What is an “Add Back”?
Find out here exactly what is and isn't an Add Back.
For a self-employed person, your reported taxable income is not necessarily the same as the actual income that you can use to pay your commitments, including repayments for a new mortgage. You will have most likely incurred expenses, that have reduced your taxable income, however, these might not be a “real” expense or an ongoing commitment.
It is these types of expenses that some lenders will allow us to add back to your taxable income and increase your assessable income, thereby increasing your borrowing power!
Look through the list below of some common add backs we can potentially use in your application. Will any of these apply to you and increase your assessable income?
Depreciation: Depreciation is a common tax deduction; however, it isn’t a day-to-day expense. So many lenders will add this back to your taxable income. Some will cap it to a percentage of profit, some will add it all back while others won’t add any if you declared a loss.
Asset write-offs: We can usually add back tax write-offs for assets purchased by your business to your taxable income. This can be a big help to many people especially if you have taken advantage of the full write off for assets purchased and used before June 2020 scheme (unveiled during the 2020 federal budget announcement) or the $150,000 instant asset write-off scheme.
Additional superannuation: If you’ve made additional voluntary super contributions beyond the minimum requirements, these can be added back.
Net Profit Before Tax (NPBT): If you have profits that you’ve retained in your company, then these can be considered as well. Note that we can only include your portion of these retained earnings if you are a part owner.
One off expense: If you had an extraordinary expense then we can generally add this back, sometimes we may need an accountant letter to support this.
Interest expenses: If you have a business loan or investment loan then it’s likely that you have tax deducted the interest that you have paid. Another income add back we can use with these liabilities already being assessed separately in any loan application.
Rental property expenses: Depreciation on your properties and negative gearing are potential add backs for certain lenders.
Trust distributions: Many businesses are setup in a discretionary trust and have chosen to distribute income to family members for example. We might need a letter from your accountant to confirm the beneficiaries aren’t financially dependent on this income before lenders will approve this add back.
As you can see, what and how much you are eligible to include varies dramatically between lenders, which can result in variations to maximum borrowing capacities well into the hundreds of thousands.
Please give IKTB a call and we will make sure we target the right lender and all the applicable add backs are included in your serviceability assessment to ensure you maximise your borrowing capacity!
