How lenders actually assess self-employed income
Lenders assess self-employed home loan income differently from a PAYG payslip. Many business owners are surprised by the gap between what they earn and what a lender counts as assessable income. Lenders don't look at revenue, and they don't look at what you draw. They look at taxable income, adjust it for things that are non-cash or one-off, then run their own test on whether you can repay (serviceability) using that figure.
For sole traders, company directors and partners trading under an ABN, there is a set process. If you understand how lenders build the income number, and you present your financials so the number is right, you are much more likely to get funded instead of declined.
Home loans for owner-occupiers fall under the NCCP framework. Aurelius Capital is a credit representative of Viking Money Pty Ltd (ACL 471435, Viking Aggregation Pty Ltd). Because our background is commercial finance, reading business financials is everyday work for us. On scope: we arrange home loans for the self-employed and business owners. We don't do standard PAYG home loans.
What lenders want to see
For a full-doc self-employed application, most lenders want two years of financial history:
- Personal tax returns for both years, plus ATO Notices of Assessment
- Business financial statements (profit and loss, balance sheet). These are needed for companies and trusts. Sole traders don't need them separately, because the business income goes straight onto the personal return
- ABN and GST registration history showing you have traded without a break
- Business Activity Statements, usually the last four quarters
- A letter from your accountant confirming the financials are accurate and the income is sustainable
Lenders want two years so they can see the income is real and will keep coming. One strong year can look like a one-off. Two years of steady or rising results makes the case. If income has dropped from one year to the next, most lenders will average the two, or use the more recent year if it is lower.
For company directors, the personal tax return is only part of the story. Both the salary drawn from the company and the company's retained net profit count. A director paying themselves $80,000 from a company with $200,000 in net profit after wages is in a much stronger position than their payslip suggests.
How add-backs work
Add-backs are adjustments lenders make to get from taxable income to assessable income. Some deductions cut your tax bill without cutting the cash the business actually makes. The most common are:
- Depreciation. This is an accounting expense, not cash going out. Most lenders add it back, though some only add back part of it where assets need regular replacing.
- Extra super contributions. Voluntary contributions above the required minimum are your own cash, and many lenders count the extra as available income.
- Interest on business debt being refinanced. If the loan is refinancing an existing business debt, the interest you pay now can be added back because that debt will be gone.
- One-off expenses. For example, a one-time legal bill, a bad debt written off, or a restructuring cost that won't happen again. You need paperwork to back these up.
- Director wages. For company directors, wages paid by the company are assessed together with the company's net profit. This gives the full picture of your income without counting anything twice.
A worked example. A company director's personal return shows $130,000 (director salary). The company's statements show $75,000 net profit after that salary, $40,000 of depreciation on plant and equipment, and $18,000 in super contributions above the minimum.
| Item | Amount |
|---|---|
| Director salary | $130,000 |
| Company net profit (after wages) | $75,000 |
| Add back: depreciation | $40,000 |
| Add back: excess super contributions | $18,000 |
| Assessable income | $263,000 |
The lender tests serviceability against that $263,000. It is a lot higher than the $130,000 on the personal return, and it is a truer picture of what the business makes.
Lenders don't all treat add-backs the same way. Some are cautious with depreciation on assets that get replaced often. Some want to see the add-back item in both years before they count it. The broker's job is to know which lender's method suits your situation, and to document each add-back properly before the application goes in.
How business structure changes the assessment
Sole trader
This is the simplest structure for lenders. Business income goes straight onto your personal tax return, so there is nothing to separate out. Lenders start with taxable income and apply add-backs. Because you are the business, they look closely at whether the income will continue.
Company
The director's salary and the company's net profit are assessed together. Lenders want two years of company financial statements prepared by a registered accountant, plus your personal returns. Profit kept in the company doesn't automatically count unless it has been paid out to you. A letter from your accountant explaining the cash position can sometimes support a higher figure. Lenders' rules differ a lot on this.
Trust (discretionary or unit)
This is the hardest one. A discretionary trust can pay income to any beneficiary the trustee chooses. Lenders look at the trust's net profit, the distributions paid to you, and whether those were steady across both years. If the trust earned well but spread its income across several beneficiaries to save tax, you may show a low income even though the business is profitable. Careful packaging of the application matters most with this structure. It is also the one most likely to be assessed wrongly by lenders who don't see it often.
Low-doc and alt-doc: when two years of returns aren't available
A real business owner who can't provide two years of standard financials still has options. Low-doc and alt-doc loans exist for this. They are common when the business has traded for less than two years, the structure changed recently (a new ABN restarts the history), the latest return isn't lodged yet, or income has grown so fast that the older return understates what you earn now.
Other evidence lenders will look at:
- Accountant's declaration. A registered accountant confirms your income and that it is sustainable.
- BAS statements. 12 months of lodged BAS showing turnover excluding GST. Lenders apply an income multiplier to this, and the multiplier varies by lender and type of business.
- Business bank statements. 3 to 6 months, checked against the BAS and the declaration.
- Income declaration. You declare your own income, backed by the documents above. This is where the name "low-doc" comes from.
There are trade-offs. Low-doc loans usually cap the LVR at 80%, which means a 20% deposit. Some non-banks go to 85% with strong evidence, but LMI at that level is expensive. Rates are usually 0.5% to 1.5% p.a. higher than the standard equivalent. Lenders still check the alternative documents properly. The difference is the type of evidence, and you pay a higher rate for it.
How to present financials to a lender
- Lodge both years before you apply. The most common avoidable delay is a return that hasn't been lodged. Check both are filed and the Notices of Assessment have come through.
- Prepare an add-back schedule with your accountant. List every legitimate add-back before you apply, with a short note for anything beyond standard depreciation. A credit assessor who doesn't understand your business will take the cautious view.
- Have your business bank statements ready. Most lenders ask for 3 to 6 months to check against the financials. Know what any large deposits or withdrawals were before they ask.
- Check your ABN and GST registration history lines up. Gaps, or a registration date that doesn't match how long you say you've traded, raise questions straight away.
- Think about timing. If the financial year has just ended and lodgement is months away, a lender using only the prior year may be working off a lower income than you earn now. Tax timing is for your accountant to advise on. Choosing the lender is the broker's call.
Common reasons self-employed applications get declined
Most declines can be fixed:
- Low declared income compared with real cash flow. Applications sent in without the add-back work leave borrowing power on the table.
- ABN history under two years. Most full-doc lenders want at least two years. Under 12 months of trading is often declined on policy before anyone looks at the income.
- An active ATO payment plan. A current plan tells the lender you have had recent cash-flow pressure. Some lenders can work with it and others can't, so choosing the right lender matters.
- A loss in one of the two years. Averaged with a better year, it can cut your borrowing power. Some lenders will use the most recent year if the trend is clearly up.
- A change of structure across the two years. If you changed entity partway through, it needs a clear explanation, which your accountant's letter can give.
- The wrong lender. Major banks' automated credit systems often reject unusual self-employed profiles at the scoring stage. Non-bank and second-tier lenders have a person look at the file and can be more flexible. The income could support the loan, but the application went to the wrong lender.
That last one explains more declines than most borrowers realise. A major-bank decline is often about the bank's credit system, not your position.
What Aurelius Capital does differently
Aurelius Capital's main work is business finance: commercial lending, commercial mortgages, asset finance and working capital. Reading company financials, working out add-backs and picking which lender on our panel suits a given structure is our everyday work. We bring the same approach when a business owner needs a home loan. We build the add-back schedule before the application goes anywhere, read the structure correctly, and choose a lender that knows how to assess self-employed income instead of forcing it through a PAYG template.
If you run a business, your financials show more than your tax return alone, and you want a broker's view on what you can borrow and which lenders fit, the application form is the place to start.