Best ways to use your tax refund
Many people will be getting improved tax refunds because of the final enlarged low and middle income rebate – paying a bonus $1500 for taxpayers from $48k to $90k, and part of that all the way up to $126k in income. Best to use it wisely as we’ll be less thrilled with 2023’s result!
So what are some good uses for a tax refund?
Repay non deductible debt. This could be a credit card or even a principal residence home loan. You get rid of the most expensive debt first, but repaying a home loan, or adding to your offset account, is also very worthy at a time when interest rates and minimum repayments are rising. Creating a buffer at this time is very prudent.
Place funds in an offset account against a tax deductible debt. Doing this will reduce the interest on the loan (which is tax deductible), but if you have no non deductible debt, this is still worth doing, again to create a buffer for interest rate rises. Additionally, by using an offset account rather than repaying the loan, you can readily pull the money out for an emergency or new car or whatever, and the interest expense will bounce back and be still fully tax deductible.
Invest in Super. Subject to the annual tax deduction cap of $27500 for contributions by you and any employer, this saves anyone with an income exceeding $23k p.a. The higher your marginal tax rate, the greater the saving (subject to you not exceeding $250k in total income). Super will save you upfront, and then the earnings in the fund will be taxed at no more than 15% on ordinary earnings and 10% on long term capital gains – a fraction of the tax if you held the assets in your name. After age 60 and retirement, it comes out the other end tax free (subject to a $1.6m cap per person for assets). Using last year’s tax refund to do this will enhance next year’s refund, that will otherwise be potentially falling with the removal of the $1500 per person rebate.
Fast track a home deposit for a first home. The Federal Government’s First Home Super Saver Scheme allows for the tax efficient accrual of up to $50k per person…https://www.ato.gov.au/individuals/super/withdrawing-and-using-your-super/first-home-super-saver-scheme/
Make a charitable donation. There are plenty of people and causes that need our help, and this contribution is a feel good way of also boosting next year’s tax refund.
Start or add to non-super investments. Markets have bounced a little but are down on levels seen last year, so you may be picking up investments at a good price. Compound returns are the only readily available magic in investing, but it requires you to invest early and stay with the routine. If you added every year’s refund to such investments, that in combination with compound returns will be a valuable asset in retirement, all with money you didn’t have all year so may be unlikely to miss.
Start private health cover if you don’t have it and earn more than $90k as a single person or $180k as a couple. Private health is expensive, but so is the Medicare Levy Surcharge for taxpayers who earn more than these thresholds and don’t have it. A tax refund can be used to take the sting out of initial repayments, and then your future refunds will be better now the surcharge becomes history for you.
A down payment on renovations or improvements. Property prices are weak, and renovation costs aren’t. That said, adding value and amenity to where you live or what you rent out, can be accretive to your happiness or your rental income.
Plenty of opportunities, now let’s go to work on legitimately maximising your tax refund!