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The smartest way to use your tax refund depends on your situation. For many people, paying off high-interest debt like credit cards and building an emergency fund come first. After that, you could put your refund towards your mortgage, your super or a savings goal.
At Etax, we hear from lots of Australians about their plans for their tax refund. Below are seven smart ideas to consider.
Key Takeaways
- Your tax refund is a chance to get ahead, not just a bonus to spend.
- Depending on your situation, you could use your tax return to reduce debt, build savings or work towards a longer-term goal.
- Super contributions, HELP repayments and work-related equipment each have rules and timing that affect how much you benefit.
- Saving even a modest refund each year can grow into a large sum. See below how $2,000 a year can really add up.
What should I do with my tax refund?
1. Pay off high-interest debt like credit card debt
Do you have credit card debt or a personal loan you seem to be paying off forever?
You can use your tax refund to pay down your credit card debt or pay it off. Reducing the balance means you pay less interest from then on. If you have several debts, look at which has the highest interest rate and tackle that first.
Once you have paid off high-interest debt, the money that previously went towards repayments and interest can now go towards savings or other financial goals.
2. Voluntary super contribution
Adding money to your super early gives it more time to grow before you retire.
The Association of Superannuation Funds of Australia (ASFA) estimates that a single homeowner currently needs around $630,000 in savings at age 67 to fund a “comfortable” retirement. For a homeowner couple, the estimate is about $730,000. These figures assume the retiree will also receive a part Age Pension.
You may be able to claim a tax deduction for your contribution. Read our guide on how to claim a tax deduction for personal super contributions.
If you’re on a lower income, you may get a government super co-contribution of up to $500 instead. To qualify, you must earn under the income threshold, and at least 10% of your income must come from work. You also can’t claim a tax deduction for the contribution.
Keep in mind that you generally can’t access your super until you retire. Want to learn more about super? Read our complete guide to how super works in Australia.
3. Save your tax refund for a bigger goal
You don’t need to spend your tax refund straight away.
You could use it to work towards a larger savings goal, such as a home deposit, holiday, further education or future expenses for your children. Consider a high-interest savings account or term deposit. You can compare rates on comparison sites such as Canstar. Watch out for “bonus” rates that only last a few months before dropping.
Even if your refund is not enough to reach the goal on its own, it can give your savings a meaningful head start. You could also add smaller regular amounts after depositing your refund. Over time, regular saving combined with interest can make a significant difference.
4. Put your tax refund into a mortgage offset account
If you have a home loan with an offset account, your tax refund could help reduce the interest charged on your mortgage.
An offset account works like a savings account attached to your home loan. Instead of earning interest, the money in the account lowers the loan balance your lender uses to calculate interest.
For example, if your home loan balance was $500,000 and you had $10,000 in a 100% offset account, your lender would generally charge interest on $490,000, not the full $500,000 balance.
This means you’ll pay less interest on your mortgage and pay your home loan off faster, while your offset account balance is still ready for you to use in an emergency.
If you don’t have an offset account, another option is making an extra home loan repayment. Check your lender’s conditions and any applicable fees before doing so.
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5. Make a voluntary HELP repayment
If you have a HELP debt, you can make a voluntary repayment at any time. This reduces your HELP debt once the ATO processes it.
It is important to remember that a voluntary repayment is in addition to any compulsory repayment you need to make. Making a voluntary payment doesn’t reduce or replace your compulsory repayment for the year.
The ATO adds indexation to HELP debts on 1 June each year. Paying down your balance before then means less indexation is added.
HELP indexation is usually lower than credit card or personal loan interest. If you have those debts, it often makes sense to pay them off first.
6. Buy work-related equipment you need
Is there work-related equipment you have been putting off buying?
Your tax refund could help cover the upfront cost of items such as tools, a computer, office equipment or other assets you need for your job.
If an eligible work-related item costs more than $300, you generally claim its decline in value over its effective life. The sooner you buy it in the financial year, the more you can usually claim on your next tax return. If you only use the item partly for work, you can only claim the work-related portion. Only buy what you actually need for work.
Remember: a deduction gives back part of the cost at your tax rate, not the full price but it can be helpful to add it onto your next tax return to save some tax. Etax can make it simple for you and work out your depreciation when you do your tax return.
7. Build an emergency fund or prepare for upcoming bills
Sometimes, one of the smartest ways to use your tax refund is simply not to spend it yet.
Unexpected expenses like a car repair, dental bill or broken appliance can quickly put pressure on your budget. Your tax refund could give your emergency savings a useful boost.
You could also put some money aside for expenses you know are coming later in the year, such as:
- car registration and insurance
- council rates
- school costs
- annual memberships or subscriptions
- home and car maintenance
Planning ahead makes these bills easier to manage. It also means you’re less likely to put them on a high-interest credit card.
Should I save or spend my tax refund?
There is no right answer for everyone, but even small amounts can really add up over time.
For example, if Edward saves a $2,000 tax refund each year from age 25, and earns 4% interest, he could have nearly $200,000 by age 65*.
| Edward’s Age | Saving $2000 per year |
| 25 | $2,000 |
| 35 | $26,973 |
| 45 | $63,938 |
| 55 | $118,657 |
| 65 | $199,653 |
Your result will depend on interest rates, fees and how long the money stays invested or saved. The example shows how regular saving and compound growth can turn an annual tax refund into a considerable amount of money in the future.
Before putting your refund into savings, check whether you have high-interest debts to pay off first.
*This example assumes a 4% interest rate, compounding annually. It is an estimate only and doesn’t account for tax on interest or inflation. Actual results will vary depending on interest rates, fees and other factors. Try the Moneysmart compound interest calculator to test your own numbers.
Read more about how to save a million dollars
Think before spending your tax refund
Before spending your refund, pause for a moment. Could it make a bigger difference by paying down debt, boosting your savings, or covering a bill you know is coming? If your finances are on track, it’s fine to set aside some of your refund for something you enjoy.
Frequently Asked Questions
It depends on your situation. For many people, paying off high-interest debt and building an emergency fund comes first. After that, you could put your refund towards your mortgage, make a voluntary HELP repayment, top up your super or save for a future goal.
Saving your tax refund is a good option if you don’t need the money immediately. You could add it to an emergency fund, put it towards a savings goal or keep it in a high-interest savings account or term deposit.
If you have high-interest debt, such as a credit card or personal loan, using your tax refund to reduce the balance could lower the interest you pay. Start with the debt that has the highest interest rate.
Yes. You can make a personal contribution to your super using your tax refund. You may be able to claim it as a tax deduction, or you may be eligible for a government co-contribution of up to $500 instead. Contribution caps and eligibility rules apply.
Yes. You can make a voluntary HELP repayment using your tax refund. Voluntary repayments reduce your debt but won’t replace any compulsory repayments you may have to make, based on your income.
Yes. However, buying something for work does not automatically make the full cost tax deductible. Eligible assets that cost more than $300 will generally need to be claimed over their effective life. Plus, you can only claim the portion you use for work.
No. A standard tax refund generally returns the tax you overpaid during the year, so you don’t need to declare it on your next tax return. It’s not the same as receiving an extra wage or payment, so it’s not considered extra income.
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