How to max your tax refund

Money and Life
(Financial Planning Association of Australia)

Expecting a refund from your 2017/18 tax return? 77 out of 100 Aussies are likely to get one and many could already have plans to spend it. If you’re one of them, find out how to treat yourself right with your windfall and be better off for good.

For most of us, tax refunds rarely come as a complete surprise. In fact, sometimes we might even be using the ATO as an unofficial savings account, knowing we’ll get a quick cash windfall to reward ourselves for getting all that paperwork together and lodging a return.

But treating this entire cash windfall as a reason to go for broke on booking a holiday, or spending up a storm will only boost your quality of life in the short-term. Instead, think about using just a small chunk  – say 10% – for a one-off mini-splurge on shopping or entertainment and look at channelling the rest into a meaningful financial goal that could bring you psychological and lifestyle benefits for a whole lot longer.


Goal 1. Escape your debts

Holidays are definitely seen as a way of escaping day-to-day living and the stress that comes with it. But if you really want to invest in living a stress-free life, a holiday from your debts could see you reaping the benefit of a tax windfall for much longer.

As a country, we’re no strangers to personal debt. Figures from ASIC put the total for our personal credit card balances at $45 billion, with 1 in 6 Australians struggling with their share of this amount[1]. By directing some of your refund towards clearing your credit card balance and other personal debt or even getting ahead on your mortgage payments, you’ll be saving yourself the stress of having these debts on your mind, as well as future interest you’d have to pay otherwise.

Find out more about managing debt.


Goal 2. Be ready for the unexpected

The latest Household Financial Comfort report from ME Bank for August 2018 highlights  a rise in the number of households dipping into their savings just to cover living costs. According to consulting economist for ME Bank, Jeff Oughton “Comfort with short-term cash savings was the most notable component of the Household Financial Comfort Index to decline, seeing a 3% decrease to 4.93 out of 10 during the first half of 2018 – its lowest level in a couple of years.”

As wages have flatlined in recent years, it’s not surprising to learn that savings levels are suffering. And this has some serious implications for our financial wellbeing. According to the 2018 Australian Financial Wellbeing report from ANZ, our financial wellbeing score slumps from an average of 59 to 34 when we have less than $1000 in savings. So if you’re among the 22% of Australians who have no savings whatsoever[2], putting that much aside from your tax refund for a rainy day is a great way to boost your financial wellbeing and resilience.

In an ideal world, you’d have an emergency savings buffer of three months’ salary to stop you reaching crisis point if you were to lose your job or become unable to work due to illness or injury. But unless you’ve been paying way too much tax in the last financial year, chances are you won’t have this much to add to your stash. Instead, you could put your mind to adding to your $1k savings little by little in the next 12 months, by being smarter with your budget and cash flow.

Need more help to save, check out these posts:

Psych yourself into saving

Budgeting apps to help you save

Save on your 3 biggest expenses

Savings and budget checklist


Goal 3. Future proof your finances

When it comes to savings, it isn’t just the rising cost of living that Aussies are up against. Not only is life getting more expensive overall, we can expect it to last longer too, with life expectancy continuing to rise. That means we’re going to have to make our retirement savings last longer, which you can do by being prepared to lower your living standards in retirement or by saving more now.

Putting a lump sum – like your tax refund –  into your super can help you do this with less impact on your cash flow and standard of living. It’s also a highly tax effective way to invest money as your investment earnings and capital gains in super benefit from lower tax rates. The only drawback is that you can’t access it until you reach your preservation age or meet a condition of release.

If you want to save even more on tax in the coming financial year, salary sacrificing into super could be worth exploring. It’s another way to get more into your super without taking as much out of your current cash flow. It can also help you make more predictable, steady progress towards saving for your ideal retirement, rather than relying on the occasional lump sum boost from a tax windfall.

Eager to get a better handle on your super? Check out these posts:

Super- so what?

Is your super working for you?

5 reasons to save for retirement

The real cost of retirement


Goal 4. Realise your wealth potential

If you’re already well across steps one to three, head straight to the top of the financial capability class and start thinking about your investment portfolio. How much you’ll want to invest and in what assets will depend on lots of things, including your investment timeframe, your risk profile and your current level of knowledge.

When you’re just getting started in the world of investing, a CERFTIFIED FINANCIAL PLANNER® professional can get you on the right track with a discussion about your investment goals and strategy.

Learn more about investing by checking out these posts:

Key investment concepts

An investment checklist

Should your investment journey start with property?

Investment 101

In announcing their new financial capability initiative and website last month, the federal government are showing their support for helping Australians make better financial choices. They’re concerned by the fact that 1 in 3 Australians find dealing with money stressful or overwhelming and would like to see the current financial capability score for Australians of 59 out of 100 get a whole lot higher in years to come. If you’re among the 1 in 3 feeling stressed about money, maybe it’s time to take that tax refund and use it to make smarter decisions that will support your financial wellbeing in the coming year – and beyond.

Want to make better choices for your financial wellbeing? A CERTFIED FINANCIAL PLANNER® professional can help you weigh up priorities and allocate any extra money to bring you the maximum benefits, for now and the future.

 

[1] ASIC REP 580 Credit card lending in Australia, 4 July 2018,https://download.asic.gov.au/media/4800801/asic-credit-card-infographic-4-july-2018.pdf

[2] Financial Wellbeing: a survey of adults in Australia April 2018, page 8, “22% of Australian respondents didn’t have any savings.” https://financialcapability.gov.au/files/anz-financial-wellbeing-summary-report-australia.pdf

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Categories: Tax