OVER the next few weeks, a lot of readers will be receiving tax refund cheques from the Australian Taxation Office. According to the ATO, the average refund issued between July 1, 2012, and August 20, 2012, was $2217 - not a small amount.
I want to make a point here: a tax refund is not a lucky windfall. It is the government acknowledging that you overpaid. This money was withdrawn from your finances during the year and now it has to be reinserted. But how and where?
It's not a bad question and one that depends on what life stage you're going through. Here are some tips that, depending on your age, will help you put your return in the right place.
First job or tertiary student
Put your return into debt reduction or into a high-interest account. At this age, most youngsters have their first credit card and if the balance on it is getting close to the max, a tax refund should be applied to it.
If your credit card is looking OK, you should make this money earn more money, but you won't want it locked away for the six months or a year that most bank term deposits operate on. There are high-interest savings accounts that allow you to take out the money when you want, but check the fine print: many will lure you with a high-interest rate but the headline return will drop once your money has been in there for four to six months. If you want flexibility and a high return, make sure you are getting both.
If you are locked into saving a deposit for a house, a tax refund is best placed in your high-interest savings account, so long as you don't have significant credit card debt or a high-interest car loan. For example, if you are paying 15 per cent for your cards, and only getting 5 per cent in your savings, perhaps use the tax refund to control your debt.
In most variable-rate mortgage accounts, once you've been paying it for 18 months or more you are starting to pay-down principal as well as interest. So paying lump sums into the mortgage can noticeably speed the pay-out timeline. Financial websites such as ybr.com.au and moneysmart.gov.au have calculators that show how much faster you pay the mortgage - and how much you save - by putting lump sums into it. But there's no point doing this in most fixed-rate mortgages and many variable-rate home loans won't allow you to put in lump sums or pay out early.
So make sure you check your mortgage first.
Mortgage payers with kids
People with a mortgage and kids have so many competing priorities for a windfall that there could be 20 places to put a tax refund cheque: kids' school fees, Christmas presents, mortgage, credit cards, electricity bill or the deposit on a much-needed new car.
For people in this situation, you already know where the money has to go. My advice is to not let it be absorbed into the general bank account: tag the money and make it work for you. And if you're stressed and overworked, then seriously consider putting that tax refund into a holiday.
Business owners have a choice of how to spend their tax refunds. You can reinvest the money straight back into your business or use it to pay down personal credit card debt or mortgage balances (depending on where the refund accrues).
Many business owners use tax refunds to catch up with their quarterly BAS payments or their year-end bill. Either way, a tax refund shouldn't be squandered.
Mostly, people in their 50s are still working and paying mortgages but they are also preparing for retirement. People in this phase of life could top up their superannuation, having first checked with an adviser about the benefits of doing this and what the latest rules are. Or, a tax cheque could be placed into a high interest-bearing account, or could be used to buy high-yielding shares (that at least deliver dividends). In your 50s, your mortgage might be within reach of being paid out, in which case, putting a tax refund cheque into the mortgage is a good bet.
In retirement, investors are generally looking for very stable, high-yield places to put their money. If you are retired - and also lucky enough to have a tax refund - make sure your electricity bill is under control and then have a look at tucking some of the cash away in a high-interest account.
There's no point in banking this cheque in your bank transaction account - you'll be receiving either zero interest, or an interest rate so low the monthly account fees wipe it out. Once in retirement, you are exposed to inflation risk - the risk that inflation reduces the value of your savings faster than your yield can enhance the value. So, look for high yields, high stability and good access to your funds.
Mark Bouris is executive chairman of Yellow Brick Road Wealth Management, ybr.com.au. Follow Mark on Twitter at @markbouris.