This year, before you race off to the shops to spend your tax refund, consider your tax refund could have the biggest impact on your life and your finances.
At Etax we hear from lots of Australians (and tax accountants) about the ways they plan to spend their tax refund. Let’s look at some of their ideas.
“What should I do with my tax refund?”
These clever money ideas could help make you more financially comfortable.
1. Super contribution top-up
According to ASIC, a single person who retires at 65 with a ‘modest’ lifestyle (with annual living expenses of about $23,000) will need $300,000 in today’s money to retire. Those who want a ‘comfortable’ lifestyle (with living expenses of $41,830 per year) will need at least $544,000 to retire.
For most of us, those are big numbers. Boosting your super early-on means there’s more time for your super savings to grow.
Just contact your superannuation fund or advisor for advice and learn how to transfer your tax refund into your super fund – your “future self” will thank you when you retire!
2. Buy work related equipment items that cost over $300 now, for a better deduction on next year’s return
If you’ve been holding off on purchasing any big-ticket work related items like computers, tools and work equipment, using your tax refund could be a good option.
Work related items that cost you more than $300 need to be depreciated over the “effective life” of the item. If you buy these items at the end of a financial year, the benefit on your next tax return will be very small. But if you buy the item early in the year – July or August – your depreciation calculation will cover more time and this means a bigger deduction on your next tax return. Your tax agent can help make that simple for you.
3. Save your tax refund in a term deposit for your children
You can put aside your tax refunds, year after year, so in the future you can cover future big-ticket expenses for your children. Save your refund in a long term deposit or another safe long-term, interest-earning investment – later you can use it for your kids’ university education or their first car.
When your children are older, you can give them a good leg-up without a hard hit to your wallet.
4. Pay off credit card debt or loans
Do you have a credit card debt or a personal loan you seem to be paying off forever?
Consider using your tax refund to lower your credit card debt or pay it off. Your interest repayments will drop as soon as you lower your outstanding balance. Once you’re debt free, start using your money for you, rather than contributing to the bank’s profits by paying credit card interest repayments.
5. Put your tax refund into a mortgage offset account
If you’ve got a mortgage, your bank or mortgage provider probably offers a “mortgage offset” option.
A mortgage offset account is basically a savings account. Instead of receiving interest on your savings each month, your offset account balance is subtracted from your outstanding mortgage loan balance to calculate the interest component of your mortgage payment.
You’ll end up paying less interest on your mortgage, leaving more money in your pocket. You can pay your home loan off quicker and pay less of your money in interest charges, while your offset account balance is still ready for you to use in an emergency.
“Should I save my tax refund?”
Saving your tax refund could help you retire quite a lot earlier
That’s not an exaggeration. It’s very real, especially if you start early. Let’s look at a simple example:
Edward is 25 years old. He gets about $2000 each year on his tax refund.
In 2019, Edward started putting his tax refund into a normal savings account that he set up purely for saving, not spending. He shopped around the banks and found an account with the best interest rate. He will repeat that once each year to ensure he’s getting a good rate from the banks. And pretty soon, he’ll shift the money into a term deposit, to get a better interest rate while still having access to money if there’s an emergency.
Let’s see what happens to Edward’s once-per-year savings of his $2000 tax refunds.
|$2000 per year||$2000/year PLUS $50/week|
This table is based on a long-term estimated savings interest rate of 4%, which is higher than today’s rate, but more conservative than the default rate using the moneysmart interest calculator from ASIC, for example.
Before you start on a savings plan, consider talking to a financial advisor AND consider whether you have debts that are costing you in monthly interest; those might be your 1st priority, and a good way to spend your tax refunds.
Where not to spend your tax refund
Australians spend billions of dollars every month, just staring at a pokie machine or website that’s eating their salary – or their tax refund. Overall, pokies are a sure-fire way to lose money, fast.
Aussies are the biggest gamblers in the world – partly because we’ve allowed gambling machines to pop up all over our communities, and allowed it on the internet. (Many countries have banned or restricted pokies and online betting.) Australians lose around $24 Billion dollars a year – with more than half being fed straight into pokies.
Makers of pokie machines use technology and cognitive science to make you think you’re winning or breaking even, when in fact, you’re losing. Gambling machine vendors are apparently also developing new ways to draw younger generations into gambling. Online betting companies are also hard at work, with new tricks and marketing.
We suggest, if you want to give away your tax refund, give it to a person in need, or a charity; you’ll feel happier than you would if you gave all that money to a pokie machine.
An interesting thing about gambling is that it can also be described as an indirect form of taxation. Gambling is legal in Australia and this may be in part because, it is taxed heavily. A large chunk of the nation’s gambling losses go back into the Government’s coffers. So if you lose your tax refund at betting, it’s a bit like sending part of your tax refund right back to the ATO.