A significant Family Court decision highlights how parents who lend their married children all or part of the deposit on their first homes are at risk of losing their money if a child’s marriage later fails.
Most parents would not realise that their loans could become swallowed up in a marital property settlement and become irrecoverable.
This is a lending time bomb with many millions of dollars being lent each year by generous parents helping their children to gain a foothold in the high-cost housing market that may otherwise be unachievable.
Sulo v Colpetti
The Family Court ruled in the case of Sulo v Colpetti that two substantial unsecured loans from a wealthy father to his married adult son could not be treated in the son’s marital property settlement as outstanding debts.
Justice Gary Watts gave several reasons for not including the loans totalling $380,000 (plus interest on the second loan) in his property settlement calculations:
- First, the two loans had become unenforceable because the six-year deadline under the Statute of Limitations to enforce repayment of an unsecured debt had expired. Such loans are known as being “statute barred”.
- Second, there was no evidence that the husband’s father was intending to “actively pursue a claim” against his son for repayment.
“I accept that the husband does not enjoy a close and loving relationship with his father,” Justice Watts stated in his decision, “but I conclude there is nothing in the husband’s father’s mind to attempt to recover the monies against the husband.
“In fact,” Justice Watts added, “the husband indicated during the trial that his main fear was that after his father died his five siblings would attempt to enforce the debt.” The father was aged 84 at the time of the Family Court hearing.
The confirmation in the property settlement hearing that the Statute of Limitations deadline had been exceeded underlined the fact that the father could not legally demand repayment any time in the future.
Most parental loans are on an at-call basis, meaning that the six-year period before loans become “statute-barred” begins running immediately the money is advanced. With loan agreements requiring repayments at certain dates, the six-year period begins when a borrower defaults on a scheduled repayment set out in the contract.
The decision in Sulo v Colpetti should serve as a sharp warning to parents that unsecured loans to their married children may become irrecoverable. Indeed, the majority of outstanding parental loans in existence are probably past the point of being legally recoverable.
As outlined in the Sulo v Colpetti judgment, the husband’s father had made a $150,000 interest-free loan to his son in late 1995, repayable on demand. (The son’s wife unsuccessfully argued before the Family Court that this loan was, in fact, a gift.)
And in September 2002, the father made a second loan to his son, this time of $230,000 at 10% annual compound interest – repayable on or before April 2003.
Under the written loan agreement for the second loan, no interest was payable provided the debt was repaid by the due date. Again, the loan was not repaid.
A series of fundamental lessons are reinforced from the decision in Sulo v Colpetti:
- It is a mistake for parents to believe that their interests relating to an unsecured parental loan have a high degree of insulation from the fallout of marital property settlements. Documenting a loan is not enough to provide protection.
- Parents should vigilantly ensure that parental loans never “go stale” by overshooting the deadline set under the Statute of Limitations. Loans should be regularly refreshed, at least annually. Otherwise debts may become irrecoverable gifts.
- The six-year period under the NSW Statute of Limitations will not be restarted after its expiration simply by the borrower alone acknowledging the debt.
In Sulo v Colpetti, the son had signed an acknowledgement of both debts in August 2009 – after the six-year period had expired in both instances.
Before signing this acknowledgement of debt, the son had asked his father’s solicitors to obtain an affidavit from his father stating that the “debts existed and were repayable”. However, the solicitors had been unable to obtain this affidavit because the father was overseas and instructions could not be obtained.
A key point that did not arise in Sulo v Colpetti is that any repayments of parental loan should be clearly identified in writing as such. Without clear written identification as a repayment, it could be claimed during a disputed property settlement that the amounts were indeed gifts or intended for another purpose.
Parents who lend their married adult children money should face the regrettable reality that the children’s relationships may end in divorce. If that occurred, parents may then seek repayment of parental loans that they may otherwise have been satisfied to leave unpaid.
Australian Bureau of Statistics (ABS) data suggests that Australia’s current divorce rate is 40% – and this does not include de facto relationships, which are also now within the jurisdiction of the Family Court.
If an adult child’s marriage unfortunately breaks up in the future, parents should already have ensured that they are able to legally recover any loans. In this way, the parents can perhaps financially assist this child in the future as well as other family members if desired.
One of the difficulties with parental loans is that there is much uncertainty about the possible implications of the Statute of Limitations. In all States and the ACT a debt will become statute barred after 6 years (NT 3 years) with time starting to run from the date on which the right of action accrued. This may be because the loan requires repayment by that date or because the borrower defaults under the loan.
The Australian Securities and Investments Commission (ASIC) currently has a comprehensive paper on its website, Collecting Statute-Barred Debts. ASIC states the six-year limitation period under the Statute of Limitations for enforcement of an unsecured loan agreement can be restarted if the “debtor makes a payment or acknowledges the debt in writing”. In Qld, SA, Tas and WA a limitation period can be re-started at any time whereas in ACT, NSW and NT a limitation period cannot be re-started once it expires. In NSW the Limitation Act 1969 specifically extinguishes the cause of action so there will be no debt to request or demand payment of. In all other jurisdictions the debt remains owing but cannot be enforced.
However as partly shown in Sulo v Colpetti, ASIC’s attempts to succinctly explain the position would appear to be an over-simplification that may be ineffective in practice, depending on the exact circumstances.
In short, a poorly structured parental loan agreement that isn’t diligently kept well within the Statute of Limitations deadline may be almost a guarantee of failure if it needs to be reinforced sometime in the future.
Fiona Sonntag is a Principal in the Argyle Private team in Sydney, focusing on superannuation (SMSFs) and property acquisitions. Please feel free to register and leave a comment below, or contact Fiona directly at email@example.com for more information.