Family Loan Agreement Australia: Lending to Family Members
Your daughter needs $15,000 to clear a credit card. Your brother wants help buying a work ute. Your parents are short while they wait for a property to settle. You can help, you want to help, and asking family to sign paperwork feels cold.
It is also the single thing most likely to keep the money, and the relationship, safe. Loans between family members are treated differently by the law from loans between strangers, and not in the lender's favour. This guide covers why, what a family loan agreement should include, and the tax and estate questions that come with it.
This article is general information, not legal, tax or financial advice. For a large loan, or one tied to property, a relationship or an estate, speak with a lawyer or accountant.
Why Family Loans Need Writing More Than Other Loans
With a loan to a stranger, nobody doubts it was a loan. With family, the law starts from a different place.
Money from a parent to a child can be presumed to be a gift. Australian courts apply what is called the presumption of advancement: when a parent transfers money to a child, of any age, it is assumed to be a gift unless there is evidence that both sides intended a loan. The burden of proving it was a loan falls on the parent.
Between other relatives the problem is slightly different. For any agreement to be enforceable, both people must have intended it to be legally binding, and arrangements inside a family are more easily seen as informal help than as contracts. A signed loan agreement answers both problems at once.
When It Matters Most
- The borrower separates from a partner. If there is no document, the money can be treated as a gift to the couple and divided between them. Our guide to Bank of Mum and Dad loans covers this for home deposits.
- The lender dies. An unpaid loan is an asset of the estate. Without a record, the other children may never know one of them still owes money, or may believe a gift was a loan.
- The lender needs the money back. Health, aged care or retirement can change what a lender can afford to leave outstanding.
- The lender receives a Centrelink payment. Loans and gifts are assessed differently. See family loans and Centrelink gifting rules.
- Memories differ. Years later, people honestly remember different amounts and different promises.
What a Family Loan Agreement Should Include
1. Who is lending and who is borrowing
Full legal names. If an adult child and their partner are both receiving the money, decide whether both are borrowers and name them accordingly.
2. The amount and how it was paid
The exact amount, the date, and the method. Pay by bank transfer with a clear description such as "loan", so the bank record matches the agreement.
3. A clear statement that it is a loan
Say in plain words that the money is a loan to be repaid and is not a gift. Between parent and child this sentence does a lot of work.
4. Repayment terms
Regular instalments, a lump sum by a date, or repayment when something happens, such as the sale of a property. An agreement with no repayment terms looks much more like a gift. Our private loan repayment calculator shows what different terms cost per month.
5. Interest, or a statement that there is none
Interest-free family loans are common and perfectly valid. Write "no interest" so it is not left open.
6. What happens if things change
Missed payments, the borrower selling the asset the loan paid for, the borrower separating, or either person dying. For example, the agreement can say the balance becomes repayable if the borrower separates, or that any balance is deducted from the borrower's share of the lender's estate.
7. Signatures and dates
Both people sign and date it. Electronic signatures are fine. Sign before or when the money is transferred if you can.
Tax: The Short Version
- The loan itself is not income for the borrower, and repayments of the amount lent are not income for the lender.
- Interest is income. If you charge interest, you need to declare it in your tax return, even on a loan to a family member.
- There is no gift tax in Australia, but gifts and loans can affect Centrelink entitlements.
If the loan is from a company or a trust to a family member, different and stricter rules apply, and you should get advice from an accountant first.
Family Loans and Your Will
A loan that is still outstanding when the lender dies does not disappear. The executor can ask for it to be repaid, or the will can deal with it. The common options are:
- Forgive the loan in the will
- Deduct the unpaid balance from that person's inheritance, so the other beneficiaries are treated evenly
- Leave it to be repaid to the estate
Whichever you choose, the loan agreement and the will should say the same thing. This is the area where it is worth paying a lawyer to check.
Already Lent the Money?
You can still document it. A loan agreement signed after the money has changed hands records the amount outstanding today and the terms from here on. A signature from the borrower acknowledging the debt is far better than nothing, which is why even a simple IOU has some value.
How to Raise It Without Offending Anyone
- Present it as protection for the borrower as well: it stops other relatives, or a future ex-partner, disputing what was agreed
- Blame fairness: "I want it written down so your brother and sister know exactly where things stand"
- Keep the document short and in plain English
- Sign it together, at the same time the money is transferred
Create a Family Loan Agreement
Describe who is lending, how much and how it will be repaid, and get a private loan agreement drafted for your situation, ready for both of you to e-sign. From $3.99.
Create a Loan Agreement →Sources: Moneysmart (ASIC), Australian Taxation Office — Income you must declare, Services Australia — Gifting.
Frequently Asked Questions
Is a loan agreement between family members legally binding?
Yes, if it is clear that both people intended a loan and the terms are set out. A signed written agreement is the strongest evidence of that intention.
Can I lend money to a family member interest free?
Yes. There is no requirement to charge interest on a private loan between individuals. State in the agreement that no interest applies.
Do I have to declare a family loan to the ATO?
The loan itself is not income and is not declared. Any interest you receive is income and must be included in your tax return.
What if my child never repays the loan?
You can enforce it like any other debt, starting with a written request and a letter of demand, or you can choose to forgive it. Be aware that a loan nobody ever asks to be repaid can start to look like a gift, and a claim generally has to be brought within six years, or three in the Northern Territory.
Does a family loan agreement need a lawyer or a witness?
Neither is legally required for a simple loan. Legal advice is sensible for large amounts, loans secured against property, or where the loan is part of estate planning.