Gifts and loans: how to safeguard your relationships

Are you balancing generosity against sound financial and legal advice matters? It can be hard to see someone you care about struggling financially but gifting or lending money can affect Age Pension entitlements and your tax position. Whether you have a lot to give or a little, Margaret McKay explains your rights and responsibilities when you give or lend money to others.

By Margaret McKay

Was it a gift or a loan?

We’ve all been there. You’re having a barbie with your mates, and one of them asks, “Hey, mate, can you lend me a few bucks? I’m a bit short this week.” You hand over the cash, expecting to get it back soon. But weeks go by, and you don’t hear anything from your mate. You start to wonder: was it a gift or a loan?

How to avoid a fight over money

This is a common scenario that can lead to awkward situations and even disputes among friends and family. According to a survey by Finder, one in 4 Australians has lent money to someone who never paid them back, and one in 5 has fallen out with someone over money.

So, how can you tell the difference between a gift and a loan, and how can you avoid any misunderstandings or conflicts?

Communicate clearly

The most important thing is to make sure both parties are on the same page about the nature and terms of the transaction. Is it a gift or a loan? If it’s a loan, how much is it, when is it due, and what is the interest rate (if any)? If it’s a gift, is there any expectation of reciprocity or gratitude? It’s best to have this conversation before handing over the money, and to confirm it in writing, with a text message, an email, or a signed note.

Keep records

Even if you trust your mate, it’s always wise to keep some evidence of the transaction. This could be a bank transfer receipt, a screenshot of a payment, or a witness statement from someone who saw or heard the exchange. This way, you have something to back up your claim in case of a dispute or a misunderstanding.

Don’t lend more than you can afford

Lending money to someone can be risky, especially if they are unreliable or have financial problems. You should only lend money that you can afford to lose, and that won’t affect your own budget or goals. Don’t put yourself in debt or hardship in the event that the loan is not paid or is late in being repaid.

Be respectful and understanding

If you are the borrower, be grateful for your friend’s help, and honour your agreement. Pay them back on time, or let them know if you have any difficulties or delays. Don’t take advantage of their generosity or trust, and don’t make excuses or avoid them.

Seek legal advice

If all else fails, and your mate refuses to pay you back or acknowledge your loan, then you may need to seek professional help. Depending on the amount and the circumstances, you can file a claim in the small claims court, hire a debt collector, or consult a lawyer. However, be prepared to spend some time and money on this process.

What if it’s not money but something else?

Your mate borrowed your lawnmower and he never got around to returning it. It’s the same mate you’re always shouting a round of drinks for, but he never seems to have his wallet on him to buy you a drink, and remember, you gave him tickets to the footy grand-final that you couldn’t use a couple of years ago. Loans or gifts?

Bank ‘Mum and Dad’

Many parents provide financial assistance to a child to enable purchase of a property, or to begin a new business. A group hug and tears of joy follow, with a “Gee, thanks Mum and Dad.” That child will ultimately be in a relationship, either married or de facto. All one big happy family…

… until it isn’t. Sadly, relationships break down, and some end up in the Family Court. It can be several years after that initial provision of funds before final settlement. Courts will only consider available evidence: emails, letters or diary notes, but over time, these things can become lost in the wash.

Without tangible evidence of a loan, the courts can only use their best judgment, with the default position being gift.

The Rolls Royce

A woman goes to a bank for a loan of $10,000 for a holiday. The manager asks for collateral to secure the loan. She hands over the keys and the papers for her Rolls Royce. “You can keep it until I pay you back.” The manager agrees and gives her the money.

Returned from holidays, the woman goes to the bank and re-pays $10,000 plus $50 interest. The manager said, “We checked your credit history and found out that you’re very wealthy. Why did you need to borrow money from us?” The woman smiles and says, “Where else can I park my Rolls Royce for two weeks for $50?”

The manager is speechless. Was it a loan or a gift?

Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.

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