Self-Employed Home Loan in Australia: How It Works

Short answer: Lenders usually start from the taxable income on your tax returns, not your cash flow, so a self-employed borrower is often assessed on less than the business actually earns. A lender may add back certain non-cash or one-off deductions, but which ones and how many years of income it uses differ between lenders.

This is general information only and not financial advice. Check the specifics with your lender or a licensed broker and your accountant.

Why self-employed income is harder to assess

An employee has payslips that show a gross income. A self-employed borrower has a tax return, and a good accountant is paid to lower the taxable figure legitimately. That is sound tax planning, and it is also why the number a lender sees first can be well below your real earnings. In my experience this is the single biggest reason capable business owners are told their borrowing capacity is lower than they expected.

What lenders typically ask for

Documentation requirements differ between lenders, but expect to be asked for tax returns and Notices of Assessment, often for the last two years, plus business financials and evidence your tax is up to date. Some lenders accept one year in certain circumstances, and some allow alternative documentation. Ask for the specific list before you apply.

You can get your Notice of Assessment through myGov if your ATO account is linked (ATO, your notice of assessment). The ATO does not say how a lender will use it, so confirm with your lender what it accepts as income evidence.

What is an add-back?

An add-back is a deduction in your tax return that a lender agrees to add back to your income because it did not reduce your actual capacity to service a loan. The classic example is depreciation. The ATO explains that if a depreciating asset is used to earn assessable income, you can generally claim deductions for its decline in value over its effective life, and that some assets qualify for an immediate or accelerated deduction under depreciation incentives (ATO, depreciating assets and capital expenses). That deduction lowers taxable profit without cash leaving the business that year.

Other items sometimes considered include interest on business debt that will be refinanced or paid out, and genuinely one-off expenses. Which items a lender accepts, and whether it asks for evidence such as an accountant’s letter or a depreciation schedule, is lender-specific. Add-backs rarely apply automatically; in my experience you or your broker generally need to raise them and document them before the application goes in.

Illustrative example: adding back depreciation

These are my own numbers to show the arithmetic, not a real client and not a prediction of what any lender will do. Suppose a sole trader’s tax returns show net business profit of $90,000 in year one and $110,000 in year two, and the deductions include depreciation of $12,000 and $15,000 respectively.

• Without add-backs, a two-year average is ($90,000 + $110,000) / 2 = $100,000.
• If the lender accepts the depreciation add-back in both years: year one becomes $102,000, year two becomes $125,000, and the average is ($102,000 + $125,000) / 2 = $113,500.
• If the lender instead uses only the most recent year because the trend is rising, and accepts the add-back, the figure is $125,000.

Same business, three different assessed incomes. That is why lender choice and preparation matter. Note too that income is only the first step: your personal expenses, other debts and the interest rate buffer all still apply.

How the loan is then tested

Once income is set, serviceability works the same way as for anyone else. APRA expects lenders to test repayments at a buffer of at least 3 percentage points above the loan rate, and has confirmed that the buffer remains at 3 percentage points (APRA, November 2024). Living expenses are assessed too, and many lenders use a benchmark such as HEM as a floor. What a Lender Actually Sees When They Assess Your Budget shows how your spending is read, and What Your Credit Score Actually Does to a Home Loan Application covers the credit file side.

If you have already been declined

A decline from one lender is a decision under one policy, not a verdict on whether you can repay. Moneysmart advises asking the lender why you were rejected and checking your credit report (Moneysmart, loan rejection). Common causes for self-employed applicants are add-backs that were never raised, a weaker early year pulling down an average, or a policy that does not suit your business structure. If your credit score is strong and you were still declined, Good Credit Score but Home Loan Rejected: Why? explains how serviceability can fail even on a clean file, and Why Was My Home Loan Application Rejected? covers what to do next.

What to do next

• Ask your accountant which deductions in your last two returns are non-cash or one-off.
• Get your Notices of Assessment and make sure any tax debt is paid or on a plan.
• Prepare a current profit and loss statement and an add-back schedule with evidence.
• Ask potential lenders how many years of income they use and which add-backs they accept before applying.
• Avoid multiple applications while you sort this out, since each is recorded on your credit file.

Frequently Asked Questions

How many years of tax returns do I need for a self-employed home loan?

Lenders commonly ask for the last two years of tax returns and Notices of Assessment. Some accept one year in certain circumstances, so ask each lender for its specific list before you apply.

What is an add-back?

An add-back is a deduction in your tax return, such as depreciation, that a lender agrees to add back to your income because it did not reduce your ability to repay. Which items are accepted differs between lenders.

Can I get a home loan if my taxable income is low?

It is harder, because lenders usually start from taxable income. Add-backs, a rising income trend and a lender whose policy suits your business can all change the result, but there is no guarantee.

Related Reading

• Good Credit Score but Home Loan Rejected: Why?
• Lending Glossary
• Should You Refinance? The Simple Maths That Actually Answers It
• How an RBA rate move changes your repayments

Written by Michael Wignall, who’s spent 30+ years in banking and home lending across the ACT, Illawarra, and Riverina regions of NSW.

More on this topic is collected in the Finance Strategies for Australians hub.

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Written by Michael Wignall, Lending Area Manager with 30+ years in banking and home lending across the ACT, Illawarra, and Riverina. Got a question or an idea for a post? Get in touch.