OVER the next few weeks, a lot of readers will be receiving tax refund cheques from the Australian Taxation Office. According to the ATO, the average refund issued between July 1, 2012, and August 20, 2012, was $2217 - not a small amount.
I want to make a point here: a tax refund is not a lucky windfall. It is the government acknowledging that you overpaid. This money was withdrawn from your finances during the year and now it has to be reinserted. But how and where?
It's not a bad question and one that depends on what life stage you're going through. Here are some tips that, depending on your age, will help you put your return in the right place.
First job or tertiary student Put your return into debt reduction or into a high-interest account. At this age, most youngsters have their first credit card and if the balance on it is getting close to the max, a tax refund should be applied to it.
If your credit card is looking OK, you should make this money earn more money, but you won't want it locked away for the six months or a year that most bank term deposits operate on. There are high-interest savings accounts that allow you to take out the money when you want, but check the fine print: many will lure you with a high-interest rate but the headline return will drop once your money has been in there for four to six months. If you want flexibility and a high return, make sure you are getting both.
House savers If you are locked into saving a deposit for a house, a tax refund is best placed in your high-interest savings account, so long as you don't have significant credit card debt or a high-interest car loan. For example, if you are paying 15 per cent for your cards, and only getting 5 per cent in your savings, perhaps use the tax refund to control your debt.
Mortgage payers In most variable-rate mortgage accounts, once you've been paying it for 18 months or more you are starting to pay-down principal as well as interest. So paying lump sums into the mortgage can noticeably speed the pay-out timeline. Financial websites such as ybr.com.au and moneysmart.gov.au have calculators that show how much faster you pay the mortgage - and how much you save - by putting lump sums into it. But there's no point doing this in most fixed-rate mortgages and many variable-rate home loans won't allow you to put in lump sums or pay out early.
So make sure you check your mortgage first.
Mortgage payers with kids People with a mortgage and kids have so many competing priorities for a windfall that there could be 20 places to put a tax refund cheque: kids' school fees, Christmas presents, mortgage, credit cards, electricity bill or the deposit on a much-needed new car.
For people in this situation, you already know where the money has to go. My advice is to not let it be absorbed into the general bank account: tag the money and make it work for you. And if you're stressed and overworked, then seriously consider putting that tax refund into a holiday.
Business owner Business owners have a choice of how to spend their tax refunds. You can reinvest the money straight back into your business or use it to pay down personal credit card debt or mortgage balances (depending on where the refund accrues).
Many business owners use tax refunds to catch up with their quarterly BAS payments or their year-end bill. Either way, a tax refund shouldn't be squandered.
Pre-retirees Mostly, people in their 50s are still working and paying mortgages but they are also preparing for retirement. People in this phase of life could top up their superannuation, having first checked with an adviser about the benefits of doing this and what the latest rules are. Or, a tax cheque could be placed into a high interest-bearing account, or could be used to buy high-yielding shares (that at least deliver dividends). In your 50s, your mortgage might be within reach of being paid out, in which case, putting a tax refund cheque into the mortgage is a good bet.
Retiree In retirement, investors are generally looking for very stable, high-yield places to put their money. If you are retired - and also lucky enough to have a tax refund - make sure your electricity bill is under control and then have a look at tucking some of the cash away in a high-interest account.
There's no point in banking this cheque in your bank transaction account - you'll be receiving either zero interest, or an interest rate so low the monthly account fees wipe it out. Once in retirement, you are exposed to inflation risk - the risk that inflation reduces the value of your savings faster than your yield can enhance the value. So, look for high yields, high stability and good access to your funds.
Frequently Asked Questions about this Article…
I just got a tax refund — what should I do with it?
Treat a tax refund as money you overpaid the government, not a windfall. Where you put it depends on your life stage: pay high-interest debt first, park it in a high-interest savings account if you're saving for a home, use it to make a lump-sum mortgage repayment if your loan allows, reinvest in your business, top up super after checking with an adviser, or put it into a stable, high-yield account in retirement.
Should I use my tax refund to pay off credit card debt or save it in a high-interest account?
If your credit card carries high interest, pay that debt first — the guaranteed saving from eliminating, say, 15% card interest usually beats a 5% savings return. If your cards are under control, consider a high-interest savings account, but check the fine print: many intro rates drop after four to six months.
Is a tax refund a good way to boost my house deposit?
Yes — if you're saving for a home deposit, a tax refund is best placed in a high-interest savings account so it continues to grow, provided you don't have significant high-interest debts that should be paid down first.
Can I use my tax refund to pay down my mortgage?
Putting lump sums into a variable-rate mortgage can noticeably speed up repayment once you’re paying principal as well as interest (typically after about 18 months). But check your mortgage terms first — many fixed-rate loans and some variable loans don’t allow extra lump-sum payments or early payout.
Where should parents with a mortgage put a tax refund cheque?
Parents often face competing priorities (school fees, presents, bills, car deposits). The article recommends tagging the refund so it doesn’t get absorbed into general spending and putting it to the priority you already know you have — whether that’s debt reduction, bills, or even a holiday if you’re stressed and need a break.
What’s the best way for a business owner to use a tax refund?
Business owners can reinvest the refund straight back into the business, use it to catch up on quarterly BAS or year‑end bills, or apply it to personal credit card or mortgage balances depending on where the refund accrues. The key is not to squander it.
Can I use my tax refund to top up superannuation before retirement?
People in their 50s may consider topping up super, but the article advises checking with a financial adviser about the benefits and current rules before doing so. Alternatively, you could place the refund in a high-interest account or buy dividend-paying shares, depending on your goals.
If I’m retired, where should I put a tax refund cheque?
Retirees should avoid leaving the refund in a transaction account that pays little or no interest (and may lose value to fees). Instead, control regular bills (for example, electricity) and tuck the money into a stable, high-yield account with good access to funds, while being mindful of inflation risk.
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