Aaron explains how lenders calculate income for self-employed borrowers: they add up your personal tax return income, then subtract any company losses you claim as director. A $100,000 income minus a $50,000 loss leaves $50,000 for loan qualification. Talk to a broker and accountant before applying.
So you're self employed and you want to borrow money. Hey, it's Aaron from Diagnostics and Finance. A lot of people are sending me their financials when they're self employed. If you're a sole trader, it's your individual tax return. If you're a company, it's your individual tax return plus your company tax return and the company financials. And one of the things that grates against me a little bit when I'm looking at these financials is someone that might be self employed is that they get their individual tax return and their individual tax return shows maybe $100,000 worth of income in wages or dividends or other things that you're able to get through that means. And then their company runs at a loss. So when you're going to borrow money and your company's running at a loss, say your company's running a loss of $50,000 and you've got an individual income of $100,000 and you're the sole director of the company. When you come to borrow money, we're going to take your 100 grand and we're going to take the loss off it. So you only got 50 grand anyway. So in my understanding is if your company was a little bit more neutral than a loss and your income was a lot lower, you may have paid less tax. The problem is when you come to borrow money, we have to take the loss off your income to get the income that we're going to be putting in. So when you're coming to borrow money, it's always good to come and talk to a broker so that you can understand what strategies or what policies we have with the lenders to be able to borrow the right amount of money to achieve your goal. So for example, right now we're sitting in the month of April, there's still another quarter of business. So if you are planning to buy a house going into the next financial year, it's always good to understand how your financials should look. Whether you can change them or not, that's up to you and your accountant. But if you can look down the path of getting the right financials in the right situation, you'll be able to borrow according to the bank's rules. I understand there's tax planning and there's all these other things that come into why you might have a loss, why you shouldn't have a loss. But we need to look at it from how a bank looks at self employed people as a policy point of view versus what we're trying to achieve with our accountants. So it's always good to buy a house. But let's plan for it when you're self employed. All right, Bye for now.
