Debt recovery of loans between family members - Family Law

Article Summary

The presumption of advancement is a legal concept that states that money given, or an asset purchased in the name of a family member (in certain family relationships) but with the funds of another family member will be considered to be a gift or advancement.

This presumption exists for several relationships, such as:

A husband transferring property or loaning money to his wife.
A parent transferring property or loaning money to his child.
A male fiancé transferring property or loaning money to a female fiancé.

The general understanding in these cases is that a parent is not going to sue their child for a debt in debt recovery, or a husband is not going to sue his wife for a debt. Because of this, the Court will presume that there is no legally binding contract because of the presumed lack of intention to be legally bound, and therefore, it is presumed to be a gift.

If a loan cannot be proven, then a resulting trust may arise. A resulting trust arises when one person transfers property to another without gaining anything in return, and the recipient of the property holds it on trust for the person who provided the consideration for the transfer.

The article concludes with recommendations for those considering lending money to family. To ensure clarity, the lender should make it abundantly clear that the money is a loan and formalize it through documentation and a repayment schedule. This ensures the lender can legally reclaim the money if necessary.

In relation to loans between family members, the presumption of advancement is a legal presumption that arises in various common law jurisdictions in relation to the transfers of money or other property between certain family members.

The presumption applies to the following loans between family members:

A husband transferring property or loaning money to his wife.
A parent transferring property or loaning money to his child.
A male fiancé transferring property or loaning money to a female fiancé.

The presumption of advancement can be rebutted relatively easily by documentary evidence that no gift was intended (by loan agreement, for example).

The presumption of advancement with regard to gratuitous transfers from parent to child was limited to transfers by parents to minor children. However, in some cases, the presumption of advancement may apply to transfers from parents to adult children.

It is important to note that the presumption of advancement does not apply to cohabiting couples (whether heterosexual or homosexual), nor between a man and his mistress.

In this article, our debt recovery lawyers will explain the presumption of advancement, resulting trusts, and how they relate to family debts.

What is an Advancement?

In order to effectively understand advancements and loans between family members, it is first important that you understand the meaning of advancement and what it entails.

In the context of loans between family members, an advancement is considered a gift from one family member to another.

By allowing an advancement, the "gifter" waives all right to seek collection of the money or other object (such as a house or car) that was given to the other party.

This means that you will not be able to collect any money gifted to your family in any legal sense unless there is specific evidence that will allow you to do so, which will be discussed later in the article.

What are Loans Between Family Members?

Now that we have discussed what advancement is in the context of advancements and loans between family members, it is time to discuss the other crucial element; loans! So, what is a loan?

The Oxford English Dictionary defines loan as:

A thing that is borrowed, especially a sum of money that is expected to be paid back with interest.

Butterworths Concise Australian Legal Dictionary defines a loan as:

An advance of money ... the payment of an amount on behalf or at the request of a person where there is an obligation to repay the amount.

In Re Securitibank Ltd. (No. 2) [1978] 2 NZLR 136 Richardson J said:

The essence of a loan of money is the payment of a sum of money on condition that at some future time an equivalent amount will be repaid.

In Commissioner of Taxation v Radilo Enterprises Pty Ltd [1997] FCA 22 the Court said:

In essence then a loan is a payment of money to or for someone on the condition that it will be repaid.

In Federal Commissioner of Taxation v Rawson Finances Pty Ltd [2012] FCA 753 Edmonds J said:

The essence of a loan of money from A to B is a corresponding contemporaneous obligation on the part of B to repay the money transferred from A to B ... Absent that obligation, the transfer of the money from A to B is something else – a gift, a payment by direction, a payment or repayment of an anterior obligation – but it is not a loan.

A loan is a sum of money that is given by one family member to another, with the expectation that it will be paid back in the future.

In some cases, the lender, or the person giving the loan, will also add interest, which means that a percentage of the loan will be added over the time that it takes the loan to be paid back in its entirety, which the person that received the loan, or the borrower, must additionally pay back.

But what does this have to do with advancements and family debt recovery?

Well, in family debt recovery, when people give a child or spouse or other family member money, they do not necessarily expect it to be paid back, at least in its entirety.

However, sometimes a family will fight, or some other circumstance will arise and a payment that was once an advancement may be claimed to have been a loan that must be paid back.

This is where the next principle, the presumption of advancement, plays into the equation to help to ensure fairness in all areas.

What is the Presumption of Advancement?

Advancements and loans between family members can be difficult to distinguish between when discussing families and money exchanged between them. For this reason, the law introduced a principle referred to as the presumption of advancement to clarify the difference between the two.

So, what is the presumption of advancement?

In Calverley v Green [1984] HCA 81, Gibbs CJ summarised the authorities and said at [3]:

Where a person purchases property in the name of another, or in the name of himself and another jointly, the question whether the other person, who provided none of the purchase money, acquires a beneficial interest in the property depends on the intention of the purchaser. However, in such a case, unless there is such a relationship between the purchaser and the other person as gives rise to a presumption of advancement, i.e., a presumption that the purchaser intended to give the other a beneficial interest, it is presumed that the purchaser did not intend the other person to take beneficially ... For the presumption to apply the money must have been provided by the purchaser in his character as such – not, for example, as a loan. Consistently with these principles it has been held that if two persons have contributed the purchase money in unequal shares, and the property is purchased in their joint names, there is, again in the absence of a relationship that gives rise to a presumption of advancement, a presumption that the property is held by the purchasers in trust for themselves as tenants in common in the proportions in which they contributed the purchase money.

This presumption exists for several relationships, such as:

A husband transferring property or loaning money to his wife.
A parent transferring property or loaning money to his child.
A male fiancé transferring property or loaning money to a female fiancé.

The reason that the law presumes that these certain relationships are gifts is because one of the essential elements of contract formation, that is the intention to create legal relations.

Intention to be Legally Bound

In Australia, for a contract to exist, the parties to an agreement must intend to create legal relations. The presence of consideration usually provides evidence of this, but not always, so this requirement must be separately proved in each case.

The onus is on the party seeking to prove the contract to demonstrate intention and the nature of the relationship between the parties.

In Jones v Padavatton [1968] EWCA Civ 4, Salmon LJ (as his Lordship then was) wrote at 332–333:

[A]s a rule when arrangements are made between close relations, for example, between husband and wife, parent and child or uncle and nephew in relation to an allowance, there is a presumption against an intention of creating any legal relationship. This is not a presumption of law, but of fact. It derives from experience of life and human nature which shows that in such circumstances men and woman usually do not intend to create legal rights and obligations but intend to rely solely on family ties of mutual trust and affection.

There is a long line of precedents, following the case of Balfour v Balfour [1919] 2 KB 571 which says that family, social, and domestic arrangements do not normally give rise to binding contracts because the parties lack the necessary intention to create legal relations.

If you have given a family member money or have allowed them to purchase any other assets with money you provided them with without specific legal clarification of it being a loan, you may be unable to collect that money legally in the future without evidence that it was a loan.

Say, for example, if you thought of it as a loan but did not clarify legally that it is so and the other party refuses to pay it back in the future, any legal action taken may be unsuccessful under this presumption.

Loans Between Family Members or a Gift?

Now that we have discussed the presumption of advancement, you may be wondering if assets or money given to family members in the past will be considered a loan or advancement by a court.

When considering whether or not an advancement by a family member will be considered a loan, it will be the responsibility of the lender, or the loaning party, to prove that intentions were to create a loan.

Heydon v The Perpetual Executors Trustees and Agency Co WA Limited [1930] HCA 26 was a case where the High Court held that the burden of proving the facts in support of either of the causes of action set out in the statement of claim lay on the plaintiff, stating:

In this case the plaintiff sued for money lent and money received by the defendant as trustee for the deceased. The defendant denied these allegations and said the money was given to her as a gift. At the trial the learned Judge thought that the onus of proving there had been a gift lay on the defendant. We are respectfully of opinion that the burden of proving the facts in support of either one or the other cause of action set out in the Statement of Claim lies on the plaintiff.

The court will then, on the balance of probabilities, consider if the money/assets were given under the expectations of a loan or of a gift. They will consider factors such as:

Any security, such as a mortgage, made in relation to a loan.
Any written agreement or record of a loan being made.
Evidence of conversations, in person or online, made regarding the existence of a loan/gift.
Terms of repayment.
Whether there was an expectation of repayment at the time the money/assets were given.
Whether there were any loan repayments made by the borrowing party.

If it is found that the monies advanced were indeed a loan, there will then have to be considerations regarding if the loan can be enforced legally and if it can be repaid realistically.

If the answer to these questions is yes, the court will then likely enforce that the borrowing party begin making loan payments back to the lending party.

What is a Resulting Trust?

If the presumption of advancement is rebutted, a resulting trust may arise instead.

In Calverley v Green [1984] HCA 81, Gibbs CJ said at [3]:

In the absence of evidence to rebut that presumption, there arises a resulting trust in favour of the purchaser. Similarly, if the purchase money is provided by two or more persons jointly, and the property is put into the name of one only, there is, in the absence of any such relationship, presumed to be a resulting trust in favour of the other or others.

In Treichel & Anor v Treichel [2022] QDC 181, Rinaudo AM DCJ said at [134];

A resulting trust arises where a person has purchased property in the name of another, or provided funds for such a purpose, for no consideration and in circumstances where the other person does not have some claim of generosity to the transferor (a presumed resulting trust), or where a person transfers property to another on express trust, but fails to do so in whole or in part (an automatic resulting trust).

A resulting trust arises in this context where one person transfers property to another without gaining anything in return. The effect of a resulting trust is that the recipient of the property holds it on trust for the person who provided the consideration for the transfer. Essentially, it "results" from the presumption that the person who paid the price didn't intend to give away their money for nothing.

In summary, a resulting trust can arise when one person transfers property to another without gaining anything in return, and the recipient of the property holds it on trust for the person who provided the consideration for the transfer.

In the context of the presumption of advancement, a resulting trust may arise if there is evidence to suggest that the transfer was not intended as a gift.

Proving Loans Between Family Members or a Gift

As determined by the Court of Appeal in Chaudhary v Chaudhary [2017] NSWCA 222 at [100]:

The question of whether or not the advances ... are to be properly characterised as loans or gifts ... is not to be determined by reference to any uncommunicated subjective state of mind about which inferences may or may not be drawn. The characterisation of the advance must depend upon the objective evidence as to what was said by [the lender/s] to [the recipient/s] and what [the lender/s] did, including, for example by way of documentation. [Emphasis added].

The case is to be proved on the objective standard, upon evidence showing the intention of the parties at the time of the advance.

How Do I Make Loans Between Family Members?

If you are looking to make a loan to a family member, it can be challenging to ensure it is a loan and not a gift under the presumption of advancement.

This is an essential step if you are not willing to lose the money from the loan, however, so make sure you are thorough with forming a legally binding agreement that will be considered a loan.

These are some basic steps that you can follow to make sure this is the case:

Ensure they know it's a loan.
Make a contract.
Document everything.
Repayment schedule.

Ensure They Know it's a Loan

The first thing that you must do to ensure that you are creating a loan and not giving a gift to a family member is to ensure that they know that it is a loan, and you can prove that they know.

If you expect the money given to be paid back, make sure that your family member knows that and agrees to this arrangement.

Although this step can be a little awkward, it is crucial to getting paid back down the track.

Make a Loan Contract

Another important step that you must take to create a legally enforceable loan between family members is to form a contract.

Again, this process may create tension in your family, but it is important to protect yourself and your assets the best you can. Form an agreement regarding the loan and how it should be paid back.

It is also wise to seek legal advice to make the contract extra secure and well-thought-out.

Document Everything

Another important step that you must take to create a legally enforceable loan between family members is to document everything.

Clear documentation of all of the important details and the other party discussing the agreement to be a loan may be helpful down the line if they try to deny it to be a loan, so try and keep clear records of all key information and discussions that you might need.

It is always better to be prepared!

Repayment Schedule

Another important step that you must take to create a legally enforceable loan between family members is to form a repayment schedule.

Again, the more evidence you have of a repayment agreement in place, the better.

Not only will this provide that evidence, but it can also help the person that borrowed the money to structure their payments to you. It's a win-win.

FAQ on Loans Between Family Members

Navigating the intricate financial transactions within a family can often be challenging due to the intertwining of emotions, longstanding relationships, and sometimes ambiguous intentions.

One might ask: "Was the money I gave to my sibling a loan or a gift?", "Do I owe my parents for that car they bought me last year?", or "How can I prove that I intended a sum of money as a loan and not a gift?".

To help clarify such dilemmas and questions, we've distilled the essentials from the extensive information provided above into a concise FAQ format.

In this section, we answer some of the most frequently asked questions surrounding the topics of advancements, loans, and debts among family members.

What is the presumption of advancement?

The presumption of advancement is a legal concept that indicates money or assets given, or bought in the name of certain family members with the funds of another family member, is considered to be a gift or advancement.

Which family relationships does the presumption of advancement apply to?

The presumption applies to:

A husband transferring property or loaning money to his wife.
A parent transferring property or loaning money to his child.
A male fiancé transferring property or loaning money to a female fiancé.

How can the presumption of advancement be rebutted?

It can be rebutted easily by documentary evidence, such as a loan agreement, that indicates no gift was intended.

What is the difference between an advancement and a loan?

An advancement is considered a gift between family members, where the giver waives the right to seek collection of the gift. A loan is an amount of money given with the expectation of it being repaid, usually with interest.

Does the presumption of advancement apply to cohabiting couples or a man and his mistress?

No, the presumption does not apply in these relationships.

What is a resulting trust?

A resulting trust may arise when one person transfers property to another without gaining anything in return. The recipient holds the property on trust for the person who provided the payment.

How can one prove whether an advancement is a loan or a gift?

The determination depends on objective evidence like what was communicated between the parties, any documentation, and the intention of the parties at the time of the transfer.

How can I ensure that a money transfer to a family member is treated as a loan?

To ensure it's treated as a loan:

Make sure the receiving party knows it's a loan.
Create a legally binding contract.
Document every aspect of the transaction.
Set up a repayment schedule.

Does the law consider familial, social, or domestic arrangements to usually give rise to binding contracts?

No, these types of arrangements, due to their nature, are generally not considered as having the intention to create legal relations and are therefore often seen as lacking contractual binding.

What happens if the presumption of advancement is rebutted?

If rebutted, a resulting trust may arise. This means the person who received the property holds it on trust for the one who provided the payment.

What is considered a 'family debt' in QLD?

A 'family debt' in QLD typically refers to a monetary obligation that arises between family members. This could be a loan from one sibling to another, funds borrowed from parents, or any other financial transaction where there is an expectation of repayment within the family. However, it's crucial to distinguish between a formal loan agreement and casual financial assistance, as the latter may not be legally enforceable.

How can I legally prove loans between family members?

The best way to prove a debt exists is through written documentation. Ideally, when lending money within the family, both parties should draft and sign a loan agreement detailing the loan amount, repayment terms, interest (if any), and other relevant details. In the absence of such an agreement, other evidence like bank transfers, messages, or witness testimonies can also be used, although they might be less conclusive in a legal setting.

What is the statute of limitations for loans between family members in QLD?

In QLD, the statute of limitations for most simple contract debts, including family debts, is 6 years from the date the debt became due. This means that if a family member owes you money and has not made a payment or acknowledged the debt in writing for 6 years, you might not be able to take legal action to recover that debt.

Can I engage a debt collection agency for loans between family members?

Yes, you can engage a debt collection agency to recover loans between family members. However, it's essential to consider the family dynamics and relationships before taking this step. Using a debt collection agency might strain family ties further. It's often recommended to first attempt mediation or open communication to resolve the debt before escalating to third-party intervention.

What if my family member declares bankruptcy? How will it impact the debt recovery process?

If your family member declares bankruptcy, it can complicate the debt recovery process. Unsecured creditors, which often include family lenders, will have their debts included in the bankruptcy. Once bankruptcy is declared, you might not be able to take any further legal action to recover the debt. Instead, you'll need to file a proof of debt with the bankruptcy trustee, and you will become one of the many creditors waiting for any available distribution. However, the likelihood of receiving the full amount owed is diminished, as priority debts and the trustee's costs will be settled before unsecured creditors.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

Australia: Debt recovery of loans between family members