Receiving a tax refund is the perfect chance to spend your hard-earned money on something you otherwise could not afford before.
However, while treating yourself is certainly an option, putting your tax return to work is just as worthwhile. You could make personal contributions to your super or mortgage, chip away at your personal or credit card debts, or establish an emergency fund to brave a rainy day.
Here are some ways to make the most of your tax refund.
Key takeaways
- Spending your tax return wisely can help improve your financial standing in unexpected ways.
- Effective ways to put your tax return to work include repaying your existing debts, starting an emergency fund, and topping up your super.
- Maximizing your tax return can even help reduce the amount of interest you pay on your existing debts.
Add to Your Super
Depending on your age, topping up your super might be low on your priority list. But it’s a great tax filing tip to keep in mind. Making personal super contributions, while you’re young, gives your savings more time to grow and leaves you with a larger nest come retirement time.
Also, if you make enough personal non-concessional (after tax) contributions to your super fund, then you could be eligible for the federal government’s super co-contribution scheme. This is a tax benefit for low- to middle-income earners, where the government may co-contribute up to $500 to your super fund based on your annual earnings and how much you contribute.
To be eligible for the super co-contribution scheme, your total income must be equal or lower than the higher income threshold for that financial year. You must also make a personal non-concessional contribution of at least $1,000 to your super fund.
The one downside to this approach is that you cannot access the money you contribute once it enters your super fund.
Pay Off Your Personal Debts
Another great tax planning strategy is to use your tax return to reduce your personal debt.
Personal loans and credit card debt can yield high interest rates, ranging from 15 to 20 per cent p.a. By using your tax return to clear your highest-interest debts first, you can help reduce the total amount of interest you pay.
Let’s say you have a fixed rate personal loan of $5,000. You intend to repay it within 4 years and your weekly repayments are $36 with an interest of 20.5 per cent p.a. This means your total repayment amount would be $7,320, including $2,320 in fees and interest.
What if you made a personal contribution of $2,000 to that same loan? Then, your weekly repayments would drop to $23, and your total repayment amount would be $4,882, including $1,882 in fees and interest. That’s a potential saving of $438 in interest payments alone.
Consolidate Your Debt
Are you struggling to repay multiple debts and cannot afford to wipe them all out at once? A debt consolidation plan is an effective tax planning strategy. It can turn multiple debts, each with their own due dates, amounts, and terms, into a single repayment plan.
How it works is simple: you approach a lender, apply for a personal loan, use the loan funds to pay off your other existing debts, and repay the new loan on a single repayment plan. By consolidating multiple debts into one, you will ideally pay a lower interest rate and enjoy the convenience of one payment.
Unfortunately, some lenders may reject your application if you have low credit. Major banks typically refuse bad credit applications, as they deem the risk of lending to bad credit individuals to be too high.
Companies like Debt Fix take the stress out of debt consolidation by offering practical advice and support. Our specialists listen to your needs, weigh up your options, and recommend debt relief options that suit your individual circumstances.
We also liaison with all parties involved to establish fair and reasonable loan terms. This may help you avoid high interest rates and fees and lower your monthly repayments.
Start (or Boost) Your Emergency Fund
No matter where you are now, whether you have begun a new job, been promoted, or started upskilling, life can throw a curveball. You could lose that job, get demoted, or need to put learning on hold. And when these things happen, what will you have to fall back on?
Having an emergency fund is a surefire way to weather any financial storm. Open a dedicated savings account and, whenever you can, be it weekly, fortnightly, or monthly, deposit money into that account regularly.
Depending on the account terms, you may need to deposit a minimum amount each month to generate interest.
Open an Offset Account
Want to build your savings and pay less interest on your mortgage? Link an offset account to your home loan. You can use the offset like an everyday account. You can withdraw and deposit money at any time. But there’s a twist.
The more money in the offset account, the less interest you pay on your mortgage. When the bank calculates your home loan interest, they factor in the offset account balance. So, if you have a $350,000 mortgage and $25,000 in the offset account, you’ll only be charged $325,000 in interest.
5. Compare Interest Rates and Fees
When consolidating multiple debts into one, make sure you compare interest rates and fees. Settle on the option that gives you the lowest possible interest rates and fewest fees. And avoid options that penalize you for paying off the debt early.
Also, your debt consolidation expert should explain to you, clearly and succinctly, the terms of your debt repayment plan. You should know exactly how much to pay each month, when to pay it, and the length of the repayment period.
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What is the Average Tax Return in Australia?
The average tax return in Australia varies with each financial year. In 2022, the ATO announced that the average tax refund for the 2021-22 financial year was $2,887.
Should I use my tax return to invest in shares?
That depends on how much you’re willing to invest and your investment savviness. Be sure to do your research and make informed decisions. The share market can be incredibly volatile, increasing your risk of major losses.
Is it bad to spend my tax return on luxuries?
There’s nothing wrong with treating yourself as long as you spend within your limits. However, you should be wary of spending money on non-essentials if you’re repaying other debts.