If you have a tax debt, it doesn’t mean you can’t be approved for a home loan. Here’s what you need to know about borrowing to buy property when you owe money to the Australian Taxation Office (ATO).
The end of the financial year can be a stressful time for many as we try to manage our expenses and get our finances in order before the tax man pays us a visit.
While having an ATO debt is not ideal, this doesn’t disqualify you from borrowing money for a home loan. In fact, there are several steps you can take to consolidate your tax debt in order to get the finance you need.
Can I get a home loan if I have a tax debt?
When you apply for a home loan, you need to give the lender a complete picture of your financial situation. As well as details about your income, your employment and your assets, you’ll need to provide details about your liabilities, including car loans, credit card debt and tax debt. Lenders will then use this information to assess your borrowing capability and whether or not you have the capacity to keep up to date with your home loan repayments.
The size of your tax debt and your history of repaying the debt will be crucial factors that a lender will consider when reviewing your application. One option worth considering is refinancing your tax debt and combining it with the new home loan you take out. While Australian banks are highly unlikely to allow you to refinance your debt to the ATO, there are non-bank lenders available who may be able to help.
They will take into account the reason for your tax debt and the steps you have taken to repay it when deciding whether or not to offer you a loan. Some lenders are more conservative than others, so this will affect their final decision.
How to get approved for a loan
Each lender has its own approach to risk that borrowers must satisfy in order to be approved for a loan. However, there are several steps you can take to improve your chances of getting approved for a loan:
- Provide evidence of income. From pay slips and bank statements to business activity statements, you’ll need to supply proof of income to your lender so that your propensity to repay the loan can be evaluated.
- Manage your debt. If you have a tax debt in your name, the lender will assess what steps you are taking to pay off the money you owe. So if you’ve set up a payment plan with the ATO and made regular instalments over a period of six months or more, the lender will view your loan application in a more favourable light.
- Provide explanation for your tax debt. There are several reasons why you may have ended up with a tax debt: perhaps you made an error on your return, maybe you were late lodging your return, or you may have incurred a large capital gains tax bill. You’ll need to provide the lender with a reason for your tax debt, and this reason may affect its decision to offer you financing. For example, if an error by your accountant led to the bill, you’ll most likely be seen as a more reliable borrower than someone who forgot to complete their tax return on time.
- Try to stay out of court. If you have a history of missing repayments or if you have failed to communicate effectively with the tax office, the ATO may launch legal action against you. This could lead to a court writ or judgment being included in your credit file. which will count against you in the eyes of lenders. Make sure you liaise with the ATO every step of the way to signal your intention to repay the debt as quickly as possible.
Tips for paying off tax debt
Keep the following tips in mind to ensure that you repay your tax debt to the ATO as quickly as possible:
- Stay in touch with the ATO. It can be tempting to ignore repayment notices and correspondence related to your tax debt, but this will only lead to more financial pain. You or your accountant will need to keep in regular touch with the ATO and respond to any requests for information as quickly as possible.
- Set up a payment plan. Set up a payment plan with the ATO to help you pay off your debt at an affordable rate. Do everything you reasonably can to make sure that you pay your regular instalments on time.
- Listen to your accountant. You pay your tax accountant for advice, so listen to what they say. Experienced accountants will have been through the process several times before with other clients and can help you get your finances back on track.
- Consider refinancing. While banks are reluctant to refinance tax debt, there are several other lenders who can help. Consider the refinancing options available to find one that will allow you to consolidate your debt into an affordable loan.
My wife and I are hoping to buy a home very soon. We have deposit in bank of about 20% of the value of homes we are looking at. Most of this is proceeds from the sale of my wife’s house and some savings we have added in last 6 months. Repayments will be quite comfortable, considerably less than we are paying as rent and allow room for interest rate increases without stressing much.
The sticky bit is I have a tax debt. The debt arose when I was operating a small business a number of years ago and wasn’t diligent in getting activity statements and returns done as I should have. This debt was incurred before I met my wife. I have made some contribution toward paying the debt. I have contacted the accountant that prepared my returns for the years in question to try to get the activity statements completed. When he was preparing the returns he didn’t think they would be required as he was confident the ATO would release the debt. I was unemployed and on sickness benefit for a period of time and ATO did release the debt. When I started working and lodged a tax return the debt was reinstated about 12 months ago. The debt was raised 7-9 years ago.
As I understand home loan requirements (I have never had a home loan or owned/part owned a home)the Lender would prefer the loan to be in both our names (joint application). If we do this would the ATO be able to prevent the loan or force us to sell it to cover the debt that I have?
Alternatively, If the loan was in my wife’s name only would the ATO have a problem with that? As I earn more than my wife some of my income would go toward servicing the loan. It might be possible for my wife’s income to service the loan and my income used for food, fuel, car expenses, etc so I wasn’t actually contributing to the payment of the mortgage.
Constructive advice appreciated.
Hi Wetworker,
Thank you for contacting finder.com.au – a financial comparison website and general information service designed to help consumers make better decisions.
Sorry for the delayed reply. Generally, all lenders will assess their applicant’s financial position and will take into account including but not limited to your assets, income, other debts and liabilities, credit rating, etc. So either you or your spouse will apply for the loan, the same assessment will be done. Obviously, you’ll need to be in good standing in your financial position as that would tell your capability of paying off the loan.
Furthermore, whether you or your spouse will apply for the loan, as you have an outstanding debt with ATO, most likely your tax debt and repayments history are critical factors that a lender will consider in approving your loan application.
Nonetheless, you still have the option to refinance your tax debt and combine it with the new home loan you take out. Unfortunately, most banks do not offer to refinance your tax debt, but some non-bank lenders may be able to help. You can discuss your loan options by contacting a non-bank lender featured on this page. Again, your approval will still be on a case-by-case basis, depending on their assessment financial circumstance.
Hope this helps.
Cheers,
May