as well as many other factors. For instance, certain adjustments may be applied in the property order if one party has long-term medical and care needs due to disability. 

It is because of such complexity that it may be difficult to ensure the sum of deposit the parents paid in the property settlement would be completely preserved in favour of either party.

In the event of a loan:

If the sum advanced by parent to child is in the nature of a loan, then the Court will regard it as a debt owed by one party to another. In the case that money is lent to a couple and not any one child, in particular when the purchased property is under the joint name of the couple and each of the couple is a party to the loan agreement, the Court will then regard it as a joint debt.

This debt will be included in the total asset pool and later be deducted when calculating a net asset. What can be divided between the parties is calculated from this net asset. If the Court is satisfied that the matrimonial assets are sufficient to repay this debt, the parents would be able to have this sum returned. 

Observations from Masoud & Masoud [2013] FamCA 763

Facts: After their 16-year-marriage broke down irretrievably, one of the final orders the parties sought was regarding property settlement. One critical amount that was in dispute was a sum of $800,000 advanced by the wife’s parents 13 years ago. The wife’s parents signed a loan agreement with the wife, with terms that the repayment would be due within one month of receiving a letter of demand from the parents. However, the couple separated after they sold this former matrimonial home, and only then, did the wife’s parents send a letter of demand requesting repayment from the wife.

Issues: As a way to protect the net asset pool, the husband argued that the sum provided by the wife’s parents were represented as a gift, not a loan, for the following reasons:

1. The contract term indicated that the parents would advance the sum before executing the contract, even though the sum was transferred into the wife’s account through a third party eight days after the execution of the contract.

2. The wife did not discuss repayment with her parents when the property was sold.

3. If not for the separation, the wife’s parents wouldn’t have demanded the repayment.

4. There was no requirement of interest or security. 

In the Court’s view, however, whether the money is treated as a loan or a gift depends on the construction of a contract. 

1. A family financial arrangement is different from loans from banks or commercial lenders. Not making payments pursuant to the terms of the loan agreement does not mean that the payment is not repayable. Whether the funds were provided by a third party is not significant. 

2. The failure to discuss the repayment between the parties does not change the nature of the loan. Further, it does not mean that the funds do not need to be repaid.

3. The timing for demanding the repayment is not relevant to the existence of the loan.

4. All oral and written evidence proved that this is a loan, not a gift. No requirement of interest or security is just a favourable term. 

As a result, the Court found that this sum was indeed a loan and $800,000 was deducted as debt from the matrimonial asset.

    Quoting from Reasons for Judgment [205]: 

“…It is not an uncommon situation to see the parents of children assisting them on terms. Those terms, for whatever reason, perhaps the portents or fear of the results of a failing relationship, can involve an agreement that monies will be provided by way of loan only. This Court ought not readily interfere with the rights of third parties to the marriage and frustrate the intentions of the parties to the transaction when the terms of the loan are clear and unambiguous.”

Tips:

If the deposit from your parents is a loan to you, and you wish to protect their interests, you should consider the following strategies to ensure its enforceability:

1. Find a lawyer to draft, negotiate and execute a formal written loan contact, with clear and unambiguous terms, including detailed requirements for essential information including repayment time, frequency, interest and security.

2. The parents and the child should obtain separate legal advice. 

3. Retain evidence of loan discussion, for example, written conversation and emails between parents and the child.

4. Indicate loan advancement and repayment in the transaction description, and retain relevant transaction records.

If you need professional and reliable legal assistance in your family law matters, please do not hesitate to contact our family law team at Longton Legal.

*Disclaimer: This is intended as general information only and not to be construed as legal advice. The above information is subject to changes over time. You should always seek professional advice before taking any course of action.*