April 2014 Issue 92

Loans by parents to children

B2B Editor27 March 2014

Loans by parents to children

With the price for real estate, parents will often assist their children to obtain their first property by advancing money to that child. In happy times, it is of great assistance to the child. However, if that child’s marriage fails, then the funds may be lost in the matrimonial settlement.

In a recent case in the Family Court, a father had advanced two sums to his son amounting to $380,000. The first amount was a $150,000 interest-free loan in late 1995, repayable on demand. The second loan was for an amount of $230,000 at 10% annual compound interest – repayable on or before April 2003. This loan was the subject of a written loan agreement which provided that no interest was payable if the debt was repaid by the due date.However, the loan was not repaid by the due date.

In relation to the first loan, the son’s wife tried to argue that the money was a gift rather than a loan. But the court was satisfied that it was a loan. However, the court noted that the father had taken no steps to enforce the loan and where a loan is to be repaid on an “at-call” basis, the Statue of Limitations operates from the date the loan is advanced. In the ACT, it is six years.

In other words, the father could not enforce the loan and the money was therefore retained by the son and divisible in the Family Court.

The second loan was recorded by way of a loan agreement but there were no repayments. With a loan under a loan agreement, the Statue of Limitations commences when the borrower defaults on a repayment set out in the loan agreement. The son signed an acknowledgment of debt but it was outside the six year period and that loan also became statute barred.

The lessons for parents who advance money to children:

* A loan agreement is essential but is not enough on its own. There should be repayments and evidence of the repayments should be kept;

* Never let the six year period expire. A loan can be refreshed within the limitation period to avoid the loan not being recoverable under the Statute of Limitations;

* An acknowledgement of debt after the six year period has expired will not be sufficient to refresh the loan.

ASIC say that the six-year limitation period under the Statute of Limitations can be restarted if the “debtor makes a payment or acknowledges the debt in writing”. But it must be before the limitation period has expired. In the ACT, a limitation period cannot be re-started once it expires.

Advancing money to adult children can be of great assistance in getting a start in the real estate market. But in doing so, care should be taken to ensure the funds are treated on an arms length basis. This includes loan agreement, re-payment and avoiding the loan becoming stale.

Stephen Bourke is a director in the boutique firm, Certus Law, specialising in superannuation, trusts and estate planning. He also consults to other practitioners through the consulting practice, SuperSplitting. Level 5, 28 University Avenue T: 6268 9090www.certuslaw.com.au