Two good years of trading, one year of unlodged returns

A sole trader, electrical, six years in business and two apprentices. Good work, repeat builders, no complaints about the trade. The most recent financial year had not been lodged. It was not avoidance. It was the ordinary sequence in which a busy trade puts the accountant’s emails at the bottom of the pile until they have been there a while.

He wanted to refinance the home loan, which was sitting on terms he had not reviewed in four years, and to release a modest amount to replace a van and clear a card. Nothing exotic. The existing lender would not proceed without the latest return, and neither would the next three approached directly.

What the file actually looked like

• One lodged financial year, and a following year with the return outstanding.
• Twelve months of BAS lodged and paid on time.
• Twelve months of business banking showing consistent deposits with the usual trade seasonality.
• A clean mortgage repayment history over four years, and one card carrying a balance.

That is a strong file with one gap in it. Full documentation lending is built to read the tax return, so when the return is missing the assessment has nothing to read, regardless of how well the business is trading.

Two paths were opened at once, and that is deliberate. The first was the accountant: getting the outstanding return prepared and lodged, because in a fair number of these cases the fastest route to a mainstream loan is simply finishing the paperwork. The second was a low doc structure, in case lodgement was going to take longer than the van could wait.

What low doc means, and what it does not

Low doc does not mean no verification and it does not mean nobody checks. Responsible lending obligations apply to every regulated loan. What changes is the form the evidence takes. Instead of the tax return being the primary proof of income, the lender accepts an alternative set that it will still test.

• A signed declaration of income from the borrower, which is a serious document and must be accurate.
• An accountant’s letter or declaration supporting that income figure.
• Business activity statements, commonly six or twelve months, cross-checked against the declaration.
• Business bank statements, usually six to twelve months, read for consistency of deposits.
• Evidence the ABN and GST registration have been active for a minimum period, which varies by lender.

Add-backs were the other piece of work. Self-employed income read straight off the bottom line usually understates what the household actually has available. Depreciation, one-off expenses, superannuation contributions above the compulsory level and interest on debts being refinanced can often be added back, depending on the lender’s policy. Presenting those properly, with the accountant’s support, is frequently the difference between a file that services and one that does not.

A slightly lower loan-to-value ratio was targeted than the maximum available. On specialist files, presenting a conservative position tends to produce a cleaner assessment, and it left room for the valuation to come in under expectation without the deal falling over.

In this scenario the refinance completes on low doc terms with the modest cash-out included, the van is replaced, and the card is cleared at settlement and closed. The loan is priced as a specialist loan, which is the honest cost of borrowing without a current tax return.

The more important part was the plan attached to it. The outstanding return was lodged with the accountant a few months later, and the file was diarised for review once twelve months of clean repayment history existed on the new loan, with a view to a mainstream refinance at that point. A specialist loan is a stage, not a destination.

• Refinance completed using BAS, business banking and an accountant’s declaration in place of the missing return.
• Add-backs presented with accountant support rather than left for a credit assessor to find.
• A conservative loan-to-value position targeted, leaving room for the valuation.
• The outstanding return lodged, and the file diarised for a mainstream review after twelve months of clean conduct.
• A standing arrangement with the accountant to lodge on time, so this does not repeat.

Two things worth saying plainly. Low doc lending costs more than full documentation lending, and there is no version of it that does not. And a declaration of income is a document a borrower signs and stands behind, so the figure needs to be genuinely supportable. There is no upside in overstating it and considerable downside.