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legal Tip 86: Loans and limitations of enforcement

Discussion in 'Legal Issues' started by Terry_w, 13th Oct, 2015.

  1. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    When considering related party loans you must also consider that loans can become unenforceable after certain periods. Under NSW a contract cannot be enforced after 6 years from the date which the cause of action accrues s 14(1)(a) Limitation Act 1969.
    http://www.austlii.edu.au/au/legis/nsw/consol_act/la1969133/s14.html

    Where a deed was entered into rather than a contract the period is 12 years, s 16, http://www.austlii.edu.au/au/legis/nsw/consol_act/la1969133/s16.html

    Note that this is state law and each state has different legislation with different time periods involved.

    This means a loan contract under which there has been no payment or activity for 6 years is no longer enforceable.


    Normally if money is owed the lender will be chasing the borrower much sooner than 6 years, but not always the case with family or related entities.


    This has important implications at death as if there is an outstanding loan owed by the deceased then the executor/administrator of the estate is legally obliged not to pay it. If an executor does pay a loan back when it is over the 6 year period (or 12 years if a deed) then the executor has committed a breach of their duties and they will be personally liable.


    Loans can be refreshed by making a payment or causing the borrower to make a repayment.
     
  2. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

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    And debt forgiveness can have tax consequences too.
     
    Terry_w likes this.