Page 3 - Wealth-Adviser-Issue-137 (FWP)

ISSUE 137
MAY 2026

rests on the fact that, at various points in the loan’s life, an — places the parent in a substantially stronger position as a
external party may need to be persuaded that the arrange- creditor.
ment is a loan rather than a gift. Family law courts, bank- Centrelink. The third party that examines family trans-
ruptcy trustees, and Services Australia all face this question fers most systematically is Services Australia, through the
from different angles. The same documentation discipline means tests applied to the Age Pension and other income
addresses all three. support payments. A gift from a parent to an adult child
Family law. When an adult child separates from a spouse reduces the parent’s assessable assets — but only within
or de facto partner, the matrimonial (or de facto) property the gifting free area, which is $10,000 per financial year
pool is determined and divided under section 79 of the and $30,000 over a rolling five-year period. Amounts above
Family Law Act 1975 (Cth). An undocumented family loan those limits are treated as “deprived assets” and remain on
is at significant risk of being treated as a gift to the couple the parent’s assets-test record for five years from the date
— and therefore not deducted from the asset pool — rather of the gift, with deeming rules also applying for the income
than as a debt repayable from the pool before division. The test. A genuine loan, by contrast, is generally treated as an
leading authority is Biltoft and Biltoft (1995) FLC 92-614, in assessable financial asset of the lender, with any interest
which the Full Court of the Family Court held that unse- received counted as income. Neither treatment is automat-
cured liabilities are generally deducted from the value of ically better than the other — the optimal position depends
assets in calculating the property pool, but the court retains on the parent’s overall pension situation — but the choice
a discretion to exclude debts that are “vague or uncertain”, between them is only available where the arrangement is
“unlikely to be enforced”, “unreasonably incurred”, or properly documented as a loan. An informal advance with
“incurred after the separation”. A family loan without con- no agreement and no expectation of repayment will be
temporaneous documentation, without specified repayment treated as a gift, with the deprivation consequences that
terms, and without any history of demand or repayment flow from that. The detailed mechanics of the Age Pension
can fall into the “vague or uncertain” or “unlikely to be means tests were covered in Issue 131.
enforced” categories — in which case the parent lender
loses the protection of the loan as a deductible liability, and What about forgiving the loan later?
the spouse of the borrower benefits accordingly. The dollar Many family loans are made with at least the private
effect can be substantial. On a property pool of $1 million hope that they will eventually be forgiven — perhaps as part
with an undocumented $200,000 advance from the borrow- of an inheritance, perhaps as the parents’ circumstances
er’s parents, the difference between treating the advance as change. A loan that is properly documented at the time
a deductible debt and treating it as a gift to the couple can of advance can still be forgiven later, and that forgiveness
be $100,000 or more for each spouse. can be effected through a simple written deed of release or
A properly drafted loan agreement, signed at the time of amendment to the loan agreement. The important point
advance, with specified repayment terms and ideally some is that the forgiveness is itself a discrete act — it should be
history of partial repayment or interest payment, materially documented when it happens, not assumed to have hap-
strengthens the case for treating the advance as a debt. It pened in the absence of demand. A loan that has not been
does not guarantee the outcome — the court still has discre- called on for many years is still legally a loan; it does not
tion — but it shifts the evidentiary position significantly. automatically become a gift merely because repayment has
Bankruptcy. When an adult child enters bankruptcy, the not been demanded.
trustee in bankruptcy is required to identify all creditors of Forgiveness also has its own consequences. From a
the bankrupt estate and to receive proofs of debt from each. Centrelink perspective, the amount forgiven is treated as a
A parent who claims to be owed money by the bankrupt gift on the date of forgiveness, which triggers the gifting and
child must lodge a proof of debt with supporting evidence deprivation rules afresh from that date. From a family-law
— and the bankruptcy legislation places the onus on the perspective, a forgiveness that occurs after separation has
creditor to prove the debt. Informal family loans frequently been foreseen — particularly if it has the effect of removing a
fail at this point. Without a loan agreement, the parent liability from the borrower’s side of the property pool — may
must rely on bank statements, statutory declarations, and itself be vulnerable to challenge as a contrivance. The trade-
whatever contemporaneous correspondence exists. Where offs need to be thought through at the time, ideally with
the evidence is thin, the trustee may reject the proof of debt advice, rather than left as an open question.
entirely, or accept it at a discounted figure. The parent then
loses any share of any dividend paid to unsecured creditors, The estate planning dimension
and the money advanced is effectively gone. A documented For older lenders, a properly documented loan also mat-
loan with clear terms — and, ideally, a registered security ters for what happens at their own death. An undocumented

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