Loan Tip: Serviceability and Carried Forward Losses in Companies

Often a person will start up a company to operate a business and there will be a lot of start of costs which are deductible so the company may make some losses in the early years. These losses can be carried forward to offset future income (subject to some tax rules) so this reduces the profit of the company in the later years.

This often reduces serviceability.

But there are some lenders who will take the earlier year losses into consideration when working out serviceability – basically ignore the losses.


Example

Homer starts Mr Plough Pty Ltd which buys a lot of Ploughing equipment in the first year and pays Homer a wage. Its net income is negative $100,000.

In the second year the expenses are less and the income more, so it makes $100,000 which is reduced to nil by deducting the losses.

In the third year the company makes $100,000 and there are no losses, so this is its income.

Bank A may average the last 2 years profit to get $50,000 for serviceability

Bank B may take the lower of the last 2 years profit to get $0 for serviceability

Bank C may disregard the losses and average out $100,000 income over the last 2 years and use this for servicing

(Bank D may just use last year’s $100,000 and go with that).