Top five tips for using your tax refund in 2014

THE deadline for submitting your tax return is this Friday, although many will already have done so. Here’s what you should do with the extra cash.

THE annual ritual of submitting your tax return is about to come to an end as the deadline approaches on October 31 (for those taxpayers who don’t use a tax agent).

Most organised people will have already had it done and dusted and hopefully will have received a tidy sum in return from the Australian Taxation Office.

It’s a sign of a financial year’s hard work done, and a reward for either paying too much tax, or being prudent with your deductions.

However, like a sore thumb, the inevitable question sticks out around how you should use that refund, which for some people could be substantial.

While it’s always tempting to see that money as ‘free’ and use it to buy something for yourself, it’s better to think of the refund as a kind of forced savings — the government is giving you those savings back, and they should be put to good use.

Here are a few ways you could make sure that money isn’t sitting idle, and maybe making some back for you.

1. INVEST YOUR REFUND

Even refund amounts as small as $2000 are enough to invest, whether in shares or managed fund type investments. Any amount, no matter how small, could become the kick-off to your kids’ trust fund. While it’s not enough to begin a sizeable portfolio, wisely investing the amount into one or two stocks could see you benefiting in the long term.

2. PAY OFF YOUR CREDIT CARD AND LOAN DEBT

Minimising the balance on your credit card or loan is another quick and easy way of putting that refund to good use. That way, you can instantly reduce the amount of interest you pay. Even for sizeable balances, putting your tax refund toward those credit card debts and loans can remove the bite from those monthly repayments.

Even refund amounts as small as $2000 are enough to invest.

3. PUT SMALL AMOUNTS IN HIGH INTEREST SAVINGS ACCOUNTS AND TERM DEPOSITS

If your tax refund is too small to invest in shares or in a managed fund, a high-interest savings account or term deposit could be an easy way to make your money work for you over the long term. These can provide returns of between 3 and 4 per cent per annum currently, providing a consistent return six or 12 months down the road.

4. PAY OFF HECS DEBTS WHERE POSSIBLE

For those with small HECS/HELP debts, it would be worthwhile using your tax refund toward paying this off more quickly. If you make a voluntary repayment of $500 or more, you will receive a bonus of 5 per cent. This means your account will be credited with an additional 5 per cent of the value of your payment. If you can pay this off in full, you can stop your employer from taking extra tax out of your pay each period.

However, if you have a large HECS/HELP debt, it may be more beneficial to use one of the other options and continue to pay this off through your employer with each pay cheque.

5. LIVE A LITTLE

If you’ve exhausted the above options, and you still have a little refund left over, live a little! Don’t blow it of course, but using that unexpected windfall towards a small luxury can bring you a little happiness.

Disclaimer: Information provided above is of a general nature and is not intended as advice and does not take into account your personal situation. Please consult your financial and/or tax adviser for specific advice.

James Solomons is head of accounting at cloud accounting software firm Xero Australia