How do lenders treat add-backs for self-employed income?

• Depreciation and amortisation: non-cash, so the money is still in the business
• Interest on business loans that will be paid out by the new loan, since that expense disappears
• Superannuation contributions above the compulsory rate, which are discretionary
• Director or owner salary and wages paid to the applicant, which are already counted as personal income
• Non-recurring expenses such as legal fees for a one-off dispute or a write-off, with evidence they will not recur
• Instant asset write-offs, treated the same as depreciation by most lenders

Motor vehicle expenses, home office costs, travel and entertainment are deductions that reflect real spending, so most lenders leave them in. Some will add back a portion of vehicle costs where the vehicle is essential and the personal use is small. Rent paid to a related entity is sometimes added back if the property is being refinanced into the same group. Bad debts, stock write-downs and revaluations are assessed case by case. A specialist will know which lender is generous on which item, and it can move borrowing capacity by tens of thousands.

Start with net profit before tax from the financial statements. Add the accepted add-backs. If there is a company or trust, allocate the result according to your share, then add any wages or distributions you actually received that were deducted in getting to profit. Most lenders then either average the last two years or take the lower year, and some apply a growth cap if the latest year is more than 20 per cent higher than the previous one. That final figure is your assessable income.

Ask your accountant to prepare a clear add-back schedule with the financials, showing each item and where it appears in the accounts. Lenders can only add back what they can see. Financials that lump items into "other expenses" cost you borrowing capacity because nothing in that line can be identified as one-off or non-cash.