Legal Tip 413: Spouses Lending Money to Each Other

Just because you are married, or in a defacto relationship, doesn’t mean you cannot contract with your spouse. You can, but there is a general presumption that spouses don’t contract with each other. This includes lending money.


Spouses are discrete legal entities to each other in Australia (in some countries they are lumped together) so that means they can lend to each other. To prove that it is a loan the contract should be in writing though. This should be enough to rebut the presumption that spouses are not contracting with each other.


Why would you want to lend to your spouse? Many reasons, some include:

a) You want the money back!

b) Estate planning

c) Bankruptcy protections

d) Family law protection

e) Tax reasons


Example

Homer is on his third wife by now and when he dies he wants to make sure his assets pass to his biological children. He is aware of Family Provision potential claims. His new wife doesn’t work, other than being an influencer starting out, and she cannot qualify for a loan and has no cash of her own. He wants to help her buy $200,000 worth of shares but as he is 50 years older than her, he thinks he might be more likely to die first. He wants that $200,000 he will lend her to fall back into his estate so his kids get it if he dies. (heaps of other issues to consider with this too). So he lends it to her under a written agreement so that it is clear it is not joint money and is not a gift.

 

Not only that the ATO considers spouses may not (always) need a written loan agreement in some cases. Example - One owner, two borrowers. The other spouse does not need a loan agreement for a JOINT borrowing only used by one of them. That said it is often well advised to do so. In the event of a martial breakdown it may mean one party has a stronger legal claim to refute their share of a loan or have it subject to specific orders.

However it is well recommended anytime where deductions could be required that they do. It cements in place the fact a interest expense is lawfully incurred. Provided there is an accounting for that loan if the rate and terms vary from back to back. If its not done today and in 8 years its refinanced one day the ATO could review it and then you could be in a world of mess.

There can also be defective related loans. Eg Hubby and wife are buying home and hubby is a high income earner and he gets his wife to lend him their savings so it appears he has some charge over the property etc. It may be a sham. And if the end goal was to create a higher deductible loan XX months later it could also fall under Part IVA as a scheme

 

I found another draft version of this tip that I had written so here it is


Sure, they can. Spouses are separate legal entities that can contract with each other.


There is an assumption that spouses don’t contract with each other, but that is a presumption that can be rebutted and the best way to rebut this is with a written loan agreement.


Why would a person want to lend to their spouse?


Many couples keep finances separate and one spouse might be in need of money for something. It might also be done as part of an estate planning strategy, a tax strategy or an asset protection strategy or even a family law strategy. Perhaps it is because of distrust!


Example

Marge is a gambler. Homer keeps his assets separate to those of Marge. She wants to buy a business to help take her mind off exploiting horses but has lost all of her money.



Homer agrees to help fund it, but

a) He doesn’t trust Marge

b) He wants security for his debt

c) He wants to keep the money in his estate if he were to die before Marge

d) He might want to start charging Marge high interest later on to help her save tax.

They arrange a written loan agreement with a personal property securities act charge over the assets of the business. If Homer dies, he will leave his assets to the trustee of a testamentary discretionary trust which Bart controls so that Marge will still owe the debt – otherwise Homer fears she will lose it. The estate could charge Marge interest at this point, and it should be more tax effective if there are children in the family.