Your annual tax refund could be a good time to save, eliminate debt or do something ‘long-term’ for your kids.
This year, before you race off to the shops to spend your tax refund, consider your tax refund could have the most significant impact on your life and your finances.
These clever money ideas could help make you more financially comfortable.
1. Super contribution top-up
According to ASIC, a single person who retires at 65 with a ‘modest’ lifestyle (with annual living expenses of about $23,000) will need $300,000 in today’s money to retire. Those who want a ‘comfortable’ lifestyle (with living expenses of $41,830 per year) will need at least $544,000 to retire.
For most of us, those are big numbers. Boosting your super early on means there’s more time for your super savings to grow.
Just contact your superannuation fund or advisor for advice and learn how to transfer your tax refund into your super fund – your “future self” will thank you when you retire!
2. Buy work-related equipment items that cost over $300 now for a better deduction on next year’s return
If you’ve been holding off on purchasing any big-ticket work-related items like computers, tools and work equipment, using your tax refund could be a good option.
Work-related items that cost you more than $300 need to be depreciated over the “effective life” of the thing. If you buy these items at the end of a financial year, the benefit on your next tax return will be minimal.
But if you buy the item early in the year – July or August – your depreciation calculation will cover more time, and this means a more significant deduction on your next tax return. Your tax agent can help make that simple for you.
Saving your tax refund for your kids could open up more education options in their future.
3. Save your tax refund in a term deposit for your children
You can put aside your tax refunds, year after year, so in the future, you can cover future big-ticket expenses for your children. Save your refund in a long term deposit or another safe long-term, interest-earning investment – later, you can use it for your kids’ university education or their first car.
When your children are older, you can give them a good leg-up without a brutal hit to your wallet.
4. Pay off credit card debt or loans
Do you have a credit card debt or a personal loan you seem to be paying off forever?
Consider using your tax refund to lower your credit card debt or pay it off. Your interest repayments will drop as soon as you reduce your outstanding balance. Once you’re debt-free, start using your money for yourself, rather than contributing to the bank’s profits by paying credit card interest repayments.
5. Put your tax refund into a mortgage offset account
If you’ve got a mortgage, your bank or mortgage provider probably offers a “mortgage offset” option.
A mortgage offset account is a savings account. Instead of receiving interest on your savings each month, your offset account balance is subtracted from your outstanding mortgage loan balance to calculate the interest component of your mortgage payment.
You’ll end up paying less interest on your mortgage, leaving more money in your pocket. You can pay your home loan off quicker and spend less of your money in interest charges, while your offset account balance is still ready for you to use in an emergency.
Saving your tax refund could help you retire quite a lot earlier
That’s not an exaggeration. It’s genuine, especially if you start early. Let’s look at a simple example:
Edward is 25 years old. He gets about $2000 each year on his tax refund.
In 2019, Edward started putting his tax refund into a regular savings account that he set up purely for saving, not spending. He shopped around the banks and funded a statement with the best interest rate. He will repeat that once each year to ensure he’s getting a reasonable rate from the banks. And pretty soon, he’ll shift the money into a term deposit to get a better interest rate while still having access to cash if there’s an emergency.
Let’s see what happens to Edward’s once-per-year savings of his $2000 tax refunds.
Where not to spend your tax refund
Australians spend billions of dollars every month, just staring at a pokie machine or website that’s eating their salary – or their tax refund. Overall, pokies are a sure-fire way to lose money fast.
Aussies are the biggest gamblers globally – partly because we’ve allowed gambling machines to pop up all over our communities and allowed it on the internet. (Many countries have banned or restricted pokies and online betting.) Australians lose around $24 Billion dollars a year – with more than half being fed straight into pokies.
Makers of pokie machines use technology and cognitive science to make you think you’re winning or breaking even, when in fact, you’re losing. Gambling machine vendors are also developing new ways to draw younger generations into gambling. Online betting companies are also hard at work, with new tricks and marketing.
We suggest, if you want to give away your tax refund, give it to a person in need or a charity; you’ll feel happier than you would if you gave all that money to a pokie machine.
An interesting thing about gambling is that it can also be described as an indirect form of taxation. Gambling is legal in Australia, and this may be in part because it is taxed heavily. A large chunk of the nation’s gambling losses goes back into the Government’s coffers. So if you lose your tax refund at betting, it’s a bit like sending part of your tax refund right back to the ATO.
10 Easy Ways to Pay Less Tax
1. Keep Good Tax Records (with the correct method, it’s straightforward)
You need receipts for tax deduction claims, so you can show them to the ATO if they ask about your deductions. These days, the ATO is asking a lot of questions about tax deductions.
Thousands of people miss deductions they could have claimed every year. That’s millions and millions of dollars that the ATO keeps, where people could have got it back in their tax refunds.
Do you keep track of every deduction?
Simply keep track of those receipts – it’s the best way for you to remember everything you can claim. And that means more money in your tax refund.
Record keeping can be easy. Put aside just 5-10 minutes each week to download statements, update your logbooks and put all your receipts into a folder. We guarantee it will save a lot of time at the end of the financial year— and you pay less tax!
2. Charitable donations are tax-deductible
Did you know that every donation over $2 to a registered charity is tax-deductible?
Donating to charity is always a good thing but what makes it even better is that the amount you donate is claimable on your tax return. That is a win-win.
After you donate, you should receive a receipt. Keep it in your tax receipts folder! At tax time, add up the charity receipts and enter the total into the charity donations section of your tax return.
We should clear up about donations: Your contributions do not come straight back onto your tax refund. The amount is subtracted from your taxable income, which means you get a percentage back.
3. Claim everything you are allowed to claim as a tax deduction
Claiming work-related expenses like transportation is a perfect way to increase your tax refund and pay less tax.
In general, if you have to spend money on anything related to “earning your income”, make sure you claim it.
Even if you purchase an item partly for work and partly for personal use, you can still claim the work-related part as a tax deduction.
4. Get Affordable Advice from a Tax Agent
In most cases, using a tax agent or accountant won’t just save you a lot of time; it will also improve your tax refund or net payable.
5. Medicare Levy Surcharge vs Private Health Cover:
It’s essential to maximise your tax refund
If you don’t have private hospital insurance and your income is more than $90,000 for singles or more than $180,000 for families, you will pay a minimum of 1% Medicare Levy Surcharge. That’s on top of the compulsory 2.0% Medicare levy paid by most taxpayers.
A basic private health cover plan can cost less than 1% of your gross income – less than the medicare levy that you’ll pay if you have no insurance – and that’s why private cover may be worth a look. (Plus, personal health cover has some other advantages like shorter waiting times.)
Do your homework before taking out private health cover. Make sure you get outside that’s appropriate for your circumstances and your finances.
6. Manage the timing of your tax-deductible expenses
If you know in advance that you’ll have considerable tax-deductible expenses, you may be able to choose which financial year you purchase them in. That can be important to make the most of your tax deductions right now, especially if you’re a sole trader.
For example, if you have a significant tax-deductible expense and your income for that year will push you up to the next tax threshold, it may be best to purchase your item right before the end of the tax year. This will lower your taxable income for that year and, in some cases, could move you down into a lower tax bracket.
On the other hand, in a year when you take unpaid leave or a break from working, and your income (and tax) is lower, it might be better to delay the purchase of more oversized tax-deductible items until later, when your payment and tax jump higher (so you have more tax to save). This will help you reduce the tax paid on the higher tax bracket and save more money.
Here’s another way of describing this idea: If you need to buy an expensive work-related item and it’s late in the financial year (the financial year is 1 July to 30 June), then accept that item in the financial year when your income will be higher. That helps to maximise the value of your tax deduction (and your tax refunds).
7. Investments affect your taxes
Depending on your finances or circumstances, investing can also help you reduce tax considerably.
However, this is certainly not the case for everyone. Before you decide to invest, speak to your financial planner, who can advise you if an investment will suit you. Remember, the investment should benefit you now AND into the future – there is no point saving a small amount of tax now if a poor investment ends up losing your original capital in the long run.
8. Paying off your mortgage can reduce taxes
In general, you are taxed on your savings (because of the interest income you earn on savings), so if you are an avid saver, you could face a hefty tax bill at the end of each year.
If you are buying your own home, you can kill two birds with one stone by shifting savings toward your home loan instead. You pay down your mortgage PLUS you are no longer taxed on that money. The overpayment is usually still accessible as a re-draw, should you need to use some of the money in the future. However, watching your home loan get lower and lower is exciting, and that can make you think twice before dipping in.
If you need to save money that you have easy access to, you can still reduce your mortgage interest costs by using an offset account.
It’s a good idea to talk to a financial advisor for help planning the best mortgage and personal finance management that suits your circumstances.
9. Adjust your finances with your partner
If you have a partner, it can be possible to adjust your finances between you to optimise your tax circumstances.
For example, if, as a couple, you have shared savings in a short term account, earning some interest, it would be beneficial to invest that money in the name of the lowest income earner because they will pay the least tax on the interest earned on that savings. Your financial advisor can help you make the most of this.
10. Selling Assets? Pay attention to the details
Do you plan to sell an asset that is subject to Capital Gains Tax (CGT)? One of the most common examples is a rental property or a house that has ever been rented out .
If you sell an asset that triggers CGT, there are some things to consider.
How long have you owned the asset? If you have held the asset for longer than twelve months, you may be entitled to a 50% Capital Gains discount. If you haven’t owned the investment for at least twelve months, you will have to pay more CGT.
Does your income fluctuate? If so, you may choose to sell the asset in a year you expect to earn a lower payment, as your capital gain won’t impact your tax liability.
The ways that selling assets can affect your taxes can get a bit complicated – so it’s a good topic where you’d best ask a tax agent for help.