Australian Lending Policy Reference

Income Recognition

Income recognition is the process by which lenders classify, adjust, and verify each income source before it enters the serviceability calculation. The assessed income figure is typically lower than gross income — sometimes significantly so.

Vetted and updated: 2026ACL 387460 Vetted

Core Assessment Analysis

How Lenders Recognise Income

Lenders do not assess income at gross face value. Every income source is classified, shaded where policy requires, and then stress-tested at approximately 3% above the actual loan rate (the APRA serviceability buffer). The resulting net assessed income drives the serviceability calculation.

Understanding income recognition is fundamental to understanding borrowing capacity. A borrower with $200,000 in gross income may have a very different assessed income depending on whether that income is base PAYG salary, self-employed distributions, rental income, or foreign currency earnings.

How different income types are typically treated

PAYG base salary (permanent): Generally assessed at 100% of the base salary figure. The most straightforward income type for lenders to verify and recognise.

Variable pay — overtime, bonuses, and commission: Most lenders require a 2-year history before recognising any variable component. Where recognised, variable income is commonly shaded 20–50% to account for volatility. Some lenders exclude variable pay entirely for assessment purposes.

Rental income: Typically shaded 20–30% by most lenders to account for vacancy risk, management fees, maintenance, and potential interruption. The gross rental income figure is not the figure used in the servicing calculation.

Self-employed and company income: Lenders typically require two years of business and personal tax returns. Income is usually averaged over those two years, with a declining trend often triggering further conservative treatment. Add-backs (depreciation, one-off expenses, excess super) may be permitted depending on lender policy and the borrower's shareholding percentage.

Foreign income: Shaded for both currency risk and country risk. Typical shading ranges from 10–40% depending on the currency, the country of employment, and lender policy. Some lenders apply Australian tax brackets to foreign income even if the borrower lives in a low-tax jurisdiction, which further reduces assessed net income.

Government payments (Centrelink): Treatment varies by lender and by payment type. Some government payments are included; others are excluded. Disability Support Pension, Carers Allowance, and Family Tax Benefit are each assessed differently across different lenders.

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Related pillar

Income recognition sits within the Income and Serviceability Pillar.

Model your position

For a structured diagnostic of how your specific income mix is likely to be assessed, Structur provides an individual income modelling environment.

Why Underwriters Focus Here

Income recognition drives the serviceability calculation — the fundamental test of whether a borrower can afford the proposed loan at the stressed rate. Conservative treatment of variable and non-standard income prevents borrowers from overstating their repayment capacity. The APRA serviceability buffer means that assessed income must support repayments at a rate that does not yet exist, which is why the starting income figure must be carefully verified and appropriately adjusted.

Key Outcome Assessment Factors

The income types in the application, the percentage of variable versus base components, length of time in current employment, whether income is PAYG or self-employed, the currency and country of employment for foreign income, and the two-year income trend for self-employed borrowers. The same gross income figure can produce very different assessed income depending on its source and the lender being approached.

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General Information Only

General educational information only. Income recognition policies vary between lenders and are subject to change. This content does not constitute credit advice. Model Mortgages Pty Ltd | ACL 387460.

Model Mortgages Pty Ltd | Australian Credit Licence 387460