Why big tax refunds are a bad idea

GETTING a large tax refund means your money probably isn’t working as hard for you as it should. This is what you need to do.

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ARE you looking forward to a big tax refund this year? Well, you shouldn’t.

That’s because a tax refund is effectively a free loan from you to the Australian Taxation Office, often for more than a year, and there’s a simple way to get that money back much earlier.

Many Aussies love the idea of a large refund late in the year, and LifeSherpa founder Vince Scully says his claims that tax refunds are bad news “get a lot of puzzled looks from people”.

“The reason I think it’s bad is because you are in effect lending the tax office money and they don’t pay you interest on it.”

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There are better uses for your money, especially if you’re among the millions of Australians with credit card debt charging about 19 per cent in annual interest. “A $1000 tax refund is probably costing you $190 a year in credit card interest,” Scully says.

“The tax system is designed to get most people a tax refund — 80 per cent of taxpayers get one. Only 14 per cent of them are greater than $4000 — the bulk get somewhere between $1000 and $4000.

Getting a tax refund is bad is because you are lending the tax office money and they don’t pay you interest on it.

“Thirteen per cent have to make a payment and for half of these it’s less than $2000.” Scully says this is the target you should aim for — a small tax bill — but be careful that it doesn’t blow out into a big one.

Getting your money back earlier requires you to apply to the ATO for a PAYG withholding variation, which compels your employer to tax less tax out of your wage every pay period. It can be done online at ato.gov.au, and you’ll need to give them your pay office’s contact details.

The ATO says the processing time for a PAYG withholding form is within 28 days for online lodgement or within 56 days for paper forms.

“If the application is approved, the varied rate or amount of withholding will start from the next available payday after your pay office receives the notice of withholding variation from us,” it says.

For more information you can phone the ATO on 1300 360 221.

Scully says people who benefit most from ATO withholding variations are workers who receive allowances for tools, meals or cars, rental property owners (“which is one in five taxpayers”), people with investment loans and business owners.