Tax Returns & Borrowing Money – Why They Matter
When it comes to self employed borrowers applying for their own home loan, they often find out the hard way that their existing tax strategy is not doing them any favours….
Let us try and explain
People who have a ‘normal job’ and receive a payslip for each pay period are referred to as Pay As You Go or ‘PAYG’. Their employer takes out the applicable tax amount and pays this to the tax department on their behalf for each pay cycle. With a PAYG applicant borrowing money, we simply need the last three payslips to confirm income and YTD amounts etc. Depending on the industry, sometimes we may also need tax returns to verify continuance of income, such as some doctors who may be working in a few different locations in any one-year period.
People who run their own business are regarded as self-employed. Sometimes for simplicity sake, self-employed people pay themselves a salary like a normal PAYG employee. However, this doesn’t mean they are treated as PAYG when it comes to applying for a loan - the lender still needs to be able to verify continuance of income over a minimum of two years to satisfy responsible lending criteria and have the assurance that the business is profitable and able to meet its financial obligations.
Many self-employed people have some form of tax minimisation strategy in place often set up by their accountant or financial planner. This is great if all you want to do is pay less tax and the relevant authorities allow this, as long as it’s ‘above board’ in the legal sense and you are not being too greedy with it. But often things fall apart when it comes to borrowing money. For example, if a self-employed person pays themselves a salary of $60,000 per annum and the company tax return shows a loss of $40,000 for that year, this means the business really has only made a $20,000 profit so the $60k salary you are declaring is reduced by the losses the business has made. In a lender’s eyes, you have only earned $20k, not $60k and that is what they will use as your income when assessing your loan application!
Confused? This is why when it comes to borrowing money, tax returns matter. You need to get a broker on your side who can sort through all the financial stuff before you go out and buy something to help avoid the stress and potential financial loss of not being able to secure funding after you have already purchased a property.
No changes to the RBA cash rate this month, we start the new financial year with our record low 0.25%. So, as you prepare for tax time 2020, I am available on 0438 041 111 or on email at firstname.lastname@example.org for a confidential discussion about your home loan requirements.
As always, enjoy life, work hard, play safe and remember that we are always here to help you
‘Take the Confusion Out of Lending’
All the best
Peter Vinci - 0438 041 111