It's going to be a long time between drinks so make the most of your tax refund.
- Money’s Income Tax Calculator will work out how much tax you pay - and what’s left over
Although this requires filing a tax return – which a survey by BankWest likened to being worse than having dinner with the in-laws but better than going to the dentist – it also found the average refund is expected to be a bit over $2000.
Most of those surveyed also said they'd either save at least some of it or pay down debt, not that I believe them.
Besides, what might have seemed obvious a few years back has been compromised by our low-for-longer interest rates.
Unless it's tucked away in a tax-proofed super fund, for example, a term deposit barely keeps up with inflation and you'd be treading water at best.
Paying down debt gives a good safe return since the interest you save can't be taxed. And that saving is as real as an interest payment on a term deposit even if it doesn't pop up as a credit on your bank statement.
With an outstanding credit card balance then it's a no-brainer that paying it off is the top priority. And please don't say you have a savings deposit which makes up for a credit card debt. Paying the card off is the best form of saving of all.
On a typical credit card you'd need a whopping 31 per cent to get the same bang for your buck. Or even more if you're in the higher tax brackets.
If you're getting that I'd love to know where.
But paying off the mortgage? I'm not so sure any more, unless you're a first-home buyer or know you're over-committed.
True, it's risk-free and if you put it in an offset account rather than straight on the mortgage you have more flexibility than the alternatives because it's easy to get the money back out again.
On a mortgage rate of 4.5 per cent – if you're paying much more ask your lender why – the equivalent return if you invested the money is at least 5.7 per cent and as high as 8.5 per cent once you've paid tax.
Hmm, sounds like a job for super. You could just send your refund off to your fund as an ordinary contribution and who knows what it might have grown to after 40 years. But you miss an extra tax break.
Instead salary sacrifice the same amount into a middle-of-the-road or growth fund, depending on your age, and use the refund for your everyday expenses. But remember there's a limit on how much you can put in: $30,000 or $35,000 if you're over 50.
This saves you tax because you're paying 15 per cent instead of your marginal rate, and if you're on a borderline bracket it might reduce the rate on all your income. Once in there earnings are also taxed at only 15 per cent which is the real secret of super. It lets your money compound – not that you have any choice since you're not allowed to take it out for a working lifetime – in a very tax-friendly place.
But tax breaks, aside, what would you earn in super? The average super fund aims for inflation plus 4 per cent, which would be 6 per cent a year.
Whether that's reward enough for tying your money up for decades only you can answer. It's not made any easier by not knowing whether, or rather when, the rules will change yet again. Sorry, can't help you there.
In any case, salary sacrificing to super is undoubtedly the best strategy for older, higher income-earning taxpayers.
Swapping a tax rate of 47 per cent for 15 per cent on its own leaves you with 60 per cent more to invest than, say, making a mortgage repayment.
But for younger, lower income earners paying down the mortgage or, strange to say, the exact opposite route of gearing – borrowing to invest – will be better than the financial straitjacket of super.
At low interest rates gearing is affordable, and your tax refund might help with the deposit, and gives you a head start because more is invested upfront.
And don't think it has to be negatively geared into property either. You can also gear into shares, which give you the bonus of a 30 per cent tax break on franked dividends, though you'd be taking a much bigger risk with a margin loan.
But a drawback with gearing is that you have to pay capital gains tax when you sell it, hopefully when it's also worth the most.
Incidentally there's probably more prospect of reducing the capital gains tax concession than of reining in negative gearing.
