Why tax refunds are actually bad for you
It's tax time, and many Australians are looking forward to getting their hands on a refund.
But the idea that receiving a refund is to be celebrated is absolutely galling to many tax experts.
Why? Because that refund is your money in the first place.
Imagine a stranger just grabbed $1000 from you and said "See you later, I'll give it back to you in August."
You wouldn't celebrate that, would you?
Chartered Accountants ANZ senior tax advocate Susan Franks told Yahoo Finance that receiving a tax refund simply means you paid too much tax during that financial year.
"This means that the ATO has had use of your money instead of you."
UNSW Taxation professor of practice Jennie Granger told Yahoo Finance that in strictly rational terms it is bad to receive a refund.
"If you think about this purely logically it makes sense that you benefit most by having your money in your hands so you can enjoy it now, or pay bills, invest or even save it for that future tax bill."
But humans are not rational.
"This is not just about financial logic – it’s also about personal preferences," Granger said.
"Would you prefer to have a smaller amount of cash in your hand regularly or have it out of sight and out of mind accumulating into a bigger amount you receive once a year?"
Using the Australian Taxation Office like a savings account, perhaps.
How to pay less tax during the year
If you're confident you can retain enough money in the bank to cover any outstanding taxes when submitting your tax return, paying less during the year makes sense.
There are several methods to request the ATO take less tax from you.
Firstly, if you earn income from a business or investment, you can choose to pay your tax instalments yearly rather than quarterly ("pay-as-you-go").
This option is available if the ATO's tax estimate for you is less than $8,000 – but the request needs to be submitted before October 28, when the first quarterly instalment is due.
Another way is to report your actual income to the ATO quarterly, to stop it from using last year's numbers as an estimate to work out how much tax to take from you.
"Care needs to be taken if this option is chosen as if the estimate is out by more than 15 per cent then administrative penalties and the general interest charge could be imposed," Franks told Yahoo Finance.
She also warned that professional tax advice should be sought before reducing PAYG obligations.
"They also require taxpayers to be good savers as the tax will still need to be paid."
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Australians like receiving refunds, no matter how bad it is
Granger said that regardless of what the experts say, Australians are addicted to refunds.
"Nearly 80 per cent of Australia’s individual taxpayers receive a refund and my experience has been that they prefer it that way," she told Yahoo Finance.
While working at the ATO many years ago, Granger recalled running surveys of taxpayers to see if yearly returns could be simplified.
"We even asked them, would they prefer not having to file a tax return," she said.
"They were very keen on that idea until they realised it meant no tax refunds. Then the answer was very firmly: we want our refunds!"
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