With the financial year having just ended the words on most people’s lips right now are “How much tax will I get back? “ For many receiving a tax refund is an important part of the annual budget and not receiving it can leave a serious shortfall in finances.

According to the MoneySmart website 84% of all Australian’s receive a tax refund each year, with the average amount being just over $2,100. 29% of people use their refund to pay bills with a further 13% paying off loans and credit cards. 9% pay off a portion of their mortgage, with 21% actively saving it. And only 12% of Australians appear to spend up big on their tax refunds.

What you decide to do with your refund will, to a large extent, depend on just how much it is. A couple of hundred dollars isn’t going to make a material difference to your financial situation however receiving a few thousand just might.

If you haven’t completed your tax return yet an income tax calculator can help give an indication of what you might expect but these seldom provide you with the full picture nor the opportunity to take advantage of all your tax deductions. You will find one at the ATO website.

If your return is completed you’ll already know what to expect. Here’s some suggestions on making the right choice in spending it.

  1. Don’t get tempted to pre-spend. It’s easy to get excited when you know you have money on the way but don’t run out and buy something in advance. You can’t be certain when the refund will arrive and you don’t want to incur unnecessary credit card debt or an overdue account while you await its arrival.
  2. Consider offsetting an upcoming tax liability. With the ATO charging interest rates of between 5% and 9% for overdue taxes it can make sense, particularly for the self-employed who need to manage their cash flow, to stay ahead of your future liabilities. Consider “investing” your refund in an upcoming tax liability – it may just offer a better return than other options.
  3. Assess the reason for your refund. If your refund is quite large and you don’t expect to see your income increase next year then there are options to have your regular tax deductions reduced. Care needs to be taken to avoid interest charges and penalties but it is always better to keep the money up front rather than receive a refund later. Even for those who are employed there can be options to reduce PAYG payments if you are aware of factors that might reduce your end of year tax liability like rental losses etc. Talk to a tax advisor if you feel this might apply to you.
  4. Reduce debt. What is the best return on your money? If you have debt then this could be your priority. Most credit card and mortgage accounts will charge far in excess of whatever return you will get in a bank account, however you need to decide if you can survive without the refund long term. If you feel you need to utilise the money in the foreseeable future it makes sense to keep it easily accessible.
  5. Invest. A lump sum can be just the catalyst to kick-start your savings account or investment portfolio. If you don’t have any investments at present why not use your tax refund as the stepping stone to your future financial security?
  6. Treat Yourself. Even if you have a better use for the funds it makes sense to at least give yourself some allowance for having fun. Set aside a small portion of your refund as a treat to enjoy.

If you’re receiving a sizeable tax refund it makes sense to get good advice on how you should spend it. The options are varied but can also be confusing. If your refund isn’t large then it might be time to ask why not!

Getting the advice of a good financial advisor is a wise step to managing your tax affairs and maximising your tax deductions. Completing your own tax return can be a false economy if you miss out on claims you would otherwise be entitled to.

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The information provided is intended as a guide only and does not take into consideration your personal situation, needs and objectives and should not be considered as advice of any nature.

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