I'm confused - meaning of income for lo doc loans

[Bradsdad]

Can't understand what is going on. Everything I've read recently indicates that Macquarie are no longer writing no docs. A number of brokers on this forum have confirmed this. You must have got in just in time.

A broker told me the other day that Macquarie have sacked quite a number of employees (including his contact) in the residential mortgage lending section.

I'm of the same understanding with Macquarie. I still think I can get my hands on a 70% No-Doc (73% with MI) at 9.49%, just trying to confirm the MI premiums for you.
If listing your assets and liabilities isn't a problem though, a Lo-Doc with an affordability statement would be a better option the majority of the time though.


Regards
Steve

 

[Kristine..]

I used RHG for my last 2 No Doc 80% LVR. $395 Applic. Val $200. Rate is currently a very reasonable 9%.

Consult your IP Savvy MB and Im sure they can help you with the lenders and specifics of each.

I hope this helps.

Hi Rixter

I love you to bits but RHG has not taken applications for new loans funded by RHG since Mid November, 2007

Since January 4, 2008 the No Declared Income application was no longer accepted by RAMS at all

Even with RHG , the No Declared Income (commonly referred to as a No Doc application) was pegged at 70%LVR.

The loan products were the same but the LVR was limited to 70% if no income was declared.

For the no declared income application, no statement of assets and liabilities was required.

If an income was declared, then a statement of assets and liabilities had to be provided.



The debate about 'what constitutes income' is completely hypothetical, given that a Low Doc application requires no financial statements of any kind.

So, seriously, who gives a toss whether the income estimated and declared by the applicant includes profit from their mushroom farm, from babysitting, from ebay trades, from selling vintage cars, from building and selling houses, or from their early morning newspaper delivery round or whatever?!?

Essentially, the applicant must make their own decision as to whether they can afford the new loan.

It is openly discussed on this forum about Living Off Equity and about Capitalising Interest to other loans.

Lenders, however, do not want to know about this. Imagine an application saying:

Dear Lender

My name is Billy Bloggs and I earn $6,570 per annum from my grass cutting round. I own 12 houses and collect $240,000 gross rent per annum. The houses are worth about $300,000 each, so I hold property worth about $3,600,000. I have various mortgage loans of $2,700,000 to an overall 75%LVR and pay monthly interest of about $20,970.

I would like to increase borrowings against one of the properties by $100,000 so that I can renovate two of the older properties. They will be vacant while I do this but I should be able to increase the rent when the work is finished.

I have thought about this and am confident I can afford to service the new $100,000 loan without financial hardship

Signed Billy Bloggs.

Billy includes his 100 point ID and signs his Income Declaration form.

The lenders sends the valuer out to the one property Billy is offering as security for the new loan and approves the application as the new, increased loan, will be at about 89.8%LVR.

Billy is happy, the lender is happy, everyone is happy, and in due course Billy rents out the renovated houses at 20% more rental and the new tenants are happy.



But Uh! Oh! One of Billy's grass cutting customers decides to use Jim's mowing instead! Disaster!!! Billy loses $20 per fortnight and his personal income plummets to $6,050 gross per annum.

OMG how will Billy cope with this 8% reduction in his income?!? Billy decides that he can either (a) give up his Tuesday Lunch Special at the RSL, or (b) sell one of his properties, or (c) ignore it, grass cutting customers are like street cars, there's one along every five minutes.

Phew! And sure enough, by next Thursday Billy has picked up two new grass cutting customers and his personal income rockets up to $7,090 gross per annum. The day is saved!!



By the way, my own personal grass cutting man has twelve properties including a medical centre and is about to start on a three townhouse subdivision. He didn't own anything when he was a KMart PAYG manager, but his life changed the day he took a package and bought his first property while completely unemployed.

Actually, I bought my first investment property in 1994 while completely unemployed, too. I had just sold a business and I can't recall even filling in an application form - the bank just sent me the loan documents in the mail. When I used my own personal experience at an Aussie training session (back in August 2003) they turned off the video and remonstrated with me:

Aussie: Kristine, please, you have to have a job.

Me: No I don’t. You asked me to use a true example from my own experience, and that's what happened.

Aussie: No, No, we need you to have a job. You will give all the other Aussie trainees the wrong idea - we want our customers to have jobs. Please, for the purpose of the workshop, say you have a job.

They then turned the video back on.

Me: Hello, my name is Kristine and I have a job.

Beams of approval all round. But I didn't have a job - not even a grass cutting round - and I still have that property and the sky has not fallen on me.


So:

If we want to borrow money - and let us not forget these loans are secured by registered mortgage over property - and we cannot demonstrate our income but we are confident that we can service the debt, then what does it matter whether we are required to declare an income or not?

We will either succeed and life will go on, or we will take other measures - give up the lunch at the RSL, sell a property or oh, no!!! get a haircut and get a real job!!!


Now, excuse me, I gotta run. My grass is due for a cut and I really need to ask Mr Grass Cutting Man a few questions about how his latest development is coming along!!


Cheers
Kristine

 

[Rixter]

Well timed if I must say so myself

 

[keithj]

To be able to get a lo doc loan it is critical to write down the correct income.

Hi NB,

Re-read Alice in Wonderland..... your correct income is whatever you want it to mean . That's effectively what my MB told me. It's easy to forecast selling assets & making profits next year. Ask your MB what your income needs to be first, then work out how you will acheive that level.

Cheers Keith

 

[Nth Brisbanite]

The debate about 'what constitutes income' is completely hypothetical, given that a Low Doc application requires no financial statements of any kind.

Essentially, the applicant must make their own decision as to whether they can afford the new loan.

It is openly discussed on this forum about Living Off Equity and about Capitalising Interest to other loans.

So:

If we want to borrow money - and let us not forget these loans are secured by registered mortgage over property - and we cannot demonstrate our income but we are confident that we can service the debt, then what does it matter whether we are required to declare an income or not?

Kristine

Wow, that's a great post, Kristine. You explain everything so well. I like your examples regarding mower man and Aussie Home Loans.

The critical part of your post is: Essentially, the applicant must make their own decision as to whether they can afford the new loan.The great thing about this forum is that I've learnt that I can continue to buy more property even when I get knocked back for full doc loans.

I was once told by a friend that if I wrote down an income which I can't substantiate that I will be committing fraud. Hence the reason for this thread - I now feel a lot better.

 

[Nth Brisbanite]

.. your correct income is whatever you want it to mean . That's effectively what my MB told me. It's easy to forecast selling assets & making profits next year. Ask your MB what your income needs to be first, then work out how you will acheive that level.

Cheers Keith

You're right, Keith. However some lenders do define clearly what is meant by income while others are very vague.

 

[s_t]

When I got my loan last year in July, I had started up a business/company about one yr earlier and hadn't completed a tax return for it yet. So what was my income? It was of course a forecast based on continued growth of the business in the current(just started) yr! How could anyone argue with that! As to the growth rate/margins/profit etc, well that's a little forecast you get to play with

 

[Land]

Tax audit?

KeithJ/Krisine,

I understand that you can effectively make your declared income whatever you want it to be by pretending that you might sell some of your assets in the coming year and therefore realise some taxable income. BUT, the big question for me is what if I get audited by the ATO? Is it as simple as telling them that I was intending on selling some of our assets but then changed our mind?

Is getting audied by the ATO a serious threat? I thought that they were doing a lot of audits on people taking up low docs, so that they could bust all the self employed guys who do a lot of cash in hand work and get away with not declaring it?

I am usually very aggressive, but I just want to understand the implications if I got audited by the ATO - anyone got any comments?

 

[Nth Brisbanite]

KeithJ/Krisine,

I understand that you can effectively make your declared income whatever you want it to be by pretending that you might sell some of your assets in the coming year and therefore realise some taxable income. BUT, the big question for me is what if I get audited by the ATO? Is it as simple as telling them that I was intending on selling some of our assets but then changed our mind?

Is getting audied by the ATO a serious threat? I thought that they were doing a lot of audits on people taking up low docs, so that they could bust all the self employed guys who do a lot of cash in hand work and get away with not declaring it?

I am usually very aggressive, but I just want to understand the implications if I got audited by the ATO - anyone got any comments?

Good point, Land, now you've got me thinking. My first reaction is that the ATO only audits your tax return, not the income that you've stated in a lo doc loan. I thought that under the Privacy Act that the banks couldn't release such information to the ATO.

I'd get worried if they started to read our posts and were able to trace them back to the authors.

Any thoughts or experiences from any of the accountants, solicitors and mortgage brokers on this forum??? It's a very important point that Land has raised.

 

[keithj]

My first reaction is that the ATO only audits your tax return, not the income that you've stated in a lo doc loan. I thought that under the Privacy Act that the banks couldn't release such information to the ATO.

My understanding was that the ATO COULD request info from banks re lodoc apps. I also understood that the ATO was targetting the cash economy by finding discrepancies between income stated on tax returns and that on lodoc apps. So provided you can reasonably justify the income/profit on a lodoc app (& you aren't running a cash business) then the ATO don't really have a case.

 

[Nth Brisbanite]

My understanding was that the ATO COULD request info from banks re lodoc apps.

Has anyone heard of this actually happening? There is a difference between what the ATO could do and what is actually happening.

 

[Rolf Latham]

Hiya

I think its all going to be rumours and the like

I can tell you that if you are NON lodger of rtns over the years , then you DO have something to be concerned about with lo and no docs.

ta
rolf

 

[Nth Brisbanite]

I think its all going to be rumours and the like
rolf

Rolf, are you saying that the ATO doesn't cross check tax returns with income stated on lo doc applications? Is it only rumours? Have you heard of anyone who has had such an audit?

 

[Bushy]

Surely the only thing the ATO are chasing are people doing cashies. If you have stated an income on a loan application that proves to be different in the future than your taxable income and you can prove your LOE plan with bank loan statements - why would there be a problem. I would be surprised if they would punish you for an incorrect application that was filled out in good faith.

On the otherhand, lookout if you were repaying your loans and couldn't show them where the money was coming from.

Regards Bushy

 

[Rolf Latham]

Hiya

By rumours I mean that BOTH ways..................intimations that they do, and others assertions that they dont.

I dont know of anyone that has been audited, BUT that doesnt mean it doesnt happen.

ta
rolf

 

[Spectre]

This is more hearsay... but I think I heard somewhere the ato did do their audit of low docs, nationally it was something like 6-8 people were audited and their due diligence was done and case closed.

Might be a question of time and resources for them as well as them figuring the banks have a duty to disclose these things.

But i'd venture to say if the banks did do that then they wouldnt know where to start - alphabetically or highest dollar figure.

 

[Nth Brisbanite]

Thanks everyone for making this into an interesting thread. I'm less confused but have empathy for mortgage brokers and banks who have to explain it to their clients.

From the comments I've received, I come up with the following conclusions:

1. No one person or organisation has a clear definition of income for lo doc purposes
2. You can put in any amount you like as long as you can service the loan
3. The ATO is very unlikely to audit the income you put in a lo doc declaration
4. Income can be past, present or future.

Any more thoughts?

 

[Bradsdad]

Thanks everyone for making this into an interesting thread. I'm less confused but have empathy for mortgage brokers and banks who have to explain it to their clients.

From the comments I've received, I come up with the following conclusions:

1. No one person or organisation has a clear definition of income for lo doc purposes Yep
2. You can put in any amount you like as long as you can service the loan It's a declaration so this isn't true
3. The ATO is very unlikely to audit the income you put in a lo doc declaration It's unlikely that a person would have a tax audit done at all. Does this mean it's right to lodge incorrect claims? I'd suggest being close to the mark or run the risk of penalties (however slim the chance maybe
4. Income can be past, present or future. Check wording of the delaration before assuming this

Any more thoughts?

Good luck with it all.

REgards
Steve

 

[kegger]

I work for a federal govt dept and I know for a fact that the ATO would be abiding by very strict laws (called the Privacy Act). They are only allowed to obtain information about you if they have a good reason to do so and the Tax Act must also allow them to request this information. I cannot see how they could have grounds for requesting this information from the banks. Even if the ATO were taking you to court, they would unlikely request this info because at the end of the day, having the info doesn't prove anything anyway...even if you are either falsely declaring income or not declaring your income to the ATO (this is tax fraud BTW and has nothing to do with the income you state on an loan application), having the info probably wouldn't help their cause in terms of proving something against you.

I have had advice from an excellent Accountant and mortgage brokers. At the end of the day, if you have an interpretation of income and can justify it, there is no problem.

To be honest, even if there were no tax benefits to investing in property, I would still invest anyway, so I couldn't really give a crap if the ATO did an audit on me anyway.....they are 2 unrelated issues.

Cheers

 

[Bradsdad]

Old new but I found this on the ATO site. Please check to see if rulings are still current. (food for thought....or what may become current).

Low doc loans

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Warning: This information may not apply to the current year. Check the content carefully to ensure it is applicable to your circumstances.
In June last year I announced we had begun to investigate whether people using low documentation loans were likely to have tax compliance issues. This early work suggested many people using these products had either understated their income or failed to lodge income tax returns. Our work since has confirmed our concerns.

In the first of our compliance initiatives, around 350 taxpayers were selected randomly from eight lenders to get a picture of the broader population using these products. This information was obtained using the access powers in the tax law. It identified failure to lodge tax returns as a primary concern.

Around 50 per cent of these people had not lodged returns – the average was three years outstanding.

We have already taken action to enforce lodgement from these individuals, including eight court convictions. Most of this group are now up to date and more than $1.3 million in tax has been raised. Prosecution action is continuing for those who have not yet lodged. We are also currently reviewing the accuracy of the returns that have been lodged.

In a second initiative we undertook a risk based approach that showed that, for certain low documentation loan users, concealment of income is a significant concern.

These high risk cases were identified using Tax Office and other information including complaints made against some mortgage brokers to offices of fair trading. This led us to focus more closely on the clients of certain mortgage brokers. A field of around 400 high risk clients were identified.

140 of these were selected for the first round of audit activity. These cases were chosen because the broker involved was also a tax agent who had been identified as high risk as part of our profiling of tax agents. The broker/tax agent was also subject to audit.

These audits raised over $23 million in tax and penalties.

Audits of the remaining high risk clients of selected brokers are now underway.

In the coming year we will systematically check the lodgement status of people obtaining finance through low documentation loans, and potentially other sources. We will work with the finance industry on the best way to achieve this. Because most low documentation loans are made subject to mortgage insurance we will explore the possibility of matching insurance company records against our data as a way to streamline this process.

We will also continue to refine our risk profiling process to identify cases for audit action.

Although our findings indicate concerning levels of non-compliance amongst the users of low documentation loans, many users of these products are fully meeting their tax responsibilities. Many are funding repayments from legitimate sources like inheritances and capital gains, often derived from investments in property.

Where income has been omitted most of it has been derived from cash economy business activities predominantly in the building and construction industry.

Our data matching exercises are carried out in accordance with the Federal Privacy Commissioner’s guidelines. Consistent with these guidelines, records which show no evidence of failure to meet tax obligations are destroyed.

Last Modified: Tuesday, 19 July 2005


I also found this...
........Compliance challenges
This was the second year we received specific funding from the government for a range of compliance challenges, which will continue until 2007–08.

The additional investment has been provided to allow us to:

increase our risk analysis and intelligence gathering, and undertake more audits and reviews of employer obligations such as pay as you go (PAYG) withholding, superannuation guarantee and fringe benefits tax
undertake more tax performance reviews and audits on small to medium enterprises to assess their overall tax performance against their economic performance
focus more on the tax affairs of individual taxpayers in light of the significantly higher rates of participation in share and property markets over the last few years. The additional funding has enabled us to scrutinise more returns, looking in particular at capital gains tax, rental deductions and fraudulent refunds ....


Then this......

......We also conducted a pilot audit program of a small number of loan brokers. Six out of eight cases were adjusted, with tax, penalties and interest raised exceeding $500,000. Some of the issues identified related to poor record keeping, non-return of cash payments, Division 7A and fringe benefits tax. In addition, a number had poor lodgment histories and have been referred for further action. Further work in this area is planned for 2006–07.........

I then decided to go to bed as I'd just wated over 2 hours on their site. OH and and the fun I had



REgards
Steve