Self-Employed Borrower with Complex Income and a Trust
Elena runs a landscaping business as a sole trader and is a beneficiary of a family trust that distributes income to her annually. She wants to borrow $780,000 to buy an investment property valued at $950,000. Her last two tax returns show business net income of $96,000 and $71,000; the drop reflects a large equipment purchase expensed that year. Trust distributions were $40,000 and $55,000. She has a $45,000 ATO payment arrangement for GST arrears, currently on schedule, and a margin loan of $120,000 secured against shares worth $310,000. She wants the trust distribution counted at the higher of the two years and the ATO debt excluded because 'it's on a plan'.
1. Assess how a lender would treat Elena's income, the ATO debt, and the margin loan, and identify the key risks.
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Business income. Lenders use either the most recent year or a two-year average, and many apply the lower of the two years when income is declining. Two-year average is $83,500; most recent year is $71,000. The equipment purchase may be added back as a non-recurring expense if it is genuinely one-off and documented, but the lender will want the depreciation schedule and financial statements, not just the return. Do not assume the add-back is accepted.
Trust distributions. These are counted only if they are recurring and evidenced by trust distributions over at least two years plus the trust's financials. Using the higher year alone is not supportable; a lender will average ($47,500) or use the lower figure. Confirm Elena is a beneficiary with a vested entitlement and that distributions are likely to continue.
ATO debt. A payment arrangement is a liability. Lenders generally require it to be disclosed, will assess the repayment as a commitment, and many require the arrangement to have run satisfactorily for three to six months. Some lenders decline borrowers with ATO arrears entirely. The arrears also suggest cash-flow strain that undermines the income story.
Margin loan. The $120,000 margin loan is assessed as a commitment at its actual or a stressed repayment, and the shares are a volatile asset. A margin call in a market fall could force a sale and impair servicing.
Risk summary. Declining business income, reliance on variable trust distributions, an ATO arrangement, and leveraged equities together point to a borrower with limited buffers. The $780,000 loan at 82% LVR also exceeds the 80% threshold, likely triggering LMI and tighter policy.
2. Elena asks you to present the strongest possible income figure. Where is the line between legitimate presentation and misrepresentation?
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Legitimate presentation means choosing the most favourable supportable methodology and documenting it: for example, applying a two-year average rather than the lower year, or adding back a genuinely one-off expense with the depreciation schedule attached. It means explaining the equipment purchase and providing the prior year's comparatives to show the underlying trend.
Misrepresentation means asserting figures the evidence does not support: counting the trust distribution at the higher year when the trend is unclear, omitting the ATO arrangement from the liabilities section, or describing the business income as stable when it fell 26%. Each of these would mislead the lender and could constitute a breach of responsible lending and broking conduct obligations.
The practical test is whether you could defend the figure to the lender's credit assessor with documents in hand. If the answer is no, it does not go in the application. Prepare a cover note that discloses the ATO arrangement, explains the income movement, and sets out the trust distribution history. Let the lender decide with full information.