Key Takeaways
- Retained earnings are company profits kept in the business rather than paid out as wages or dividends.
- Some lenders will count your share of retained profits toward serviceability; many count only what is paid to you.
- Counting retained profit usually requires a controlling shareholding and a consistent profit history.
- Retaining profit is tax-efficient but can understate your income unless matched to a lender that recognises it.
Accountants who run a company often leave profit in the business rather than paying it all out, a sensible move when the corporate tax rate sits below their personal marginal rate. The catch comes at home loan time: if that retained profit never reaches you as salary or dividends, will a lender count it as your income? The answer is that some will and some will not, and the difference can be substantial. With variable rates around the 6% mark and serviceability tested above that, knowing whether your retained earnings can be counted, and what it takes, can meaningfully change how much you can borrow.
Identifying lenders that count retained company profits, and evidencing them properly, is something a mortgage broker for accountants handles as part of the process. This article explains what retained earnings are, whether lenders will count them, the conditions involved, and the trade-offs to weigh.
What Retained Earnings Are
It helps to be clear on the term before looking at how lenders treat it, since the distinction drives everything that follows. Retained earnings are simply profit kept in the company.
Retained earnings, sometimes called retained profits, are the net profits a company keeps after tax rather than distributing them to shareholders as dividends. For an accountant running a practice or business through a company, retaining profit is often deliberate: the company pays tax at the corporate rate, the profit stays in the business for reinvestment or future use, and you avoid drawing it into your personal income where it would be taxed at your marginal rate. The result, though, is that your personal tax return shows only your salary and any dividends, not the profit sitting in the company, which is where the borrowing question arises.
Will Lenders Count Retained Earnings?
This is the heart of the matter, and the honest answer is that it depends entirely on the lender. The market splits into two broad approaches.
Many lenders assess only the income that actually reaches you, your salary and distributed dividends, and disregard profit retained in the company, on the basis that it is not your personal cash flow. Other lenders will look through the company to your share of its net profit, effectively adding retained earnings back to your assessable income where you control the business. For an accountant who pays themselves a modest wage and retains strong profit, this difference can be the gap between a borrowing capacity that reflects the salary alone and one that reflects the true performance of the business. Finding a lender in the second group is often the single most valuable step for a company-structured accountant, because it can lift assessable income considerably without changing anything about how the business actually operates.
The Conditions for Counting Retained Profit
Lenders that do count retained earnings apply conditions, because they are extending assessment beyond what is paid out. Understanding these helps you know whether the approach is open to you.
Controlling Ownership
Lenders willing to count retained profit generally require you to hold a controlling interest in the company, often majority or full ownership, so that you genuinely control whether the profit could be distributed to you. A minority shareholder usually cannot have retained profits counted, because they cannot direct a distribution.
A Consistent Profit History
Lenders typically want two years of company financials and tax returns showing the business has been consistently profitable, not a single strong year. A steady track record reassures the lender that the retained profit reflects sustainable earnings rather than a one-off result.
Demonstrated Company Health
The company needs to be trading soundly, with the financials showing it can support both its own obligations and the income being attributed to you. Where the business carries significant debt or irregular results, a lender is more cautious about counting profit that has not been paid out.
The Tax and Borrowing Trade-Off
For accountants, this is where professional knowledge cuts both ways, and it is worth planning around rather than discovering at application. Retaining profit is efficient but has a borrowing cost with some lenders.
Leaving profit in the company is genuinely tax-efficient, since the corporate rate is typically lower than a higher personal marginal rate, and many accountants structure their affairs this way for good reason. The trade-off is that, with a lender that counts only paid-out income, those retained profits are invisible to your borrowing capacity. There is no need to abandon a sound tax strategy; the more useful response is to match it to a lender that recognises retained earnings, or, where a purchase is planned, to review with your own tax adviser whether drawing more income in the year or two beforehand makes sense. Whatever the assessed figure, the lender then tests your ability to service the loan at the actual rate plus a buffer of 3 percentage points set by the Australian Prudential Regulation Authority (APRA), roughly 9% at current rates, so the goal is to have your real earning capacity recognised within that test rather than artificially suppressed.
How This Fits with the Professional Concessions
Retained earnings and the professional concessions are separate threads that both apply to an eligible accountant. It is worth confirming each.
Where you hold current membership of a recognised body such as CPA Australia (Certified Practising Accountant), Chartered Accountants Australia and New Zealand (CA ANZ), or the Institute of Public Accountants (IPA), you can generally access the waiver of Lenders Mortgage Insurance (LMI), which can save a premium exceeding $20,000 on a higher-loan-to-value-ratio (LVR) purchase. The waiver lowers cost but does not change serviceability, so whether your retained profits are counted remains central to how much you can borrow, particularly if you draw a modest salary.
Frequently Asked Questions (FAQs)
What are retained earnings in simple terms?
They are the profits a company keeps after tax rather than paying them out to shareholders as dividends. For an accountant running a business through a company, retaining profit is often a deliberate tax decision, since the corporate rate may be lower than your personal marginal rate, but it means the profit does not appear as personal income on your tax return.
Will a lender count profit I leave in my company?
Some will, some will not. Many lenders assess only the salary and dividends actually paid to you, while others will look through to your share of the company’s net profit where you control the business. Finding a lender in the second group is often the key step for a company-structured accountant who pays themselves modestly.
What do I need for a lender to count retained earnings?
Generally a controlling interest in the company, often majority or full ownership, so you genuinely control distributions, plus two years of company financials and tax returns showing consistent profitability and a sound trading position. A minority shareholder usually cannot have retained profits counted, because they cannot direct a distribution.
Why do some lenders ignore retained profit?
Because it has not been paid to you, so they do not regard it as your personal cash flow. From their perspective, only income that actually reaches you demonstrates your capacity to service a loan. This is a policy difference rather than a rule, which is why the same financials can be assessed quite differently between lenders.
Should I pay myself more instead of retaining profit?
It depends on the trade-off. Drawing more income can lift your assessable figure with lenders that count only paid-out income, but it may increase your personal tax. Where a purchase is planned, reviewing this with your own tax adviser ahead of time, rather than abandoning a sound strategy, is usually the better approach.
Does retaining profit affect the LMI waiver?
Not the eligibility, which rests on your recognised membership. The waiver removes a cost rather than changing serviceability, so it applies regardless of how you structure your income. What retained profit affects is your assessable income and therefore how much you can borrow, which is a separate question from whether the waiver is available.
The Bottom Line
Retained business earnings can help an accountant borrow more, but only with a lender that looks through the company to your share of its profits, and only where you hold a controlling interest and can show a consistent profit history. Many lenders count only the salary and dividends paid to you, which leaves retained profit invisible to your borrowing capacity, so the sound tax strategy of keeping profit in the business has a borrowing cost unless it is matched to the right lender. The professional LMI waiver still applies where you hold a recognised membership and can remove a premium exceeding $20,000 on a higher-LVR loan, but it does not change the serviceability test at the actual rate plus 3 percentage points. Presenting your company’s profitability clearly and choosing a lender that recognises retained earnings is what lets a tax-efficient structure translate into real borrowing power.