Sole trader home loan requirements

• Two years of personal tax returns showing the business schedule, and the ATO notices of assessment for each
• ABN registration details and GST registration if applicable
• Six months of business bank statements at many lenders, to confirm the trading pattern
• Recent BAS where the last return is more than six months old
• An accountant's details, and sometimes an accountant's letter confirming the business is trading and solvent
• Personal statements, identification and the usual application documents

Net profit from the business schedule of the tax return is the starting point. Lenders add back depreciation, interest on business loans being refinanced, superannuation above the compulsory rate and documented one-off expenses. They then average the two years, or use the lower year if the latest is lower, and some cap the increase if the latest year is more than 20 per cent above the prior one. The result is the assessable income, and the loan is sized on it after living expenses and other debts.

The latest return not lodged, which stalls everything until it is. Income minimised for tax so aggressively that the assessable figure will not support the loan, which is the accountant and the lender pulling in opposite directions. A recent switch from PAYG to sole trading, which shortens the history. Tax debt showing on the notice of assessment, which some lenders treat as adverse. And turnover under the GST threshold with no BAS, which leaves bank statements as the only alt doc evidence.

Alt doc lenders assess turnover from BAS or bank statements and apply an industry margin, which can produce a higher figure than a minimised tax return. LVR is usually capped at 80 per cent and rates are slightly higher. For a sole trader with a strong business and a light tax return, alt doc is often the better path, and a specialist will run both before choosing.

Once the lender has settled on an assessable income figure, borrowing capacity for a sole trader is worked out the same way as for an employee. The lender deducts living expenses, existing repayments and a buffer above the actual interest rate, and what is left sets the loan size. The difference is the income figure itself. A sole trader whose accountant has minimised taxable profit is assessed on that lower figure, not on turnover and not on what the business actually puts in their pocket. Two years of steady or rising net profit, few personal debts and no outstanding tax debt usually produce the highest capacity on full doc. Where the tax returns understate the business, an alt doc assessment on BAS or bank statements can give a higher figure, with the trade-off of a lower LVR cap and a slightly higher rate. The practical step is to have both calculated before choosing a lender, because the gap between the two figures is often larger than the difference in rate.