Self Employed

It is common for the self-employed to strategize with their Accountant to legally reduce their taxable income.  Lenders generally will assess a self-employed applicant borrower according to their financials including their company and individual Tax Returns, ATO Notices of Assessments and Financial Reports.  Borrowing capacity and tax minimisation are counterproductive.  The lender will frequently take the position that income must be evident in the tax return in order for it to be used in servicing, even when there are explanations, such as family trust discretionary distributions,  suggest that I higher figure be used.  There are exceptions though.  When assessing financials, a good mortgage broker will look for expenses that can be “added back” therefore increasing the net profit and increasing the borrowing capacity of the borrower.  Items that may be able to be added back, again varying lender to lender, include one off expenses, depreciation and interest being refinanced.  Any variance between trading years will be assessed and where they differ by greater than 20% it is common for the profit in the current year to be capped at 20%.  Most lenders require that a minimum of 2 years of financials be provided but there are some that require only one year.  Tax Returns are also required to be relatively current.

In circumstances where Financial reports and Tax Returns are not available but the business is trading well and is profitable, the borrower may have access to a “lo doc” loan.  A lo doc loan generally relies on different financial documents including perhaps business bank statements or BAS reports and/or a declaration from the borrowers accountant as to their capacity to service the loan.  Lo doc loans generally cost more in terms of interest and fees due to the perceived increased risk to the bank.