Can Retained Business Earnings Help an Accountant Borrow More?

Key Takeaways

• Retained earnings are company profits kept in the business rather than paid to you as salary or dividends.
• Some lenders will include your share of retained profits when assessing serviceability, while others count only the income actually paid to you.
• Counting retained profit usually requires a controlling shareholding and a consistent history of business profitability.
• Retaining profit may be tax-efficient, but it can understate your borrowing capacity unless your application is matched with a lender that recognises it.

Accountants who operate through a company often leave profit in the business rather than paying it all out. This can be a sensible strategy where the corporate tax rate is lower than the owner’s personal marginal tax rate.

The difficulty can arise when applying for a home loan. If the profit never reaches you as salary or dividends, some lenders may not treat it as personal income. Other lenders will look through the company and include your share of retained profit when assessing how much you can borrow.

Identifying lenders that count retained company profits and presenting those earnings correctly can significantly affect borrowing capacity. This article explains what retained earnings are, when lenders may count them, the conditions involved and the trade-offs to consider.

What Retained Earnings Are

Retained earnings, also called retained profits, are the net profits a company keeps after tax rather than distributing them to shareholders as dividends.

For an accountant operating a practice or business through a company, retaining profit may be a deliberate strategy. The company pays tax at the applicable corporate rate, the remaining profit stays within the business for reinvestment or future use, and the owner avoids immediately drawing the amount into personal taxable income.

The result is that your personal tax return may show only your salary and any dividends received, while additional profit remains within the company. This difference between personal income and company profit is what creates the borrowing issue.

Will Lenders Count Retained Earnings?

Whether retained earnings are included depends entirely on the lender’s credit policy.

Many lenders assess only the income actually paid to you, such as salary, wages and distributed dividends. Profit retained within the company may be ignored because it has not entered your personal cash flow.

Other lenders will look through the company and assess your share of its net profit, particularly where you hold a controlling interest in the business. In these cases, retained earnings may be added to your assessable income because you have the ability to determine whether those profits are distributed.

For an accountant who pays themselves a modest salary while retaining strong company profits, choosing a lender that recognises retained earnings can significantly improve the income used for serviceability.

The Conditions for Counting Retained Profit

Controlling Ownership

Lenders that recognise retained earnings usually require you to hold a controlling interest in the company, often majority or full ownership.

This is important because a controlling shareholder can generally influence whether profits are distributed. A minority shareholder may not have retained profits counted because they cannot independently direct a dividend payment.

A Consistent Profit History

Lenders commonly request two years of company financial statements and tax returns showing that the business has remained consistently profitable.

A stable history gives the lender greater confidence that retained profit represents sustainable earnings rather than a single unusually strong year.

Demonstrated Company Health

The company must also be financially sound and capable of meeting its own liabilities.

Where the business has significant debts, irregular results or limited working capital, a lender may be reluctant to attribute retained profits to the shareholder’s personal servicing position.

The Tax and Borrowing Trade-Off

Retaining profit in a company can be tax-efficient, particularly where the company tax rate is lower than the owner’s personal marginal rate.

The trade-off is that lenders assessing only salary and dividends may not recognise the full performance of the business. This can leave your borrowing capacity substantially lower than your actual earning position suggests.

There is not necessarily a need to abandon a sound tax strategy. A more practical solution is often to select a lender that recognises retained earnings. Where a property purchase is planned, you may also review your income distribution strategy with your accountant or tax adviser well before applying.

Regardless of how much income is recognised, lenders still test serviceability using the actual interest rate plus the applicable assessment buffer.

How This Fits with Professional Concessions

Retained earnings policies and professional lending concessions are separate considerations, although an eligible accountant may benefit from both.

Accountants with current membership of recognised bodies such as CPA Australia, Chartered Accountants Australia and New Zealand (CA ANZ), or the Institute of Public Accountants (IPA) may qualify for professional lending benefits, including an LMI waiver on eligible higher-LVR loans.

The waiver may reduce the cost of borrowing, but it does not increase assessable income. Whether retained company profits are recognised remains a separate and important part of determining borrowing capacity.

Frequently Asked Questions (FAQs)