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When Does a Gift Become a Loan?

A recent NSW Court of Appeal case examined the circumstances when money initially provided as a gift could later be classified as a loan.

The Case

In the case, the father made a financial advance to his son in the amount of $1.2 million to assist the son and his wife purchase their family home.

Following a successful purchase at auction, the father had several discussion with friends and his son, the father changed his mind and wished to classify the gift as a loan. The father engaged his solicitor to prepare and execute and mortgage for the total sum of the gift. The son and daughter-in-law signed the mortgage documents before settlement on the sale.

The matter came before the Court to determine whether the financial advance should be considered a gift or a loan.

The Law

The Court reasoned that the characterisation of the financial advance must depend on the objective evidence of what was said by the father to the son and the actions of the father, including any documents prepared by, or on behalf of the father.

The Court held that, despite the initial finance advance being a gift, the subsequent actions of the father to secure the financial advance by way of mortgage to prevent it from being the subject of divorce settlement indicated that the parties mutually recognised it as a loan at the “critical date”.

The “critical date” was held by the Court to be the date of completion of the purchase and not the auction date.

The Daughter-in-Law also filed a cross claim stating that she was made to sign the mortgage under duress and therefore it was an unfair contract. This claim was dismissed.

If you have any concerns relating to family loans or what might happen to assets such as this in divorce proceedings contact our office to speak with one of our experienced property and family law solicitors.