How to Prepare Your Tax Returns for a Self-Employed Home Loan

How Lenders Calculate Self-Employed Income

Lenders for self-employed borrowers follow this basic process:

• Step 1: Take your net taxable income from your tax return (personal, trust, or company)
• Step 2: Add back non-cash and one-off deductions (depreciation, amortisation, interest on investment properties, motor vehicle depreciation)
• Step 3: Average over 2 years (or use the lower of 2 years for declining income)
• Step 4: Apply the lender's specific assessment rate and HEM to determine maximum loan

What Are "Add-Backs"?

Add-backs are legitimate deductions that lenders add back to your taxable income because they don't represent actual cash leaving your business. The most common:

Add-Back Item	Why Lenders Add It Back	Typical Amount
Depreciation	Non-cash expense — no money actually paid out	Often $5,000–$50,000+
Amortisation	Non-cash expense on intellectual property or goodwill	Varies
Interest on investment loans	Deducted for tax but funded by rental income	Varies
One-off large expenses	Not recurring — don't reflect normal business cost	Lender discretion
Super contributions above SG rate	Voluntary — discretionary cash flow	Varies

Not all lenders add back the same items. Some are generous with add-backs; others are conservative. This is one reason why the lender you choose matters enormously for self-employed borrowers.

The Tax Minimisation Trap

Here's the tension most self-employed borrowers face: good tax planning lowers your ATO liability — but it also lowers your assessable income for mortgage purposes.

Common strategies that reduce your mortgage-assessable income:

• Large depreciation claims (Division 43, plant and equipment)
• Claiming maximum vehicle depreciation
• Pre-paying business expenses in June to reduce current year income
• Paying large bonuses or director fees at year end
• Retaining profits in the company rather than paying yourself dividends
• Discretionary trust distributions to lower-income family members

Two-Year Averaging: What It Means in Practice

Most lenders average your income over the last 2 financial years. This protects against a single exceptional year inflating your application — but also smooths out dips.

Example:

• FY 2023–24 income: $120,000
• FY 2024–25 income: $160,000
• Averaged income used: $140,000

However: if your income is declining (FY 2024–25 lower than FY 2023–24), many lenders will use the lower year — not the average. A broker can identify lenders whose policy favours your income pattern.

What to Prepare: A 12-Month Pre-Application Checklist

If you're planning to apply for a home loan in the next 12–18 months, here's your preparation list:

• Lodge both years' tax returns — personal and business — and ensure ATO notice of assessment is received for each
• Check your BAS lodgement history is complete and on time
• Avoid aggressive tax minimisation strategies in the year you're applying
• Review your business financials with your accountant and ask specifically: "what will lenders see as my assessable income?"
• Ensure all ATO debts are paid or on a payment plan
• Keep your personal savings account clean — avoid unexplained large deposits or withdrawals
• If you trade through a trust or company, confirm your accountant can prepare lender-format financial statements

When You Don't Have 2 Years of Returns: Alt Doc and Low Doc Options

If you're in your first 1–2 years of self-employment, or your returns aren't yet filed, you may qualify for an alt doc or low doc loan:

• Alt doc: 12 months of BAS statements showing business revenue, plus a signed income declaration from you and your accountant
• Low doc: Similar — often 3–6 months of BAS, some lenders require 1 year
• Rate premium: Alt/low doc rates are typically 0.2–0.8% higher than full doc — but the gap has narrowed significantly in recent years

Frequently Asked Questions