Self-employed home loans

Your taxable profit is not your borrowing income

Good tax planning reduces your taxable income. That is the point of it. But it also reduces the figure a lender starts from.

Lenders know this, which is why they use add-backs: expenses that reduced your taxable profit but did not actually cost you cash, or will not continue.

The most common is depreciation. It is a non-cash deduction, so no money left your account, and most lenders will add it back. The amount they allow can vary with the type of asset.

Others that are commonly considered, depending on the lender:

• One-off or non-recurring expenses, such as a major equipment purchase or a legal cost that will not repeat
• Additional superannuation, meaning voluntary contributions above the compulsory rate, treated as discretionary
• Interest on debts being refinanced, because those repayments stop once the new loan settles
• Retained company profit, which some lenders count and others do not

This is the single biggest reason two lenders can look at identical financials and reach materially different conclusions. Lenders differ on which add-backs they accept, and the gap between the most and least generous is not small.

How your structure changes the reading

Sole traders

Generally the most straightforward. Your business income is already in your personal tax return, so a lender works from your taxable income, applies whatever add-backs it allows, and assesses from there.

Company directors

This is where it gets interesting, and where people are most often surprised.

Your income is usually read in two parts: the wages you pay yourself, and the profit retained in the company. If you draw a modest salary for tax reasons and leave profit in the business, your personal return can make you look like a low-income earner.

Some lenders will look through to your share of retained company profit. Others will only use your wages and any dividends actually paid. The same director, with the same business, can present very differently depending on which lender the file goes to.

Where the company is genuinely profitable and you are drawing a small wage, choosing a lender that looks through the structure can matter more to your borrowing capacity than the interest rate.

Trusts

Lenders need to understand who receives the income and in what proportion. Distributions, beneficiaries, and how consistent those distributions have been all come into it. Some lenders are comfortable with trust structures and some are not, and that comfort varies more than most people expect.

More than one way to evidence income

Full documentation, meaning two years of lodged tax returns with the matching ATO Notices of Assessment, plus business financials where you trade through a company or trust, is the standard path. Where it fits, it generally gives you access to the widest range of lenders and the sharpest pricing.

It is not the only path.

Where full financials are not available, some lenders will consider alternative documentation, evidenced through Business Activity Statements, a declaration from your accountant, and business bank statements.

This is a different way of evidencing income, not an easier one. The trade-offs are real:

• A lower maximum loan to value ratio, which usually means a larger deposit
• Higher pricing than a comparable full documentation loan
• A narrower field of lenders
• Your accountant needs to be a registered tax agent and willing to sign a declaration

There is no such thing as a loan with no income verification. Responsible lending obligations mean every application requires income to be verified somehow. What changes is the method.

Which path suits you depends on what your figures actually show, what you can evidence, and what you are trying to do.

One year of financials, or two

The traditional position was two years of lodged returns. That has shifted, and some lenders will now work from your most recent lodged year rather than averaging two.

That matters most when your business is growing. If last year was materially better than the year before, an averaged figure understates you. A lender that uses the latest year alone can produce a very different result from the same paperwork.

Lodgement matters. Most one-year policies need the return actually lodged with the Notice of Assessment issued. Figures your accountant has prepared but not lodged generally do not count.

Timing is a decision. If you are close to lodging a stronger year, waiting can change what is available to you. If your last year was weaker than the one before, the opposite may be true. This is worth thinking about before you apply, not after.

Where the file goes, and how it is put together

Two things decide a self-employed application as much as the numbers do.

Which lender. Policy differences on add-backs, retained profits, trust structures, trading history and documentation are large. The right lender for a company director with retained profits is often not the right lender for a sole trader with two clean years.

How the file is presented. Financials on their own do not explain themselves. A credit assessor reading a set of accounts cold will not know which expenses were one-offs, why last year dipped, or what the retained profit represents. Identifying add-backs, evidencing them properly, and explaining anything unusual is a large part of the work.

That is not about presenting figures differently. It is about making sure what is genuinely there is visible and understood.

Newly self-employed

The common belief is that you must trade for two years before anyone will look at you. That is the position of many lenders, but not all of them.

Some lenders will consider shorter trading histories, in some cases from around six to twelve months of ABN and GST registration, supported by BAS and business bank statements. Conditions usually apply: a larger deposit, and often evidence of relevant experience in the same industry before you went out on your own.

If you have recently gone out on your own, the useful question is not whether you have to wait. It is what is realistically available now, what it would cost, and whether waiting would put you in a materially better position.

What I would want to look at

• Your last two years of personal tax returns and Notices of Assessment
• Business financials, where you trade through a company or trust
• Recent BAS and business bank statements
• How your structure works, and how you take income out of it
• What is coming: a stronger year about to be lodged, a large one-off expense, a change in the business