Business income isn't linear. COVID, a lost major client, a large investment in equipment, a health issue, a parental leave period — there are dozens of legitimate reasons a self-employed borrower might show reduced income in one year. The question isn't whether your income dipped — it's how that dip looks to a lender, and which lenders are willing to look past it.
How Lenders Assess 2 Years of Income With a Dip
Most major banks and non-banks require 2 years of self-employed income history. The challenge is what happens when those 2 years aren't consistent. There are three different approaches lenders use:
2-Year Average (most common)
Add Year 1 and Year 2 income, divide by 2. The average is used as qualifying income. This helps when Year 1 was strong — but can significantly reduce assessed income if Year 2 is lower. Example: Year 1 $150K, Year 2 $90K → average $120K used.
Lower Year Used (conservative lenders)
Some lenders — particularly Big 4 banks in risk-off periods — use the lower of the two years. This is the most conservative approach and frequently causes declines where a specialist lender would say yes.
Most Recent Year (progressive lenders)
If Year 2 is significantly higher than Year 1 AND there's a credible explanation for Year 1 being lower, some lenders (including Pepper, ING, Macquarie) will use Year 2 income only — or weight it more heavily. This is the best outcome for borrowers who've recovered.
The direction of the trend matters more than the dip itself
A borrower with Year 1: $80K → Year 2: $130K is often viewed more favourably than Year 1: $130K → Year 2: $80K — even though the first borrower has lower total income. An upward trend tells lenders the business is recovering and growing. A downward trend raises serviceability risk concerns.
Common "Bad Year" Scenarios — and How They Look to Lenders
Lender view: Widely understood and largely forgiven by most lenders by 2026, especially for industries clearly impacted (hospitality, tourism, retail, fitness). A letter from your accountant confirming it was COVID-related and that trading has since normalised is usually sufficient.
Strategy: If both affected years are now >2 years ago and your recent returns are strong, most lenders won't penalise you. If one affected year is still in your 2-year window, apply to lenders who use most recent year, or wait one more lodgement cycle.
Lender view: Acceptable if Year 2 shows recovery. The concern is whether you've rebuilt the income base. A concentration concern (one client was 70%+ of revenue) will be noted.
Strategy: Show your current client mix in the accountant letter. Demonstrate that revenue is now diversified. Recent BAS statements showing recovering turnover strengthen the case.
Lender view: Distinguishable from trading loss. A depreciation add-back can recover significant income. If you spent $120,000 on a truck and depreciated $40,000 in Year 1, that $40K can be added back to your declared income.
Strategy: Prepare a formal add-backs schedule with your accountant. This is the single highest-impact document adjustment available for this scenario.
Lender view: Needs explanation. Lenders will accept a statutory declaration or accountant letter noting the period and confirming trading has returned to normal.
Strategy: Don't leave this unexplained. An unexplained income dip is more alarming to an assessor than one with a documented reason. Keep the explanation factual and brief — "director was on medical leave Q3 2024, business resumed full capacity Q1 2025."
Lender view: Common and usually recoverable. If low income is purely from deductions (super, depreciation, home office, vehicle), add-backs can substantially recover the declared income figure.
Strategy: This isn't a "bad year" at all — it's a documentation problem. Work with your accountant to identify add-backs before applying. See our tax preparation guide for the full add-backs process.
The Accountant Letter: Your Most Powerful Tool
When income is volatile, a well-crafted accountant letter can change a decline into an approval. The letter should address:
- Business type and structure — ABN, entity type, trading history
- Specific reason for the lower year — factual, one or two sentences
- Current trading position — "the business is trading normally / has recovered / is growing"
- Declared current year income — accountant's own estimate if the year isn't lodged yet
- Accountant's professional credentials — CPA/CA membership number, firm name, signature
Don't get an accountant letter without briefing your accountant
A generic letter saying "income was $X" is not helpful. The accountant needs to explain the context of the dip. Send them a brief in writing — what the lender needs to see, which year needs explaining, and what the narrative is. An unexplained letter that simply restates the tax return adds no value and may delay your application.
When to Wait — and When to Apply Now
Timing matters. Here's how to decide whether to apply now or wait for a better filing position:
| Your Situation | Recommendation |
|---|---|
| Year 2 (most recent) is strong, Year 1 was the bad year | Apply now. Use lenders that use most recent year. An accountant letter explaining Year 1 supports the application. |
| Year 2 was the bad year, Year 1 was strong | Consider waiting one more year. If the current (unlodged) year is strong, you may be better served waiting for it to be lodged so the 2-year window shows Year 2 (bad) → Year 3 (strong). Alternatively, apply to a lender that averages rather than uses the lower year. |
| Both years were below ideal but business is now recovering | Consider a BAS-based low doc application using current year BAS showing recovery. Alternatively, wait until the current strong year is lodged. |
| One year was a genuine anomaly (COVID, health, one-off event) | Apply now. With a strong accountant letter and strong recent BAS, specialist lenders will usually approve. Don't wait another year unnecessarily. |
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Which Lenders Are Best for Volatile Income?
Not all lenders treat a bad year the same way. Here's where to go based on your specific scenario:
ING — Best for upward income trend
ING explicitly favours Year 2 income when there's a clear upward trend and the increase is more than 20%. If Year 1 was $90K and Year 2 was $130K, ING may assess on $130K with an accountant letter confirming the reason for the prior year dip. One of the best options for "recovering" self-employed borrowers.
Macquarie — Best for complex structures with add-backs
Macquarie has a sophisticated add-backs policy. If your "bad year" was driven by depreciation, high super contributions, or large one-off deductions, Macquarie's assessment process allows full documentation of those add-backs. Can significantly recover assessed income in depreciation-heavy industries.
Pepper Money — Best for genuine one-off circumstances
Pepper is one of the most contextual lenders in Australia. They read the file, not just the numbers. A well-documented COVID-related or health-related dip with strong recovery evidence is assessed favourably. Rate is higher than major banks but below BAS low doc rates.
La Trobe Financial — Best for borderline situations
La Trobe offers a "lite doc" product that sits between full doc and low doc. Useful for borrowers whose tax returns show a bad year but whose BAS and bank statements show strong current trading. La Trobe weighs multiple income signals rather than relying solely on tax return income.
Real Application Example: How a Down Year Was Explained
Scenario: Electrician, company structure, loan request $820,000
- Year 1 (2023/24): $68,000 taxable income — large vehicle and equipment purchase, $55,000 depreciation claimed
- Year 2 (2024/25): $115,000 taxable income
- Add-backs applied (Year 1): $55,000 depreciation → Year 1 adjusted to $123,000
- 2-year average after add-backs: ($123K + $115K) / 2 = $119,000
- Outcome: Approved at ING on $119,000 assessed income. Without add-backs the 2-year average was $91,500 — not enough to service the loan.
Example only. Individual outcomes depend on lender policy, property value, other debts, and credit history.
The "Current Year" Workaround
If your most recent lodged year is poor but your current (unlodged) year is strong, some lenders accept a "current year income projection" — an accountant's signed letter projecting income for the current financial year based on YTD performance. This is not available at all lenders, but at Liberty Financial and some La Trobe products, a well-supported projection letter can be used alongside one year of tax returns rather than two.
Requirements typically include: at minimum 6 months into the current financial year, YTD bank statements supporting the projection, and accountant signature with PI insurance details.