Self Employed & Stuck!

Being self employed can be great. You are your own boss, you work hard, you get rewarded with what you deserve (hopefully!). You can deduct everything and the kitchen sink from your earnings and bring your tax bill right down. HOWEVER, when it comes time to borrow money for an investment, all the bank sees from your financials may be something a little more than a single mum on Centrelink would bring in, and you’re stuck. Let me also quickly touch on what the banks look for and how the assess it. Firstly if you are on wages, it is alot more black and white. It is what it is. Base, regular income plus regular overtime and allowances if applicable. Easy to use and easier to get finance. With self employed financials, there are many factors that paint the final picture, usually MANY deductions related to the generation of this income. The good news is that there are a few factors that can actually be REVERSED on the return to bring your income figure back up a bit. Interest on business related loans and depreciation on business related assets (usually vehicles, machinery etc) are usually the big players. For example, one of my clients showed a $14,000 taxable income on her return, but had over $70,000 in depreciation among all her business assets. This meant that potentially she now had an income of $84,000 to use towards an application. This is not always the case though as some self employed clients may not have loans for equipment or have anything substantial to depreciate.

As self employed Aussies we have the power to create our destinies. We can deduct till the cows come home, pay as little tax as possible, or we can declare our incomes as more realistic, pay our tax and then be in a position to borrow for those investment properties. Can we have it both ways? In most cases no, especially if you are trying to get your first investment property. Like an accountant friend of mine wisely says, the year you pay the most tax will be the year you can invest. But the beauty of this is that the following year your new investment will be a HUGE buffer of your tax, and he more properties you introduce, the higher the buffer, and less tax you will organically pay. Can you add back the deductions from these properties to increase your income to what it should be on paper? Absolutely! All depreciation and interest or negative gearing can be added right back in. So the moral of the story? Short term pain, long term gain! Pay that tax to save thousands for years to come.

If you have your financials completed for 2014 and you are unsure, contact us to see what you can do, and advice on what you may need to do.