Family loans, particularly from parents to adult children, can become contentious during property settlements. A recent case, Wei & Xia (No 5) [2023] FedCFamC1F 679, highlights important strategies for practitioners dealing with these complex situations.
The Core Issue The fundamental question often centres on whether funds provided by parents-in-law constitute a loan or a gift. This distinction can significantly impact the property pool and final settlement calculations.
Key Strategy Elements
- Documentation and Declaration In the case study, success hinged on establishing the transfer of funds as a loan rather than a gift. The court made specific declarations in the above case.
It is vital to document the original transfer intentions at the time, or at minimum, prepare an acknowledgment of debt. Best practices include:
- Having time-stamped correspondence such as emails between parties (Son-in-Law, Spouse, etc.)
- Gathering evidence of any repayment discussions or attempts
- Quantifying the exact amounts transferred
- Having transactions described as “Loan to Son”
- Sending money in multiple transactions so that when bank statements are ultimately produced under subpoena, you can see contemporaneous notes of the exact transactions
- Property Sale Mechanism When family loans need to be repaid through property sales, structured orders should be included, as demonstrated in Wei & Xia (No 5) [2023] FedCFamC1F 679.
THE COURT DECLARES THAT:
1. The Applicant Wife (“wife”) and the First Respondent Husband (“husband”) hold, or at all material times held, on trust for the Second and Third Respondents (“parents”):
(a) 36 per cent of M Street, Suburb N (“M Street”); and
(b) 30 per cent of O Street, Suburb P (“O Street”); and
(c) 29 per cent, being $669,900, of the net proceeds of sale of Q Street Suburb N (“Q Street”).
2. The wife owns 19 of 100 shares in C Pty Ltd (“C Pty Ltd”).
THE COURT ORDERS THAT:
3. Within 60 days, the wife and the husband (“spouse parties”) shall do all acts and things and sign all documents necessary to cause the following properties:
(a) 2 D Street, Suburb E;
(b) M Street; and
(c) O Street
(“the properties”)
to be listed for sale by way of public auction with an agent to be agreed upon between them or, in default of such agreement for more than 14 days, with an agent appointed by the President of the Real Estate Institute of NSW or their nominee (“the agent”) whose decision shall be final and binding upon the parties, in the following manner:
(d) That such auction take place within six weeks from the date of placing the properties for sale by public auction or as soon as possible thereafter;
(e) That the reserve price for such auction shall be as agreed between the spouse parties or failing agreement for more than seven days, as determined by the selling agent, and in that event the parties shall agree to such reserve price;
(f) That the spouse parties shall equally pay all auction expenses as requested by the selling agent as and when they fall due;
(g) That the spouse parties shall do all such acts and things as may be necessary or recommended by the selling agent to properly present the property for sale and make it available for inspection by prospective purchasers;
(h) That any party shall be at liberty to bid for the purchase of the properties at auction;
(i) That the spouse parties shall attend at the auction sale and in the event that the properties are not sold at such auction, then the parties shall if necessary, negotiate with the highest bidder at auction if the reserve price is not reached;
(j) That the wife shall instruct the agent that all communication regarding the sale is to be in writing, or if verbal to be confirmed in writing, and to both parties jointly;
(k) That the spouse parties shall each co-operate in every way with the agent including (without limiting the generality of the foregoing):
(i) Making keys available to the agent;
(ii) Allowing inspection of the properties at all reasonable times requested by the agent;
(iii) Doing or saying nothing to hinder or prevent a sale being effected;
(iv) Ensuring the properties, including the grounds, are in a neat and clean condition at the time of inspection by the agent and prospective purchasers; and
(v) Signing all documents requested by the agent in relation to the listing for sale of the properties including but not limited to an agency agreement, except a contract or agreement for sale which has not been authorised by the parties’ solicitors.
(l) That the wife shall instruct such solicitor as is agreed between the parties and failing agreement to be selected by the wife from a list of three solicitors proposed by the husband (“the solicitor”) and the solicitor shall be instructed to include both parties in all communications, and in the absence of the wife making such nomination, the solicitor shall be nominated by the husband; and
(m) That the spouse parties shall each execute a contract for sale in the form prepared by the solicitor having conduct of the sale.
4. In the event any of the properties fails to sell by public auction on the first occasion, such property shall continue to be auctioned (unless otherwise agreed between the parties in writing) at intervals of six (6) weeks or as otherwise recommended by the agent for the best price reasonably obtainable, and for the purposes of any subsequent auction the provisions of Orders 2(e)–(m) shall apply.
5. Upon settlement of the sale of each of the properties, the parties shall do all acts and things and sign all documents as shall be necessary to cause the proceeds of sale to be applied in the following manner and order:
(a) in payment of the costs of and incidental to such sale, including legal costs and disbursements, the agent’s commission, and sale expenses;
(b) in payment of council and water rates and adjustments together with any outstanding strata fees and outgoings;
(c) in reimbursement to either party for any expenses (agreed to in writing between the parties) associated with the sale such as advertising expenses or conveyancing fees;
(d) in discharge of any mortgage registered upon the title;
(e) payment to the parents, or at their direction:
(i) upon settlement of the sale of M Street, an amount equivalent to 36 per cent of the sale price of M Street after the deductions referred to in (a), (b) and (c) above but before discharge of any mortgage referred to in (d);
(ii) upon settlement of the sale of O Street, an amount equivalent to 30 per cent of the sale price of O Street after the deductions referred to in (a), (b) and (c) above but before discharge of any mortgage referred to in (d).
(f) in respect of each property, payment of the balance then remaining equally between the wife and the husband;
(g) from the husband’s share of the balance of the proceeds of sale of either M Street or O Street, whichever is first in time, in payment to the wife of one amount of $9,284.
6. Within 14 days of compliance with Order 5:
(a) the husband and the wife take all necessary steps and execute all necessary documents each to pay to the parents, or at their direction, one half of the following amounts:
(i) $699,000, being the amount held on trust for the parents from the net proceeds of sale of Q Street;
(ii) $77,420, being the refunded deposit arising from the rescinded purchase by the husband and wife of Z Street, Suburb OO;
(iii) $54,000, being the refunded deposit arising from the rescinded purchase by the husband and wife of GG Street, Suburb HH;
(b) the husband pay to the intervenor, V Pty Ltd, the amount of $532,886.72 $492,886.72 together with any interest duly accrued thereon.
7. Except as provided to the contrary by these orders, the wife and the husband shall each:
(a) retain, to the exclusion of the other, all of their right, title and interest in any property, assets, goods or chattels as at the date of these orders;
(b) be responsible for any debts or other liabilities in their name as at the date of these orders.
8. Unless otherwise agreed in writing between the parties, within 28 days of the date hereof, the Third Respondent pay, or cause to be paid, to the wife the amount of $712,500.
9. Simultaneously upon compliance with Order 8, the wife take all necessary steps, including the execution of all necessary documentation, to transfer to the Third Respondent her C Pty Ltd shareholding.
10. Order 9 made on 29 June 2017 17 October 2017, and any accrued, but unsatisfied, liability of the husband pursuant to the said order, be discharged forthwith.
11. Any application seeking an award of costs is to be filed and served with an affidavit in support within 21 days of the date of these orders, and in the event no application is filed within the time specified, there shall be no order as to costs.
12. All outstanding applications be otherwise dismissed.
THE COURT NOTES THAT:
A. These orders have been amended pursuant to rule 10.13 of the Federal Circuit and Family Court of Australia (Family Law) Rules 2021 (Cth).
Practical Tips
- Always document family loans contemporaneously
- Include specific repayment terms where possible
- Keep clear records of fund transfers and their purposes
- Consider security options for family loans
- Use a caveat where money loaned creates a caveatable interest; also consider a registered mortgage
- Address currency conversion if international transfers are involved; aim to have the amount in a clear AUD quantum
Conclusion Successfully resolving family loan disputes in property settlements requires careful attention to detail and structured orders that protect all parties’ interests. The key is establishing clear evidence of the loan nature and, only after litigation commences, creating practical mechanisms for repayment, hopefully through the sale of Australian real property.
Remember: Every family loan situation is unique and requires careful consideration of specific circumstances. This post provides general guidance only and should not be taken as legal advice.