The Uncomfortable Reality of Intra-Family Loans

The “bank of mum and dad” now ranks among Australia’s largest sources of home loan finance, and a substantial share of first home buyers rely on family assistance to purchase property. The legal treatment of these arrangements in Victoria creates risks that a commercial lender never faces. The central problem is straightforward. Money that passes from a parent to an adult child is presumed to be a gift unless the parent proves otherwise.

Most of the law in this area is national. The presumption of advancement is general equity. Family law and the tax rules are federal. The genuinely Victorian elements are land registration under the Transfer of Land Act 1958 (Vic), the limitation period under the Limitation of Actions Act 1958 (Vic), and local conveyancing practice. This article addresses both layers and sets out how to document a family advance so that it survives a dispute.

Key Takeaways

• Money from a parent to an adult child is presumed to be a gift. The parent carries the burden of proving a loan.
• The presumption is weaker for an independent adult child, so contemporaneous documentation usually displaces it.
• Since 10 June 2025, the family law property framework is codified. A parental advance counts in the asset pool unless it is proven to be an enforceable debt.
• A loan documented as repayable on demand can become statute-barred six years after the advance. Drafting must avoid this.
• Proper protection requires a written loan agreement, independent legal advice for all parties, a registered mortgage, and conduct consistent with a loan.

Why Lending to a Child Carries Risks a Commercial Lender Never Faces

A private lender who advances funds to an unrelated borrower relies on the commercial character of the transaction. The loan agreement speaks for itself. A parent lending to a child must overcome a presumption that contradicts the stated intention. This is an evidentiary burden, not a bar, but it shapes how the arrangement should be documented from the outset.

The Presumption of Advancement

How the presumption operates

Victorian courts apply the presumption of advancement to money or property that passes from a parent to a child. The presumption holds that the parent intended a gift, and the burden falls on the parent to prove a contrary intention. In Nelson v Nelson (1995) 184 CLR 538, the High Court confirmed that the presumption operates as a rule of evidence, not a rule of law. Evidence of a contrary intention displaces it, but that evidence must be credible. Courts scrutinise self-serving statements made during litigation.

The presumption is weaker for an independent adult child

The strength of the presumption varies with the circumstances. It rests on the parent’s perceived obligation to provide for the child. Where the child is an adult and financially independent, that obligation is weak, and the presumption is correspondingly easier to rebut. For the typical first home buyer, an adult purchasing property, modest contemporaneous documentation will usually displace the presumption. The risk is not that the presumption is impossible to overcome. The risk is that parents who keep no record leave the question to be decided years later on weak and contested evidence.

Mothers, fathers, and Nelson v Nelson

The presumption developed in relation to fathers and persons standing in the place of a parent. Its application to mothers was historically contested. Nelson v Nelson is the leading Australian authority on an advance from a mother to a child and remains the reference point for the rebuttable, evidentiary character of the presumption. The practical position in Victoria is that the presumption applies to advances from either parent, and the same documentary discipline answers it.

The presumption and the resulting trust

The presumption of advancement operates against a competing doctrine. Where a parent provides the purchase money and title is taken in the child’s name, a resulting trust would otherwise arise in the parent’s favour. The presumption of advancement displaces that resulting trust. Documentation determines which doctrine prevails. A registered mortgage and a signed loan agreement support the parent’s interest. Silence supports the gift.

Family Law Exposure After the 2025 Reforms

When a child’s relationship breaks down, the former partner will often argue that the parental advance was a gift forming part of the asset pool available for division. The Family Law Amendment Act 2024 (Cth) changed how courts approach this question. Most of its provisions commenced on 10 June 2025 and apply to new and existing proceedings, except where a final hearing has already begun.

The property settlement framework is now codified in the amended Family Law Act 1975 (Cth), principally in section 79 for married couples and section 90SM for de facto couples. The statute now sets out, on its face, how the court identifies property and liabilities, assesses contributions, and weighs current and future circumstances. The treatment of liabilities is part of that codified framework. A parental advance that is proven to be an enforceable debt reduces the net pool. An advance that cannot be distinguished from a gift is treated as a contribution by the party whose parent provided it.

The reforms also elevated the duty of financial disclosure from the court rules into the Act itself. A parental loan that surfaces late in proceedings, with no contemporaneous record, invites an adverse inference. The timing of documentation is decisive. A loan agreement signed when the money changed hands carries weight. A document created years later, once a relationship has deteriorated, attracts scrutiny as an instrument designed to defeat a claim. The best evidence of a loan is a record made at the time of the advance.

The Limitation Trap for On-Demand Family Loans

A documentation strategy can fail on a point that the parties rarely consider. Under the Limitation of Actions Act 1958 (Vic), an action to recover a simple contract debt must be brought within six years of the cause of action accruing. For a loan repayable on demand, the cause of action generally accrues when the loan is advanced, because the lender may demand repayment immediately. A family loan documented as repayable on demand can therefore become statute-barred six years after the advance, even though the parties still regard it as outstanding. The protection the documentation was meant to provide is lost.

Two drafting responses address this:

• Make repayment contingent on a defined future event, such as the sale of the property, a fixed date, or the death of the borrower. Time does not run from the advance where repayment is not yet due.
• Refresh the limitation period during the life of the loan. A written acknowledgment of the debt signed by the borrower, or a part payment, restarts the six year period.

Either approach keeps the debt enforceable. Neither requires the parent to demand repayment from the child.

Documentation Standards for Family Loans

The documentation for a family loan should match or exceed the standard for a commercial loan. The informality of family relationships works against the lender once a dispute arises. A written loan agreement should record:

• the principal amount and the date of the advance
• the interest rate, or an express statement that the loan is interest-free, with the reason
• repayment terms, expressed as dates or defined events rather than on demand
• default provisions and their consequences
• the security arrangements
• confirmation that each party received independent legal advice

Independent legal advice is essential. A child who signs without separate advice may later claim that they did not understand the agreement or signed under family pressure. Independent advice for every party removes that argument. Where the child has a partner, particularly where both will appear on the title, the partner should also receive independent advice and acknowledge the loan.

Security: Registering a Second Mortgage

Best practice for private lending in Victoria requires registered security. For a loan that funds a property purchase, this usually means a second mortgage behind the primary lender. The documents are:

• a mortgage over the property in registrable form
• a deed of priority and subordination with the first mortgagee
• personal guarantees from each party with an interest in the property

Registration on title provides two benefits. It creates a proprietary interest that survives the borrower’s insolvency. It also generates objective evidence that the advance was a loan, because conduct consistent with a lending relationship carries weight in both family law and equity. Most institutional lenders will consent to a second mortgage where the deed of priority confirms their priority and restricts enforcement by the second mortgagee while the first mortgage remains on foot. The same exposure that attaches to unregistered security positions in commercial lending applies to family arrangements.

Interest and Repayment as Evidence of a Loan

Interest-free loans are common within families and create an immediate evidentiary problem, because the absence of interest resembles a gift. Where the loan will carry no interest, the agreement should state this and give the reason. A statement that the loan is interest-free as a family accommodation is better than silence on the point.

Repayment history is strong evidence of a loan. Regular payments, even small ones, show that the parties treated the arrangement as a debt. Where the child cannot sustain regular repayments, an alternative structure preserves the commercial character. A loan with accruing interest and a single payment on the sale of the property accommodates the cash flow constraint while keeping the character of a loan. The documented terms and the actual conduct must remain consistent.

The Binding Financial Agreement Option

The Family Law Act permits a Binding Financial Agreement between the child and their partner. Such an agreement can quarantine the parental loan from division on relationship breakdown. A Binding Financial Agreement requires each party to receive independent legal advice and must meet strict formal requirements to bind. A court can set it aside in limited circumstances, including fraud, duress, or unconscionable conduct.

The agreement is most effective when made at the time of the advance, before any difficulty arises. An agreement executed during a relationship breakdown, when one party has an incentive to dispute the loan, faces greater scrutiny. The approach requires the partner to agree, which can be an uncomfortable conversation. The alternative leaves family capital exposed in proceedings where the parents have no standing.

ASIC’s Increasing Focus on Private Credit

Regulatory attention on private lending has increased. ASIC’s 2026 outlook identifies retail client exposure to private credit markets as a concern. That focus targets pooled investment vehicles rather than individual family arrangements, but it signals broader interest in lending outside the banking sector. A family arrangement that pools contributions from several family members, or that promises returns to contributors, may attract regulatory consideration. The line between a family loan and a managed investment scheme depends on the specific structure. Arrangements that draw on multiple contributors warrant careful analysis.

Tax: Division 7A and Interest

Tax treatment adds further documentation requirements, and one common error should be corrected at the outset. Division 7A of the Income Tax Assessment Act 1936 (Cth) applies only where a private company lends to a shareholder or an associate. It does not apply to an ordinary loan between two individuals. Division 7A becomes relevant only where the parents lend through a company or a trust, in which case the loan must meet specific interest and term requirements, or the amount may be treated as a dividend.

For an individual to individual loan, the Australian Taxation Office does not impute interest. An interest-free family loan is permissible. Where interest is charged, the lender must include it as assessable income. The borrower may deduct interest where the funds produce assessable income, but not where the funds acquire a principal residence. These consequences should inform the structure before the money is advanced.

Enforcement: The Practical Reality

Documentation creates legal rights. Exercising them within a family raises practical difficulties that a commercial lender does not face. A parent should consider whether they would actually enforce the loan on default. A mortgage that will never be enforced provides weaker evidence of a loan than one the parent would genuinely exercise. This does not require a parent to sell the family home from under a child. It requires the enforcement provisions to be realistic. A loan with a genuine expectation of repayment on the sale of the property, secured by a mortgage that would be enforced in that event, retains its character as a loan.

Coordinating Loans Across Multiple Children

Parents who assist one child often intend to treat all children equally through their estate. Lifetime loans and testamentary intentions must be coordinated. A loan to one child, properly documented and expected to be repaid, sits outside the estate. A gift to one child may create an obligation under the will to equalise distributions. The loan agreement can address what happens on the parents’ death. Forgiveness on death converts the loan to a testamentary gift. Continuation of the loan as a debt owed to the estate preserves its character. Each option has different consequences for the child, the siblings, and the administration of the estate.

What Proper Documentation Looks Like

A well-structured family lending arrangement includes:

1. a written loan agreement signed by all parties, with independent legal advice certificates
2. a registered mortgage, second ranking where it sits behind an institutional lender
3. a deed of priority with the first mortgagee
4. a Binding Financial Agreement between the child and their partner, where applicable
5. repayment terms tied to defined events rather than to demand, to avoid the limitation trap
6. contemporaneous file notes recording the parties’ intentions
7. a record of repayments consistent with the documented terms

This standard exceeds what most families contemplate when helping a child buy a home. It reflects the legal reality. Informal arrangements are presumed to be gifts, and family law proceedings can redistribute assets regardless of original intention. The cost is modest against the sums advanced. A loan of $200,000 or more justifies legal fees of a few thousand dollars to protect the family’s position. The alternative leaves that capital exposed to claims that documentation would have prevented.

Frequently Asked Questions

Is money from parents to buy a house a loan or a gift?

In Victoria, money that passes from a parent to an adult child is presumed to be a gift. The parent can rebut the presumption with evidence of a loan, such as a written agreement, a registered mortgage, and a record of repayments. Without that evidence, the advance is likely to be treated as a gift.

Can my child’s former partner claim money I lent for their home?

A former partner may argue that the advance was a gift and therefore part of the asset pool available for division. Since 10 June 2025, the codified family law framework treats a proven enforceable debt as a liability that reduces the pool. Contemporaneous documentation is the difference between a loan and a gift in those proceedings.

Does a family loan need to be in writing in Victoria?

A loan can exist without writing, but an undocumented family loan is difficult to prove and is vulnerable to the presumption of advancement and to family law claims. A written agreement, independent legal advice, and registered security are the practical requirements for protection.

Can a family loan become unenforceable over time?

Yes. Under the Limitation of Actions Act 1958 (Vic), a simple contract debt must be sued on within six years of the cause of action accruing. A loan repayable on demand can become statute-barred six years after the advance. Tying repayment to a future event, or obtaining a written acknowledgment of the debt, prevents this.

Should a parent register a mortgage for a loan to a child?

Registered security is best practice. A second mortgage creates a proprietary interest that survives the borrower’s insolvency and provides objective evidence that the advance was a loan. It requires the consent of the first mortgagee through a deed of priority.

Do family loans attract tax in Australia?

An interest-free loan between individuals does not attract imputed interest. Where interest is charged, the lender includes it as assessable income. Division 7A applies only where a company or trust makes the loan. Interest is not deductible where the funds acquire a principal residence.

About Blaine HattieBlaine Hattie is a Principal in Commercial Transactions at Sutton Laurence King Lawyers. He advises businesses on transactions and finance with a special interest in technology, cybersecurity, digital media, defamation, and artificial intelligence.