For many of us, getting our tax return registered with the ATO is a key priority for the first few months of the new financial year.
After all, if you’re employed, the chances are you’ll get a nice refund after you’ve added up all of your deductions for the year just gone. Money spent on new equipment for your home office, education to enhance your career and business-related travel (among other things) can quickly add up.
And, when that refund lands, it’s tempting to splash out. Maybe a new outfit.
Or a new widescreen TV.
Or how about a week away in the sun to shake off those winter blues?
But given the escalating cost of living, rising interest rates and the general global economic uncertainty, it’s probably smart to take a step back and look at where that ATO refund could have the biggest possible impact.
“If you’re used to spending all of your annual tax refund, then rather than a 100 per cent splurge, an option could be to save half and spend half,” says Ryan Sealey, Financial Adviser at Fennell West.
“As the years go by, we can dial that ‘splurge’ percentage down until we get to a point where we save all of it. But you don’t need to get there straight away!”
So, what could you do with your tax refund that might have a better long-term impact than that new Ultra 4K you’ve been eyeing up?
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Build a cash buffer
In terms of what to do with that refund, Ryan suggests that building up a buffer of cash savings is the first step for everyone.
“It’s important to have an emergency fund for if and when you need it,” he says.
“After all, you never know what’s going to happen – you could lose your job, you could have a large unexpected bill – and having that security there is invaluable.”
How much of an emergency buffer you need will depend on your personal circumstances. For some, it could be $5,000. For others, it might be $50,000.
“If you own your home, that money can just sit in an offset account or redraw facility so you’re saving that interest on your home loan every month,” says Ryan.
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Put it into super
If you’re not concerned about keeping your tax refund accessible, you could put it into super. Getting into the habit of doing that over the years could have a significant impact on your retirement savings.
This could be particularly useful if you are paying insurance premiums from your super.
“Tax-effective contributions to super to meet insurance premiums can prevent your super from being eroded over time while also saving income taxes and getting you a higher tax refund at tax time,” says Ryan.
“While many people would only invest it in their super closer to retirement, the tax savings are far greater if contributed correctly to super than the interest savings on the mortgage, or investment returns on an investment portfolio.”
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Invest it
If you want to keep your refund accessible but increase the potential for it to work hard for you, then investing it is another option to consider.
“This is where the investment advice conversations kick in around risk and return, long-term compounding benefits and the logic behind adding the tax return to the investment portfolio,” says Ryan.
If you plan to invest your return, it’s smart to get some professional advice so you can decide if it’s the right strategy for you.
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Prepare for what could come…
We’ve all seen the Reserve Bank of Australia (RBA) lift interest rates over the past few months, with lenders following suit.
Mortgage payments are increasing, and Ryan says, given further rate rises are on the horizon, it would be smart to put your tax refund to one side to help soften the impact of any increase.
“Almost every lender is increasing their mortgage rates, so if you have a variable mortgage, your repayments will have increased,” says Ryan.
“The reserve bank expects to make further increases leading up to Christmas, so parking this year’s return in savings could be a good call.”
So, in short, it’s well worthwhile pausing for a moment when that tax refund comes through and looking at how you can best use it in the short, medium and long term.
Of course, if you need any advice, Ryan and the team at Fennell West are here, ready to help.
