Tips on how to make the most of your tax refund

I reckon there is a lot to love about tax time and in exchange for a few hours spent working out your income and tax deductions, most working Australians will receive a handy tax refund and there are plenty of ways to put the money to good use.

Retail therapy can be tempting but to give your tax refund some serious grunt, think about using the money to pay down debt.

A survey by comparison site RateCity found one in four people expecting a refund have exactly this strategy in mind, and it’s a very effective way to supersize the value of the tax man’s cheque.

As a guide, using a $2000 refund to make a lump sum payment on a $300,000 home loan could cut around $6843 from the overall interest expense.

Make it an annual habit and you could slash as much as $77,000 off the total cost of the loan and be mortgage free about six years sooner. This calculation is based on a loan term of 30 years and interest rate of 6 per cent.

Another option is to try using your tax refund to pay down an outstanding credit card balance.

Using a $2000 refund to make a payment on a $3000 card debt with a rate of 17 per cent, could see you save up to around $5000 in the interest charges that would apply if you only ever stuck to the minimum card repayments.

Just be sure to avoid reloading the card with fresh purchases once you’ve paid off a chunk. Here’s another idea, try using your tax refund to make a contribution to your super fund.

For a worker currently aged in their thirties adding a refund cheque of, say, $1400 to their retirement savings each year could boost the final value of their nest egg by about 25 per cent.

It’s not a bad result, and if you are a low-to-middle income earner, using your tax refund this way could make you eligible for the government’s super co-contribution.

It’s a no-strings-attached contribution to your fund from the government, and it can be worth up to $500.

To see the difference your tax refund could make to your nest egg by the time you retire, take a look at the superannuation calculator on the government’s MoneySmart website (www.moneysmart.gov.au).

A tax refund can also provide a great incentive to kick start a savings plan. Use a $2000 refund to open a savings account paying 3.5 per cent, add $50 each week and after one year you could accumulate a balance of $4716.

The beauty of a tax refund is that it’s money we haven’t already factored into our budget, making it easy to put the cash to improving personal finances.

Paul Clitheroe is a founding director of financial planning firm Ipac, chairman of the Australian Government Financial Literacy Board and chief commentator for Money magazine. Visit www.paulsmoney.com.au for more information.