Its funny, but we had had a small rush of clients who have come to us lately who are self employed and of the most part, sole traders.

Now there’s nothing strange about that, except we have found it hard to get them the finance they require… wHy?

Because they don’t pay themselves very much income…

In the endeavor of reducing tax, or from tax minimising strategies their accountants have advised them, they now do not service the debt they are wanting to take on.

Gone are the days where Low Doc loans were an option. A Low Doc loan was where the client stated an income they earned and signed a form stating this. They were not required to provide tax returns to verify this. The lender simply used the signed statement as gospel.

Well then came the GFC and lenders got scared and regulation came in… and so did ASIC.

Now although these loans exist, the shift of blame has been transferred to the broker now, not the client. Meaning that if the client was audited and found that the stated income does not match the loan application, they turn first to the brokers for answers…

Only brave brokers who very closely verify actual paperwork will write these loans now.

I haven’t written one in over 5 years… my license is not worth the commission on one deal.

Back to the story… so for those employees out there, self employed people have ways (legally) and options to reduce their tax on the business or company… and many earn cash.

So by doing this they pay little or no income tax and their tax returns can read with a very small income, like $20,000.

So lenders would look at this income for a $300,000 loan and simply laugh… in reality the applicant can afford the loan but on paper they simply cannot. How can $400 per week income repay a loan that has repayments of $384 per week… you cant live on $16 per week to eat, drive and live!

The good old days of paying no or little tax has come back and bit em in the bum…

Can’t have your cake and eat too…

And on top of that, it’s not a short term fix, lenders require you to have 2 years tax returns as evidence of income. So even if you started today to pay yourself a much higher wage, it would take the next 2 financial years to show consistency and then you also need to get your tax returns completed which most accountants don’t do self employed until 6 months after the financial year ends.

So yes it could take 2.5 years to get you back on track…

The economic loss from that could be that you cannot invest for 2.5 years either and miss some pretty good property markets where you could be making some real cash… using the investment property to offset tax.

To finish up…

There’s a saying… if you’re paying tax, you’re making money.