Submitting self-employed applications

We’ve put together a comprehensive set of tips to help you with submitting a self-employed application and avoid common mistakes in the application process:

1. Tracing income flow:
   • Only provide financials from the entity that generates income, all the way down to our applicants.
   • Include any entity that the income flows through prior to reaching our applicant, as we need to factor in any expenses the income covers.
      
2. Net profit or dividends:
   • Make sure the net profit matches the applicant’s shareholding entitlement.
   • Where the applicant is a minority shareholder (<50%) and any of the other shareholders are not in a spousal relationship with the applicant, instead of using net profit, use the dividend received by the applicant. Dividends will be evident on an applicant’s individual income tax return.
      
3. Distributions from a discretionary trust to a non-applicant:
   • Trust distributions can’t be included if the non-applicant is over 18 years old.
      
4. Business debt:
   • Business debt doesn’t need to be included as a liability as we don’t expense or buffer the debt.
      
5. Avoid duplicating income:
   • Use net profit for servicing, rather than franked dividends, franking credits and distributions to avoid duplicate income (except if a minority shareholder).
      
6. Add backs:
   • Add backs can’t include operating costs such as advertising, car maintenance and training, as they are considered ongoing. See acceptable addbacks.
      
7. Director’s wage:
   • This needs to be added in the self-employed section of the serviceability calculator and not in the PAYG income section.
      
8. Decreasing income or increasing expenses:
   • Where there are changes year on year, provide additional commentary in your notes.
      
9. Notice of Assessment (NOA) taxable income:
   • NOA shouldn’t be used for servicing as we need to evidence the breakdown that is available in the Income Tax Return or company financials.
      
10. Non-recurring income:
    • This should be removed (e.g. sale of an asset or a government subsidy)
    • Note: when using the Macquarie Serviceability Calculator, enter the non-recurring income and it will remove it automatically.

There are three types of self-employed applicants we consider:

• Self-employed – runs their own business and receives a wage, director fee and/or dividends from the entity.
• Professional specialisation self-employed – e.g. a medical surgeon or lawyer, who operate under their own business entity – see allowable professional specialisations.
• Self-employed contract worker – a person who contracts for organisations, e.g. a software engineer.
  

The tenure will depend on the type of self-employed applicant:

1. Standard self-employed - your customer will require 2 years of consistent income
2. Professional specialisation self-employed - your customer will need to have been trading in their current business for a minimum of 1 year
3. Self-employed contract workers - need to have been contracting in the same industry or previously worked as PAYG in the same industry or field for over 2 years.

The income documents will vary depending on the type of self-employed applicant. See the table below for more information.

* For professional specialisation self-employed, where the entity has only been trading for one year and the most recent year’s financials are provided, there is a maximum LVR of 80%.
** See additional information for inputting income for self-employed contract workers.

It’s important to complete the servicing calculator accurately to achieve a fast approval. Here are some tips on inputting income for self-employed entities.

1. Two years of income typically required. Where one year of income is applicable (e.g. isolation rules or professional self-employed), you’ll need to copy the income across both years.
2. Reflect ownership rights - self-employed income for a trading entity, must reflect the borrower’s ownership rights (e.g. shares, units) of the self-employed entity.
3. Consider year-on-year movement:
   1. Business income in an upward trend, we can use a maximum income of 120% of the previous year, not exceeding the highest year. We can use the most recent year in isolation (i.e. the higher income year) if the increase in income is ongoing and evidenced via year-to-date Business Activity Statement (BAS) for a minimum period of 6 months supporting revenue in line with the most recent year (i.e. >=90% annualised income).
   2. Business income in a downward trend, the income to be used is the most recent year. Additionally, year-to-date BAS supporting revenue in line with the most recent year (i.e. >=90% annualised) must be provided where both of the following apply:
      • The most recent year's income has decreased by more than 20% of the previous year, and
      • Cash out/equity release for any purpose is being applied for on top of the refinancing of existing debt(s) plus a $5,000 allowance for costs. Note, this doesn’t apply where a deposit is being generated for a related purchase application submitted with Macquarie.
4. Rental income is to be included in the rental income section to ensure the appropriate haircuts are applied. It shouldn’t be included in the borrower’s self-employed income.

The financial statements that should be provided for self-employed, company and trust income, include:

• Business tax returns or account prepared profit & loss and balance sheet statements for the most recent 2 years (only the recent statements are required if they show 2 years’ performance for the entity), and
• Personal tax returns for the most recent 2 financial years and the most recent ATO assessment notice of the directors who are applicants.
  • Where the ATO notice of assessment isn’t available, an accountant’s confirmation of lodgement is acceptable.                          

Draft tax returns for the most recent year can be considered where the returns are pending lodgement, subject to an accountant’s letter or email confirming there will be no changes when lodged.

Cash flow projections or any other projections aren’t acceptable.

Ideally all the information required for our team has been included in the application. You must not duplicate information you’ve already provided to us within the broker notes.

Broker notes should only be used when:

• income is complex (e.g. multiple income-generating entities),
• comments to note any downward trends in income or upward trends in expenses, and
• any other mitigating factors that justify the use of any non-standard add backs or entries on the financials supplied.
  

The shareholder ownership percentage will determine whether net profit or dividends are used. Where your customer’s ownership is:

• 50% or more, we’ll use the same ownership percentage of net profit
• less than 50%, we’ll use actual distributions (dividends + franking credits) not exceeding the ownership % of net profit.

We won’t use:

• distributions to third parties (including adult children, over 18 years old)
• retained profits from earlier years.

Allowable add-backs for self-employed applications are:

• Directors’/Partners’ salaries (if not used separately in servicing calculations).
• Directors’ superannuation contributions more than the minimum compulsory amount.
• Interest relating to loans being refinanced can be added back to net profit. Business depreciation up to a total amount not exceeding 20% of business net profit (the Macquarie Serviceability Calculator will automatically consider this).
• Non-recurring expenses or one-off items subject to satisfactory confirmation from applicant’s accountant.
• Distributions from a discretionary family trust to children under 18.