Your business accounts may show a modest profit after a substantial depreciation expense or an unusual cost. That can leave you wondering whether the home-loan assessment will stop at the bottom line.
Some expenses can warrant a closer look when a lender assesses self-employed income. These adjustments are often called add-backs. They can matter, but they are not spare money you can simply add to a borrowing calculator.
What is being added back?
The starting point is an expense already deducted in the relevant profit figure. An assessment may consider whether that expense should be treated differently when looking at ongoing repayment capacity.
Depreciation is a useful example. It recognises an asset's decline in value and may differ from the cash paid during the year. But a business that owns vehicles or equipment can still have finance repayments, maintenance and future replacement needs. Removing the accounting expense does not remove those obligations.
The ATO's small-business education explains depreciation for tax purposes. A tax deduction and a lender's income adjustment answer different questions. Your accountant handles the tax treatment; the lender determines its credit assessment.
One-off costs need a reason, not just a label
A completed relocation or an unusual professional expense may help explain why one year's result looks weaker. The useful evidence is what the expense was, where it appears in the accounts and why it is not expected to continue.
Calling ordinary advertising, maintenance or staff costs 'one-off' does not make them disappear from the economics of the business. If a similar cost will recur under a different name, your household budget should still allow for it. The lender also needs to decide whether any adjustment is acceptable.
Keep a short schedule of the items you want assessed, with supporting records. It should help the broker ask a precise question, rather than present an inflated income total as a fact.
Which loan route is worth investigating?
Westpac's self-employed guidance asks borrowers using its standard two-year assessment to have records explaining depreciation, asset write-offs and liabilities available. It also notes that some borrowers may be able to borrow more under the standard assessment than a simplified route.
If your issue is that the reported profit needs explanation, ask whether a full financial assessment is more useful than trying to minimise paperwork. The trade-off is more evidence to prepare, but potentially a fuller understanding of the business. The published guidance does not promise that a particular expense will be accepted.
Alternative-document loans remain a separate option when the evidence does not fit the conventional route. They should not be used to bypass a clear explanation of business costs. Our self-employed lending guide covers that wider choice.
A small example explains the limit
Suppose a hypothetical business reports $100,000 profit after $15,000 depreciation. Adding those figures produces $115,000 before any other adjustments. That arithmetic illustrates a possible reconciliation, not the lender's accepted income or the cash available for mortgage payments.
If the asset has a loan attached, the repayment still needs to be accounted for. Tax, ownership, other commitments and the rest of the application also matter. There is no fixed multiplier that turns a $15,000 adjustment into a particular increase in borrowing capacity.
Ask for the calculation, not a promise
Before choosing a lender, ask the broker to identify the starting income figure, the proposed adjustments and the evidence required for each. Make sure an amount already included elsewhere is not counted twice.
Bring Flexdoc the accounts, depreciation schedule, unusual-expense records and associated loan statements. We can assess which lending route deserves investigation. The objective is a supported view of sustainable income, with enough money left to run the business and the household.
General information only. Your circumstances have not been assessed. Lending criteria, terms, fees and approval apply. Seek appropriate tax and legal advice.