A Finance Expert on the First Thing You Should Do With Your Tax Refund

Tax refund spend

The end of financial year is June 30, and with that comes tax filing and, depending on your situation, refunds. If unexpected, you may not know what to do with it.

“Tax can be an overwhelming topic that can lead people to become disengaged from the process,” says Natasha Janssens, money coach and founder of Women With Cents. “This means they don’t proactively plan their tax return to maximise the deductions they’re entitled to and can forget that a tax refund is, in fact, their own money and not a windfall.”

Recent research by Finder found that of those expecting to receive a refund this EOFY this year, less than half (44%) intended to put it towards saving, with the remainder planning on using it to cover their bills, mortgage, credit card debt, shopping, or holidays.

This is likely a result of the cost of living crisis, says Mark Chapman, Director of Tax Communications at H&R Block, as the realities of the day-to-day family finances mean that the tax refund can easily be swallowed up by basic necessities. Some of the spending we’re doing with our tax refund isn’t wise, he says.

So, what is the best way to spend your tax refund? Ahead, Janssens and Chapman share the answer.

Pay Off Loans and Debt

According to recent research, the average Australian credit card balance is $3,181, and with interest rates typically in excess of 20%, Chapman says there’s a great opportunity for Australians to reduce their debt — and interest bills — when they receive their tax rebate.

“Paying down debt is certainly a smart way to use your tax refund because you immediately see a saving in interest,” he says. “Generally, the best plan is to pay off the debts that have the highest interest rates. Paying off the mortgage should normally be a lower priority because the interest rate is generally a little lower, but it should certainly be considered if you don’t have any other debts.”

Janssens says a tax refund can be a great source of ‘forced saving’, which you can then use strategically to get ahead, financially.

Contribute Towards Savings Goals

Once you have your debts out of the way and you’ve bulked up your emergency funds, it’s time to look toward the future with your tax refund, says Janssens.

“Do you have any short-medium-term savings goals that you want to contribute toward?” she says. “Alternatively, if you are ready to take a more long-term view, then it can be time to consider boosting your super or investing outside of super, if early retirement is a greater priority.”

Top Up Your Superannuation

“You could also use this year’s tax refund to make a personal contribution into your super fund and thereby reduce next year’s tax bill – or increase the size of your tax fund,” says Chapman.

“Provided the total amount of your contributions, including those from your employer, does not exceed $27,500, this can be a great way to boost your retirement savings and claim a tax deduction for the personal contribution. Don’t forget to advise your super fund that you’ve made the payment by the time you lodge next year’s tax return.”

If you do plan to boost your super, Janssens says there are a few things to consider before deciding whether you’ll make a before or after tax super contribution:

  • Are you likely to exceed the allowable limit for contributions?
  • Are you eligible for a government co-contribution to your super?
  • Do you intend to claim a tax deduction?
  • Will your spouse contribute to your super or split their super with you?

Buy Shares

“If you wish to invest for the medium-to-long term, says seven years or more, then shares can be another option to consider [with your tax refund spend],” says Janssens.

“Doing research on index funds and micro-investing apps can be a great starting point if you are a beginner, as well as checking out information and guides available on the Australian Stock Exchange site.”

You should always take advice from a qualified financial planner before deciding whether to invest in shares and where to put your money, says Chapman.

Invest in Yourself

Finally, Janssens says you give thought to your next year’s tax return and invest in yourself.

“Is there something you can do to boost your income, like undertaking a course of study that would enable you for a promotion, pay rise, or career change?” she says.

“Depending on the circumstance, you may even be eligible to claim a tax deduction for it. Also, review your income protection insurance and consider taking out a policy if you don’t have one in place. Not only will you be eligible for a tax deduction, but you’ll be protecting your biggest asset – you. Keep in mind that you can’t claim a tax deduction for income protection held in super or paid for by your employer.”

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