Is there too much focus on trying to avoid Tax?

By Kelsey Miller from DelayPay

I was speaking with a broker a couple of days ago about serviceability and the nature of how this has changed the borrowing capacity for home buyers over the last few years.

Once upon a time, a rough rule of thumb on borrowing capacity was between 6-7 times your wage. So if you take home 100K a year, you have the potential to borrow around 600 - 700K as a rough indication.

In today's market, that number has dropped to 3-4 times your wage, that's almost a 50% reduction in borrowing power...pretty significant, I would say.

I think it's fair to say that a similar trend has played out in business lending terms. The metrics are a bit different but I would hazard a guess that the emphasis on serviceability has had a similar impact. Pretty much every day, I chat with a Farmer about the difficulty of extending an overdraft; the change to a bias towards serviceability is at the heart of this.

Whilst the change in focus from banks has been well publicised, many of the businesses I speak with still focus their financial strategy on equity in land and minimising tax, or more accurately, continue to do the same things they have been doing with their accountant year in year out.

Unfortunately, tax minimisation strategies often have a negative effect on demonstrating serviceability; after all, part of the intent of minimising tax is to shift around your profits to reduce your taxable income.

I understand why this continues to be top of mind; at the end of the day, who wants to pay the tax man? However, in reality, if you want access to bank funding to drive your business forward, a shift in thinking is needed.

I am not an accountant and don't pretend to be one, but I have shifted my thinking on this aspect of lending over the past year or so. A big part of my shift in thinking came from me asking my accountant about how to best balance the need to demonstrate the ability to service debt with the desire to reduce tax. The answers I received helped me to make a few changes that have really helped my relationship with my bank.

It is not an exact science, but if your accountant has been focused on minimising your tax for years, there is a pretty good chance that not much will change in your management accounts until you start asking some different questions....just some food for thought next time you're chatting with your accountant.

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