You might have until 31 October to submit your tax return if you are completing it yourself but if you’re expecting a refund then chances are you won’t be waiting that long! According to the Australian Taxation Office, more than 2.61 million individual 2021 refunds had been issued by August 3, totalling more than $6.6 billion with an average refund of $2,521. I don’t know too many people who wouldn’t be happy with having $2,500 hit their bank account.
No matter the amount, if you are likely to get a tax refund this year you will need to make a decision about how to best spend it. Commonwealth Bank’s team of behavioural economists conducted a number of tax time experiments which revealed some interesting insights. One was the importance of planning ahead and pre-committing what you will do with your refund.
“When we think about $3,000 arriving in a month or two, we engage in a very different type of thinking than we do if we have $3,000 put in front of us today. Make some time to think clearly and plan before you experience the rush of that big deposit hitting your account,” explained Commonwealth Bank’s Head of Behavioural Economics, Will Mailer. The pre-commitment element contributed to increased savings behaviours in one of CBA’s experiments.
It’s also a good idea to think about the ways you can act ahead of time to make it more likely you will follow through on your good plans, suggested Mr Mailer. “This might mean you have your tax refund deposited into a difficult to access account, or one without a card attached to it. Separating a deposit into more than one account, can create a type of behavioural speed bump, where we are paused to stop and think every time we empty one account and have to access another,” he said.
To help you resist the urge to spend the money Mr Mailer said it can all come down to how you think about it. “Research shows that we are more likely to save money we consider a rebate, than money we consider to be a bonus,” he told Canstar. So, by labelling your tax refund as a ‘rebate’, you may be more inclined to spend the money more wisely than if you were to consider the refund as a ‘bonus’.
Finally, Mr Mailer recommended you “do the maths”. “Some financial decisions help us avoid lots of interest, fees or hardship later. Others might bring tax benefits or new income streams,” he said.
To help with this, Canstar has crunched the numbers on five different examples to show you how much bang you could get for your refund buck – you could potentially even double your money. Of course, you need to be mindful that these are based on hypothetical scenarios and in some cases past performance but it hopefully gives you some food for thought.
1. Put the money into your super fund
About $36 billion was withdrawn from super funds as part of the government’s COVID-19 Superannuation Early Release Scheme, with an average payment of $7,638 according to statistics from Australian Prudential Regulation Authority (APRA). If you’re one of the 3 million-plus Aussies who took money out from their super, adding in your tax refund could go some way towards closing the gap early access may have on your super balance at retirement.
Even if you haven’t taken money out of your super fund there can still be a financial benefit in adding your tax refund to your super. I asked Canstar to crunch the numbers and they show that a 40-year-old who currently has $61,247 in their super and adds a $2,500 refund to their fund could have $7,756 more in their super at retirement. Keep in mind, though, that adding the money into your super will mean that you can’t access it until you retire.
Impact of putting $2,500 into your super
Gross Annual Income: $74,516
|No Extra Contribution||$2,500 Non-Concessional Contribution|
|Account Balance at Retirement||$551,380||$559,136|
|Difference to Base Scenario Retirement Balance||–||$7,756|
Source: www.canstar.com.au. Prepared on 4/08/2021. Scenario begins at the start of the 2021-22 financial year and is based on a 40 year old with a starting balance of $61,247 (per APRA Annual Superannuation Bulletin), starting gross annual income of $74,516 (per ABS Characteristics of Employment – median employee earnings), and retiring at age 67. SG Contribution amounts per Government announced rates, and are assumed to be paid into superannuation fund quarterly. Employer contributions are assumed to be taxed at 15%. Net investment returns assumed to be 8.14% p.a. based on the average annual 5-year return of balanced investment options available for a 40 year old on Canstar’s database (with returns effective to 30 Jun 2021). Average life and TPD insurance premium of $394.77, is assumed charged at the end of each year based on products available for a 45 year old on Canstar’s database. Annual income and insurance premiums are assumed to increase with inflation each year. Inflation is assumed to be 2.5%p.a. due to the rising cost of living (CPI Inflation) plus a further 1.5%p.a. due to the rising community living standards (per the Moneysmart Superannuation calculator). End balance at retirement is shown in “today’s dollars”, i.e. it has been adjusted for inflation. Please note all information on income and superannuation performance returns are used for illustration purposes only. Actual returns and the value of your investment may fall as well as rise from year to year; this example does not take such variation into account. Past performance is not a reliable indicator of future performance.
2. Add the refund to your mortgage
Another option to consider is adding the refund into your home loan either using a redraw facility or offset account. This is a great way to save interest on your loan and you can still access the money if you need it. As the table below, compiled by Canstar, shows by adding $2,500 into a $500,000 home loan you could potentially save $3,927 on a 30-year loan.
Impact of putting $2,500 into your home loan offset account/redraw facility
|Offset Amount / Extra Repayment at Start of Loan||Total Interest Paid|
Source: www.canstar.com.au – 4/08/2021. Based on the average owner occupier variable rate available for a loan amount of $500,000, 80% LVR and principal & interest repayments, excluding introductory and first home buyer only loans, of 3.16%. Calculations assume a total loan term of 30 years, and that the balance in the offset account is held constant at the specified amount for the entire loan term or that the extra lump sum repayment of the specified amount is made at the start of the loan term.
Compare Home Loans with Canstar
If you’re currently considering a home loan, the comparison table below displays some of the variable rate home loans on our database with links to lenders’ websites that are available for first home buyers. This table is sorted by Star Rating (highest to lowest), followed by comparison rate (lowest-highest). Products shown are principal and interest home loans available for a loan amount of $350,000 in NSW with an LVR of 80% of the property value. Before committing to a particular home loan product, check upfront with your lender and read the applicable loan documentation to confirm whether the terms of the loan meet your needs and repayment capacity. Use Canstar’s home loans comparison selector to view a wider range of home loan products. Canstar may earn a fee for referrals.
*Comparison rate based on loan amount of $150,000 and a term of 25 years. Read the Comparison Rate Warning
3. Pay off your credit card
Credit card debt can be one of the most expensive types of debts. The average purchase rate based on personal, unsecured credit cards on Canstar’s database is 16.85%pa.
Let’s say you have an outstanding credit card debt of $3,998 but are only making the minimum payments. It would take you 25 years and nine months to clear your debt and you’d have paid $7,483 in interest.
Whack the $2,500 refund onto your credit card and you’d save $5,627 in interest, even if you stuck to simply making the minimum repayments after that. You could potentially save even more by making higher repayments.
Paying off the average credit card debt using minimum repayments
|Average Debt: $3,998^
Average Purchase Rate: 16.85%
|Total Interest Costs||Time to Repay|
|No Extra Repayment||$7,483||25 years 9 months|
|Extra Repayment of $2,500||$1,856||12 years 8 months|
|Difference||$5,627||13 years 1 months|
Source: www.canstar.com.au – 4/08/2021. Calculations assume a credit card with the average purchase rate and median minimum repayments of 2% or $20 (whichever is greater), based on unsecured personal credit cards on Canstar’s database; excluding interest-free cards. ^Average credit card debt per RBA Credit Card Statistics (May-2021; original terms), and assumes 40% of personal credit card accounts are revolving a balance and therefore accruing interest, based on the Canstar 2020 Customer Satisfaction Survey (n=5787). Extra repayment scenario assumes $2,500 repayment is made at start of schedule and then minimum repayments are made thereafter.
Compare Credit Cards with Canstar
The table below displays some of our referral partners’ low rate credit cards for Australians spending around $2000 per month. The results shown are sorted by highest Star Rating, then lowest purchase rate, then alphabetically by provider name. Use Canstar’s credit cards comparison selector to view a wider range of credit cards. Canstar may earn a fee for referrals.
4. Invest in an Australian shares ETF
One option to consider is using your tax refund to start investing using an Exchange Traded Fund (ETF) which is a pooled investment option that can be traded on the sharemarket. ETFs tend to be low-cost and most are designed to move in line with an index. This may be the riskiest option though as the money is subject to the volatility of the sharemarket.
Australian shares have returned about 9.83%pa (including dividends reinvested) over the 10 years to July 31, 2021, so I used the compound interest calculator on Moneysmart to find out how a $2,500 tax refund could potentially grow over various periods.
As the table shows you could potentially nearly double your money in seven years and more than double it in 10 years.
Investing $2,500 in an ETF returning 9.83%pa
Source: Moneysmart compound interest calculator
Compare Exchange Traded Funds (ETFs) with Canstar
The table below displays some of the International Broad Based ETFs available on Canstar’s database with the highest three-year returns (sorted highest to lowest by three-year returns and then alphabetically by provider name). Use Canstar’s ETFs comparison selector to view a wider range of products. Canstar may earn a fee for referrals.
5. Spend it!
It’s probably not something I would normally recommend but given the impact of COVID-19 on our economy it could do with a cash injection. There are some caveats – I’d only do this if you have no debt, have an emergency fund in place and can afford to spend the money. If you take this route try to spend it locally or buy Australian-made products.
Cover image source: CreativeFireStock/Shutterstock.com