The good, the bad and the tax refund

We all know that taxes are one of life’s most unwelcome certainties. However, although we tend to think negatively about anything that takes away a portion of our hard-earned cash, there are times when lodging a tax return can put a smile on our face – that is, when it's followed by a ‘tax refund' from the ATO.

When the tax refund hits our bank account, often our first instinct might be to buy that new electrical appliance, or to hit the shops to splurge on that new outfit. But before we blow it all on an impulse purchase, it's a good idea to pause and consider if a lump sum - even one that’s only a few hundred dollars - might be better spent on things that can add more life-long value.

It’s easy just to write a tax refund off as a windfall. But if you blow the lot on clothes or electronics then you're more than likely handing some of it straight back to the government in the form of GST and customs duties.

However, there is another way. Remember, you've earned that money just the same as anyone else. So by looking a little further over the horizon, you could spare yourself some future frustrations and the likelihood of buyer’s remorse – knowing that you’ve invested in something more lasting and rewarding than just an impulse purchase.

So instead of seeing your tax refund as a guilt-free extra, think of it as a special, ‘once in a year’ opportunity to build for your future without having to sacrifice your current income or lifestyle.

Breaking free of debt

A smart way to use your refund could be to reduce your high-interest bearing debt accounts like credit cards, personal loans and mortgages.

Being in high levels of debt can be very expensive – not to mention stressful. The longer you owe, the more you’ll pay on interest and additional servicing fees. By focusing on paying off your high-interest bearing debt, you can make real progress towards freeing yourself from one of the biggest expenses you - and most Australians - face today.

If managed properly, we can feel a lot better about ourselves - breaking the negative spiral of rising debt.

This is where the lump sum of a tax refund can make a lasting difference. For instance, using a $1,000 tax refund to pay off a credit card which charges 15.75% interest can save you almost $160 in interest, in the first year alone. But more importantly, it could help to reduce your credit card debt a lot sooner!

Magnifying your returns

It might also be worth thinking about putting some or all of your tax refund into your super fund.

For instance, under the current super co-contributions scheme, if you earn less than $31,920 pa, the government will double your after-tax contribution (up to $1,000) into your super fund – giving you an instant 100% return on your investment in the first year alone!

To find out more you can visit the ATO website at ato.gov.au or simply call us and we’ll help to make sure you make the most of your super and your tax refund.

If you’ve already submitted your 2009/10 tax return, this could well be the time you get back some of the money you've paid out over the course of the financial year. If you haven’t, then remember that the end of October is the ATO’s cut off date for individual returns without an accountant.

Want to get more out your tax return?

As everybody’s circumstances are different, it’s best to meet one-on-one and go through your specific circumstances and goals. A short meeting could be the difference between a good and bad return on your hard-earned money.

So to ensure you’re getting the most of your tax return, call us today.

What you need to know
Information current as at September 2010.  This article contains general information only. It does not take into account your objectives, financial situation or needs. Please consider the appropriateness of the information in light of your personal circumstances.  If you decide to purchase or vary a financial product, your financial planner, our practice, AMP Financial Planning and other companies within the AMP Group will receive fees and other benefits, which will be a percentage of the premium you pay and/or the advice fee you agree with us.  Further details are available from your planner or AMP Financial Planning Pty Limited, telephone 1300 157 173.