After submitting your tax calculations to the South African Revenue Service (SARS), you may receive a delightful gift in return – otherwise known as your tax refund. This is a tax break offered by SARS based on certain expenses.
With the sudden influx of cash, what should you do? We have a look at six productive ways you can spend this money.
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How to spend your tax refund
It’s crucial that you don’t waste the opportunity to improve your overall financial position when you come into some cash, and this is especially true for your tax refund. It’s a chance to mend your finances a little and push yourself in the right direction.
James Williams, head of marketing at Wonga, notes five important areas you should consider when spending your tax refund.
1. Reduce your debt
Use your tax refund to settle or reduce debts that attract high interest rates, such as store cards, credit cards, or personal loans. A small payment goes a long way towards bringing down your outstanding balance and reducing the amount of interest charged.
Make payments on all your outstanding accounts, but prioritise those with the highest interest rates. This will reduce the overall cost of the loan and save you money in the long term.
2. Boost your savings
Use your tax refund to boost your existing savings account, or open one to start your savings journey. The sooner you get started on this, the better.
With a tax-free savings account, which is available through most large financial institutions, you can invest up to R36,000 per tax year, to a maximum of R500,000 during your lifetime. You won't pay tax on any interest earned if you stick within these limits.
3. Improve your home
Use your tax refund to add value to your primary asset by looking at those renovation or extension plans you’ve wanted to start. Making improvements to your property adds value to your future potential selling price.
4. Save for your children
Put away your tax refund to cover future big-ticket expenses for your children. Save your refund in a long-term deposit- or investment account so that you can later use it for your kids’ tertiary education or their first car.
5. Pay it forward
Consider paying towards a charitable organisation to benefit your community, such as a children’s home, animal shelter, or a community centre that would appreciate funds to continue the service they provide to others.
And the 6th idea - your retirement annuity
According to Brett Mackay, investment consultant and group retirement annuity manager at 10X Investments, you can make things better for yourself by investing your refund in your retirement.
“By reinvesting any retirement-related refund every year, retirement funds become the gift that keeps on giving,” says Mackay.
He explains that lump sum payments into a retirement annuity will have the same effect as additional monthly contributions.
“If your tax return shows that you are due a refund from SARS this year, consider depositing the refund into your retirement annuity. That way, your taxable income for the next tax year will be reduced as well,” says Mackay.
“A tax refund is not usually money you would have expected to receive. Don’t be tempted to spend it on things you weren’t even planning to buy, and don’t max out your credit card in anticipation of a refund,” he advises.
Investing a tax refund in your retirement annuity and leaving it there for many years will also mean that it benefits from the effects of compound interest, adds Mackay.