To gift or to loan? When the manner of giving matters

With the festive season fast approaching, we are reminded of the "gift of giving".

When substantial funds are the gift of choice, how can you be sure that the gift remains with its intended recipient after a separation? Can you "convert" a gift into a loan upon separation?

When a separation occurs, it is all too common for a member of the couple to insist that funds received from their family members (or related entities) should be considered a loan, and therefore returned or repaid. However, unless there is evidence of a legal obligation for the funds to be repaid at the time they were provided, the Court is entitled to find that the money constitutes a gift to the recipient.

It is a gift!

If a person is gifted funds during their relationship or marriage, that gift is usually included in the assets available for division upon separation. The party whose family gifted the funds may receive an adjustment in their favour for that financial contribution.

However, not all contributions are created equal, and each contribution made by parties to a relationship must be weighed and balanced against others – these include contributions as a parent or carer.

When funds are considered a gift, it is only in limited circumstances that the person who received the gift will keep it on a dollar-for-dollar basis as part of their final property settlement.

How do I make sure a gift does not become a gift to the recipient's spouse in the event of a separation?

Quite often, this is the million-dollar question.

In short, a financial agreement between a couple is a good way to ensure that gifts (and any assets that may be acquired from those gifts) remain the separate property of the recipient in the event of a separation.

Or is it a loan?

Funds that are determined to have been received by way of a loan are treated as a liability of the couple and required to be repaid to the lender.

A Court can characterise the advancement of funds as a loan where a genuine loan agreement specifying terms of repayment exists,¹ which includes, for example:

1. the parties to the loan agreement and date of the loan
2. the amount of the loan
3. the interest to be paid on the loan, and
4. the frequency of repayments (it is preferable that periodic payments are made rather than one lump sum in the future).

How do I make sure an advancement of funds is treated as a genuine loan?

Even though a loan agreement exists, the Court may determine that an unsecured, albeit documented, loan is vague or uncertain, unlikely to be enforced, or unreasonably incurred.² Simply put, there must be a genuine, legally binding obligation for the monies to be repaid, as intended by the parties at the time the funds were advanced, and reasonably expected to be enforced.

It is important that the terms of the loan agreement are performed by the borrower, and the lender should also obtain advice regarding securing their interest, for example, registering a caveat or mortgage, or securing their interest on the Personal Property Securities Register, depending on the circumstances.

Protecting the intended gift recipient or the lender

Ultimately, the characterisation of funds from family members or related entities as being a gift or loan may have a significant impact on the division of property at separation.

It is therefore important that the circumstances surrounding the advancement of funds have been properly considered and protected by proper documentation, prior to the advancement being made.

If you have questions regarding advancement of funds to a party in a relationship or financial disputes during a relationship breakdown, please contact a member of the Family & Relationship Law team for further information.

[1] Masoud & Masoud [2016] FamCAFC 24

[2] Strand & Strand (No.2) [2018] FamCAFC 247; Biltoft & Biltoft [1995] FamCA 45.

This article was first published in December 2020 and updated in December 2024.