Smarter ways to spend your tax return

According to the Australian Taxation Office (ATO) 2017 Annual Report, the average tax refund is $2,574. The majority of people use this small windfall to pay bills, loans and credit cards or make home loan repayments. A much smaller percentage—only 21 per cent— saved it for a rainy day, while the rest spent it on a holiday, a new fridge or TV or other household appliances.

While there is no right or wrong way to spend your tax return, or any sort of bonus income—and of course, it’s dependent on your own unique set of circumstances—there may be some smarter ways to put it to use than others.

Reduce debt stress…

Debts, particularly those high-interest, short term debts, can cause stress, as well as a lot of expense. If you have store cards, credit cards or any other short-term loan, you could use your refund against these, starting with the highest interest loan first.

Investing just one year’s worth of tax refund, could save you over $10,000. And this could work out even better if you were to continue to invest each year’s tax refund.

And the other debts

After those high-interest card and short-term loans, other loans you could think about putting any windfall against includes personal loans and then your home loan. Generally, it’s best to consider starting with the loan with the highest interest rate.

However, everyone’s situation is different so, be sure to check penalty rates for early repayments and to consult your financial adviser before making a decision about the best way to spend your return.

Invest it for emergencies

Depending on your circumstances, creating an emergency fund can be a great idea.

Find a savings account ideally with the highest rate and no ongoing fees and let the magic of compound interest do the rest.

Longer term investments

Other investments you could consider include term deposits, which can earn you a higher rate of interest than a savings account, on the condition that it can’t be accessed for a predetermined time without incurring a penalty.

Mortgage Trusts are another option where your funds are invested in residential and commercial mortgages, or a property trust, which invests your sum directly into property. However, these options don’t guarantee a fixed rate of interest or return of your capital, but often promise a higher reward for this higher risk.

Donate it

For the more altruistic, donating your tax refund may be an option. Not only could you be helping out vulnerable members of our society, but your refund could also pave the way for a possible tax offset the following year.

For a donation to be considered a tax deductible gift or contribution, it needs to meet certain criteria, one of which is that the organisation you are gifting to must be a registered charity or registered not-for-profit organisation. You’ll also need a record of your donation, such as a receipt.

While a small windfall, like your tax return is tempting to spend on a holiday or new household appliances, it may not always be the best use of this money.

If you’re unsure whether your plans for spending your return is the best option for you, it’s best to seek advice from a licensed financial adviser before making any investment decisions.

For more discussions about market insights including tax and savings, head over to the Trilogy blog or learn about return on investment by different investment types.