Posted on 01/06/2018
You’ve completed your tax return, sent the papers to the Australian Taxation Office (ATO) and now a sizeable tax refund is sitting in your bank account.
Once your tax return is completed, while it is tempting to spend the ‘bonus money’ from a tax refund on clothes, movie tickets or dining out, this lump sum payment can be pivotal in setting up your financial future.
Mark Hamilton, Head of Financial Planning at Statewide Super^, shares his tips on how to make your tax return work for you, as well as some common mistakes Aussies are making when it comes to their tax.
The triple-zero fund
Every so often life throws financial surprises your way and that’s when a stash of cash – known as an emergency fund – is vital, Mark said. Use your annual tax return to set-up and build your emergency fund.
“Aim to have at least a month’s salary in an emergency fund,” he said. “You can fall back on this money when you’re faced with medical or dental emergencies, car repairs or replacing an appliance.
“Your emergency fund also helps with fluctuating cash flow. Some months we have higher expenses than at other times, so instead of turning to credit and growing your personal debt, utilise your rainy day fund.
“Emergency funds are also important when faced with the reality of being unable to work or when unemployed, as in many cases the waiting period before income protection payments kick in is between 30-60 days.”
Pay off high-interest debt
Over the long-term, high interest debt on credit cards and personal loans can add up significantly.
Mark said a large windfall such as a tax return provides an opportunity to pay off high interest debts.
“In most cases if it’s personal use debt – personal loans, student loans, home mortgage and credit card – there are no tax deduction capabilities on the interest, so pay off these loans first,” Mark said.
Invest rather than spend
Receiving a lump-sum amount of money provides you with the perfect opportunity to start an investment portfolio – even if it starts out fairly basic.
“The earlier you start investing your money, the more you will benefit from the power of compounding returns – where you get earnings on top of earnings,” Mark said.
“Managed funds are a great place to invest your tax return as it gives you great diversification across a number of sectors without needing thousands of dollars.”
Stick it in super
Boosting your super early on means there’s more time for your super fund to grow.
Adding your return to super can be tax-effective and because the money is locked away until you retire, you will reap the benefits of compounding returns over time.
Making an after-tax contribution by using your tax return can be a smart option for low income earners as they may also be eligible for a government co-contribution the following year.
Common mistakes Aussies are making
- Not lodging their tax return on time – you could face fines
- Having poor records - resulting in not claiming things you’re eligible for
- Over claiming and being caught out later – Australia’s tax system is a self reporting process and it’s up to the individual to be able to substantiate their claims if questioned about them later
- Tax isn’t free money – remember that the government isn’t sending you a bonus, but rather money that should have been yours all along – so use it wisely with your long-term financial goals in mind.