Bonus Tax Refund effectiveness!

Just received your tax refund? Have you just found out you are due for a sizable tax refund? If you want some ideas how to use it to add value to the surprise windfall you might consider the following info.

australian cash notes of various denominations, rolled in separate bundles

Tax refund bonus?

Why do you get a tax refund? Whether you planned it or not, it is because more tax was withheld during the year than was finally required to meet your obligation to the tax man.

Was that your plan?

If not, check to see what happened with your tax return information: was it correct? If it was, there was a deduction claimed that was for a higher expense than you had expected at the start of the year; or you may have been under-employed for part of the year. If either of these cases applies to you, see what is recommended below.

If on the other hand you did work to a plan to ensure a high refund would be paid to you, ensure that you apply it in the way that you originally intended.

Some possible scenarios (and the appropriate way to deal with them) are –

  • Income protection insurance premium claimed as a deduction: use the amount ‘saved’ (in tax) to offset the ongoing cost of the premium.
  • Incurred a loss on an investment (rental property, investment portfolio etc – negative gearing) because of interest cost of a loan to invest: use the amount ‘saved’ to pay down part of the loan or some of the interest for the new year.
  • Claimed high medical expenses that resulted in a rebate: use the amount ‘saved’ to rebuild the savings depleted by paying for the medical care (or to help buy Private Health Cover if you don’t yet have that in place).
  • Requested extra tax withheld throughout the year: presumably with a plan in mind – ensure that the amount saved is allocated to the area planned (car/ holiday/ home savings account perhaps?).

a recycled jar labelled 'savings' and containing coins‘Jam-jar’ saving/ accounting like this might seem ‘old hat’ – but try it and you will be surprised at how much further your tax refund will go! You’ve lived without the money throughout the year, allocating it wisely when it comes back won’t put a strain on your pocket either.

Can you suggest other ways to ‘invest’ your tax refund effectively?

Some other tax tips –

[Self-lodged personal tax returns should be lodged with the ATO by 31 August: act quickly to avoid being fined!]

[To allocate the correct amount to each of the above can be tricky: a ‘reasonable’ way to approach this is to use the average rate of tax you paid during the year. To calculate that rate, check the notice of assessment for the item ‘Assessed tax payable’, divide that figure by the figure shown as ‘Your taxable income’ and that will give you a rate that could be say 0.215. If the refund amount was $600; and the premiums paid during the year and claimed as a tax deduction for your income protection insurance was $1,000, then the amount to set aside on this account, is $1,000 x 0.215 = $215.]

[Tax deductions are allowed for Income Protection Insurance premiums paid during the year.]

[A recently published article: Make your tax windfall work]

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