Loan Tip: Can Capital Gains income improve Serviceability?

The general rule is that capital gains income will be disregarded by lenders when they are calculating serviceability. It is considered that the capital gains are one offs and won’t be received consistently (from a tax point of view if they were then they would be taxed as income under s6-1 ITAA97 and not be capital gains!).


An exception to this might be with some low doc loans where the income of a client is taken into account with no breakdown of this income being given.


Example

Bart buys one property does it up, waits 12 months and then sells it and repeats. He has done 3 so far and declares the capital gains on this tax returns each year. He generates another $100,000 income per year by doing this.

He asks the lender to consider this as income. They won’t like it if he is selling quickly as they won’t make any money on it, but they won’t consider that income for serviceability either as they consider it one off income.

Shortly after Homer is audited and finds out the ATO is taxing him on an income basis, and not capital gains so he won’t get the 50% CGT discount. His amended assessments show his income from his as $200,000 per year now.

The lender might take this as income, but he would likely have to apply as commercial borrower.

 

On the other hand lenders dont assess or consider unrealised tax payable on gains. At least not until its sold.

Eg Fred has a portfolio worth $2m. Lender knows he has $450K of loans. However the lender will lend up to 80% of the $2m (less the existing $450K) ie a extra $1.15m . But Fred could have a tax liability of several hundred grand. eg Freds portfolio is two properties that doubled in value. The expected tax on selling one is $235K....So his unrealised CGT could be as much as $470K. They dont count this.

However if he did sell one his lender may want an accountant to assess the tax payable on the sale so that the expected tax is held aside and doesnt impact cashflow later. In some cases taxpayers are asked to provide their tax return showing the actual gain subject to tax and their notice of asessment AND may be encouraged to have paid this earlier than they would like because a lender wants the security of knowing the tax is final and has been paid. In other cases an accountants letter will work. Lenders wont want a later loan application because they didnt set enough savings aside.

Strategy - Borrow first then sell?

This is a common issue where we often take the lead given by the taxpayer's broker.

 

a good strategy just on diagnosis of a terminal illness perhaps. Spend the money and die insolvent.

 

Prepaid funeral plan on a credit card.