Self-Employed and Planning to Borrow? Tax Time Matters More Than You Think

Self-employment is a major part of the Australian economy. According to data based on Australian Bureau of Statistics figures, around 1.7 million Australian businesses are self-employed and operate without employees, representing almost two-thirds of all businesses in the country. From tradies and consultants to farmers and tourism operators, many business owners across the Mid North Coast rely on their own enterprise to generate income, making tax-time preparation particularly important when planning to borrow.  

Many business owners claim legitimate business deductions available under tax law, however, it’s important to understand that taxable income is one of the factors lenders considered when assessing a loan application. While legitimate deductions may reduce the tax bill, it can also reduce the income a lender uses when assessing a loan application. The result? Someone with a healthy business and strong cash flow may qualify to borrow less than they expected. If you expect to apply for finance in the coming year, its worth discussing your plans with your accountant and mortgage broker early. Understanding how lenders assess self-employed income can help avoid surprises later in the process. The goal isn’t to pay more tax or less tax. It’s to understand how your financial position may be assessed if you plan to seek finance in the future.

An accountant can help ensure your tax affairs are accurate and compliant while explaining the impact of deductions on your taxable income. A mortgage broker can help you understand how different lenders assess self-employed income and what documentation will be required. Every lender has different policies. Some may consider add-backs for certain non-cash expenses such as depreciation, while others may assess income differently depending on the structure of the business and year on year fluctuations in income.

Preparation is often the key and business owners who keep clean financial records, separate personal and business expenses, lodge returns on time and maintain up-to-date financial statements are generally in a stronger position when seeking finance.

It is also important to remember that lenders often want to see consistency. Large fluctuations in income from year to year can lead to additional questions during the assessment process.

For those planning a major purchase in the next six to twelve months, do not wait until you have found a property or a contract is signed before seeking advice. A quick discussion with your accountant and broker before shopping for your next property may provide valuable insights into how your financial position will appear to a lender and give you a realistic picture of your borrowing capacity. Getting the right advice gives you the power to make informed decisions that align with your broader financial objectives. Tax time is often viewed as the end of the financial year. For self-employed Australians considering borrowing, it may be more useful to see it as the beginning of the next one. A little planning today could make the difference between getting the loan you need and finding out too late that your paperwork tells a different story from your business success.

If you want to discuss your upcoming plans and potential borrowing capacity, jump onto www.farnsworthfinancial.com.au and book a Discovery Appointment!