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  1. #1
    Join Date
    Jul 2003
    Kapiti in New Zealand

    Default Tax chief cracks down on loans that hide big income

    Hello all,

    News for today,

    Half of all borrowers using "low doc" loans have failed to lodge tax returns for an average of three years running, says a Tax Office survey that threatens to smash the fastest-growing form of lending.

    The random survey confirms Tax Office fears that low documentation loans allow borrowers to disclose high incomes to banks and other lenders while hiding income from the Tax Office.

    "Early work suggested many people using these products had either understated their income or failed to lodge income tax returns," the Tax Commissioner, Michael Carmody, said yesterday.

    "Our work since has confirmed our concerns."

    Mr Carmody said his crackdown had already secured eight criminal convictions for tax evasion, and other prosecutions were under way.

    He is considering using special powers - which his office used to force lenders to provide confidential customer information for the survey - to match tax returns against mortgage insurance records.

    "In the coming year we will systematically check the lodgement status of people obtaining finance through low documentation loans, and potentially other sources," he said.

    Unpublished Reserve Bank

    research shows the proportion of new low-doc loans in the mortgage market has doubled, to 10-15 per cent, in two years.

    While the Tax Office is concerned borrowers are understating their income for tax purposes, the Reserve Bank is worried they are overstating their income to lenders.

    Low-doc loans, which carry a higher interest rate than standard loans, typically cater for the self-employed or those who do not meet traditional lending criteria because they do not require income verification and other documentation.

    Yesterday the big banks played down their low-doc arrangements and said they had no knowledge of tax avoiders using their products. "It's difficult for us to comment on that - it wouldn't come up in part of the discussion with the customer," said a spokeswoman for ANZ.

    However, smaller lenders confirmed the low-doc industry was driven primarily by small business owners trying to minimise the tax they paid. "It's not that they don't have a cashflow; it's just that they haven't lodged their tax returns," said Peter James, managing director at Resi.

    Mr James said low-doc borrowers accounted for between 15 and 20 per cent of his business.

    "The problem is that the tax structure is so hard and so penalising that I can understand why people aren't rushing [to pay tax]," he said. "The problem is not the low doc; it's the tax system."

    Mr Carmody said the initial 140 audits had raised more than $23 million. Many of the culprits were in the building industry. "Where income has been omitted, most of it has been derived from cash economy business activities predominantly in the building and construction industry," he said.

    A government regulator, who did not wish to be named, said the Tax Office survey and resulting crackdown could cripple the low-doc industry because it would remove the incentive for borrowers to pay the higher interest rates.

    Any shake-up is expected to benefit the big banks at the expense of non-bank lenders, such as Liberty Financial and Bluestone. A spokesman for NAB said: "The low-doc loans as a proportion of our total home loan book are 0.8 of 1 per cent."
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  2. #2
    Join Date
    Jun 2005
    auckland New Zealand


    All the more reason to stay on the right side of IRD.
    I love being able to sleep at night

  3. #3
    Join Date
    Oct 2003


    Quote Originally Posted by Marc
    A government regulator, who did not wish to be named, said the Tax Office survey and resulting crackdown could cripple the low-doc industry because it would remove the incentive for borrowers to pay the higher interest rates.
    Interesting statement. So the higher interest rate is not due to increased risk of the person but because the use of a low doc loan enables a person to hide income from teh Reveune. So the bank takes their cut (through higgher interest rates) to enable this fraud to continue. Not really a strong aguement.

  4. #4
    Join Date
    Aug 2005


    It's not supprising that NABs market share of Lo Doc is less than 1% - their product is not very compeditive.

    The ATO is activly trying to persue those who don't declare income then use a Lo Doc to obtain a loan. There are many cases of this happening, but the opposite also happens a lot.

    There are people who don't have a substantial income or one which would qualify them for the loan they want, yet they can afford to service the loan. In this case, they're paying the appropriate dues to the taxman, but they're inflating their actual income on the loan income declaration in order to get the loan.

    Consider an investor who has multiple properties. Lenders generally take 60-80% of rent as servicability, with no consideration to tax deductions or lifestyle and spending habits. This means the the investor won't qualify for the loan, but they know that they can afford it. To get around this the obvious answer is a Lo Doc loan.

    Also, I read a statistic somewhere that indicated that default rates on lo doc were lower than those of full doc. This would indicate that the higher rate is not a risk fee, but simply because the lender can charge a premium for these loan.

    Some lo doc loans are actually very comparible to regular rates under certain circumstances.


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