As the current financial year draws to a close, Australian workers have good reason to celebrate. In return for a few hours spent preparing our tax returns, eight out of ten workers expect to receive a tax refund, with the average amount likely to be around $2,317 per person. It’s a handy lump sum but the interesting part is how we plan to use the money.
According to Bankwest’s ‘Taxing Time’ survey, 81% of Australian tax payers anticipate getting some money back from the Tax Office. Only 6% expect to pay tax and 13% reckon they’ll break even.
Among those expecting a refund, the average amount due is $2,317. Almost one in two people plan to use their refund to pay off some debt – which is great if you can do it - while some plan to save, and others intend to spend their refund simply meeting basic living costs.
However 18% of workers say they will use the cash to treat themselves to something special – typically a holiday or electronics.
It’s always tempting to use a windfall like your tax refund to indulge in some retail therapy. However a few smart strategies could see you get considerably more value from your tax refund.
If you have a home loan it’s worth using your refund to make an extra payment. On a mortgage of $350,000 charging 7.0% interest, tipping the average refund of $2,317 into your loan could cut up to $9,912 off your overall interest bill. It’s an easy way to more than triple the value of your refund.
If you planning to save the refund, try depositing the money into one of the online savers currently paying over 6% interest. Add an extra $50 each week and after just three years you could have a nest egg worth $11,314. Check out websites like RateCity and InfoChoice for details of the savings accounts paying the highest returns.
Or, you could use the money to boost your retirement lifestyle. Let’s say for example that a worker currently aged 30, contributes the average tax refund of $2,317 to their super fund. We’ll assume a ‘balanced’ style of fund delivering average annual returns of 7.5%. By getting into the habit of contributing a refund of this size into his or her super fund each year, our hypothetical worker could have an extra $91,208 in super by the age of 60.
To see how much you could benefit by using your refund to reduce debt, start a savings plan or build an investment portfolio, take a look at the range of online calculators available. The government’s new Money Smart website at www.moneysmart.gov.au is a good starting point.
Do remember, you tax return must be lodged by 31 October 2011 if you’re preparing your own return. You could have up until May next year if you use a registered tax agent.
Paul Clitheroe is a founding director of financial planning firm ipac, Chairman of the Australian Government Financial Literacy Board and chief commentator for Money Magazine.