Lending to a child? Build Loan Agreement – get back your child’s loan if they divorce

Lending to a Child: Dad loses money when his son divorces

The evils of the Presumption of advancement

The Australian presumption of law is that where a husband transfers property to his wife or his children then, in the absence of other evidence, the Court presumes that the transfer was a gift – not a loan.

In contrast, if the mum or child transfers money or assets to dad then there is an assumption that this is a loan – not a gift.

A transfer from a father or a husband is presumed to be a gift, but not a transfer from a wife or a mother – this is presumed to be a loan to the father. A parent Loan Agreement to a child overrides this rebuttable presumption.

This is the case even if the couple is only engaged: Wirth v Wirth (1956) 98 CLR 228

At Legal Consolidated, we take the view that this would also apply to defacto and same-sex couples under the authority of the Hong Kong case of Cheung v Worldcup Investments Inc [2008] HKCFA 78

This has been the law in Australia, which adopted English law: Grey v Grey (1677) 2 Swans 594; 36 ER 742

Build on our website a parent Loan Agreement. Get your child to sign it. You then are protected.


 

Make the Loan Agreement ‘At Call’ when lending to a child

Dad loved his son. He lent him $300k to buy his first home. His son married an attractive but street-smart girl. After a few years, she left him and got 1/2 of the $300k. Dad pleaded with the Family Court that it was his, not his son’s money. But without a Loan Agreement, he had no evidence. At common law when money transfers from a father to a child, it is prima facie a gift. (In contrast, if a mum or a child transfers money to a dad, then it is prima facie a loan.)

All parents should have Loan Agreements with their children – if the children divorce, the money is then not lost. As you build your Loan Agreement on our website, we show you how to structure a loan from a parent to a child – without falling foul of the tax office or Family Court.

When lending to a child a Loan Agreement is an agreement between a Lender (eg: dad) and a Borrower (eg: son). This Loan Agreement formally sets out the terms and conditions of the loan.

The Loan Agreement details: the amount borrowed, when it is repaid and any interest payable.

This Loan Agreement can be used for intercompany loans also – from one company to a related company. See sample

‘At Call’ Loans – is the Family Court bound?

You need freedom to determine when you want repayments made. This Loan Agreement allows for “at call” loans. This is where the loan is only repayable when Dad demands the money back. The Family Court still removes the debts from his son’s marriage assets.

But I keep giving my son more money

What if you don’t know the final amount that you are lending? That’s ok. When you build the parent loan agreement leave in the default answer; “as lent from time to time”.

If I charge interest I pay tax?

Yes, if you charge your child interest on the money lent then that is an ‘income’ that is reported when you complete your tax return. As to charging interest, you have a few options. You can:

  1. charge ‘Nil’
  2. leave it open to be decided later “as demanded from the lender from time to time”
  3. or a flat rate or varying rate.

If no interest is charged then no tax is payable. If your child divorces, you can dramatically increase the interest rate to remove even more wealth from the Family Court pool of money. Therefore, often the best answer when you build the parent loan agreement is: ‘

If you have any further questions please contact us. We are a law firm so we can give legal advice.

Dr Brett Davies, CTA, AIAMA, BJuris, LLB, Dip Ed, BArts(Hons), LLM, MBA, SJD
Legal Consolidated Barristers and Solicitors lending to a child lending to a child
Australia wide law firm
Mobile: 04777-96959
Reception: 1800 141 612
Email: brett@legalconsolidated.com
Skype: brettkennethdavies

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