Some Important Things to be Aware of When Giving or Loaning Money to a Family Member

Helping family members financially, whether it is with a first home payment, school finance, or medical bills, is common in Australia. The distinction has actual legal, tax, and financial ramifications and goes beyond simple family generosity. Knowing the difference between a gift and a loan can help you avoid misunderstandings, disagreements, and even possible problems with Centrelink or the ATO, regardless of who is giving or receiving the money.

What Is a Gift?

Money (or any other asset) given freely with no expectation of repayment is called a gift. Usually, it's an act of kindness, such as grandparents providing early inheritances, parents supporting kids, or siblings helping one another.
 

Essentials:

• No repayment is necessary
• Usually unofficial, but able to be recorded;
• In Australia, the gift itself is generally tax-free;
• May have an influence on both partners' Centrelink benefits;
• May affect Family Tax Benefits or elderly care means testing

What Is a Loan?

Money that is given with the obvious intention that it will be returned, either in full or over time, possibly with interest, is called a loan. If there is a commitment to repay, even if there is no interest, it is still a loan.

Essentials:

• May be considered an asset if you're applying for Centrelink or entering elderly care;
• Should interest be levied, it may be taxable (even if the interest is not collected);
• Repayment is required; 
• May be legally enforced if not repaid.

The Importance of Documentation

Clearly stating your intention is crucial, regardless of whether you plan to give the money as a gift or as a loan. Due to miscommunications or the fact that the agreement was never formally established, far too many Australian families have experienced conflict.
 

Gifts:

Consider writing a letter of gift declaration or a will that ought to contain:

• Both parties' names
• The sum provided
• A clear declaration that there is no expectation of reimbursement
• Dates and signatures

Loans:

Use a loan agreement for loans, preferably one that has been examined by a lawyer. As a minimum it should contain:

• Loan amount;
• Terms of repayment (dates, instalments);
• Interest rate (if applicable)
• Both parties' signatures;
• What happens if repayment ceases;
• A statement that the parties were afforded the opportunity to obtain independent legal advice.
• Details of any witnesses to the agreement.

Emotional & Practical Considerations

Although supporting family can be fulfilling, there are emotional concerns involved as well:

Gifting advantages:

• Being straightforward and giving,
• Not complicated if you don't expect reimbursement, and
• Less likely to cause arguments over money (if explained properly).

Gifting disadvantages:

• The potential to lower your personal financial security,
• Set expectations for other children or family members, and,
• If improperly handled, impact your Centrelink benefits.

Advantages of loans include:

• Promoting accountability;
• Allowing you to help without releasing your assets; and
• Having the capacity to be set up to legally safeguard your interests.

Disadvantages of lending:

• May not be enforceable if undocumented;
• May make divorce or estate planning more difficult if family circumstances change;
• Can strain relationships if repayment becomes a problem.

Contact us for a free thirty-minute consultation with a lawyer.

Any information on this website is general in nature and should not be taken as personal legal advice. We recommend that you speak to a lawyer about your personal circumstances.

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