Tax Planning

3 Reasons Reducing Your Tax Refund Makes Weird Sense

Every year Australian Taxpayers lodge their income tax returns and celebrate the refund cheques the Australian Taxation Office is kind enough to provide. A tax refund is viewed as the mid-year government bonus taxpayers have been waiting for. It’s almost like finding money in the street!

But is it really?

In reality those tax refund cheques represent money that belonged to the taxpayers all along. This is because taxpayers actually pay a larger provision than was actually needed. The ATO has been holding the funds all year, interest free. Ask yourself, in what other scenarios would you allow anyone to use hundreds or thousands of dollars of your hard earned money for an extended period of time, interest free - then celebrate when they give it back to you as if it were never yours to begin with?

Large tax refunds can occur for a number of reasons, including:

  • significant work related deductions;
  • negatively geared investments;
  • incorrect PAYG withholding from income or investments;
  • overestimated provisional tax instalments.

You should also note that a large refund does not relate to having a ‘good accountant’ as many conditions may effect the outcome. The service offer by an accountant is identifying the above and structuring the tax liability in an appropriate manner.

Why Reducing Your Refund Makes Sense

Taxpayers who choose to take steps to closely match their withholding tax with their actual income tax liability for a financial year reduce the need for a refund cheque and are able enjoy some unexpected benefits.

  1. Increased investment income: By reducing the amount of your money the ATO is holding, you (rather than the ATO) can invest this amount and receive the investment income.
  2. Debt Reduction: If you currently have interest bearing debt such as a credit card you can reduce this balance faster by removing any excess withholding tax on your next paycheque. Given that some Australian credit cards charge in excess of 20% interest annually this can result in a significant interest saving.
  3. Improved Lifestyle: Currently saving for that dream family holiday? Reducing unnecessary withholding tax could mean the different between taking the trip this year and waiting until next year.

As a taxpayer, if you or your employer are looking to take more control over withholding taxes, keep an eye out for our articles on salary packaging and Fringe Benefits Tax.