How to use your tax refund to build wealth
Taking advantage of small amounts can go a long way.
According to the ATO, more than four million Aussies have already lodged their tax return, with the average refund received around $2,500.
An earlier Finder survey revealed that almost 50% of respondents were expecting to get a tax refund for FY24/25. That’s equivalent to more than 10 million Aussies receiving a reasonable cash windfall over the next few months.
Source: Finder. May 2025. Author visualisation.
If you’re lucky enough to receive something back from the ATO this tax season, you might be wondering where best to direct the payout. Between ongoing cost of living pressure, debt repayments, changes to HECS and superannuation, there are multiple things competing for our attention. So, what are the priorities?
Top up your savings account
Recent years have been characterised by a cost of living crisis, forcing many households to dip into savings as the pressure of rising interest rates, surging inflation, and bracket creep steadily eroded real household disposable income.
Latest ABS data shows that the household savings rate has finally clawed back to 5.2%, closer to its long run average. This has mainly been driven by income headwinds receding, interest rate relief kicking in and tax cuts starting to flow.
Source: National Income, Expenditure and Product. Australian Bureau of Statistics. 2025. Author visualisation.
Despite this, consumers have responded with lacklustre retail spending and are instead choosing to save much more than economists expected. The long winter certainly isn’t over. Understandably, many remain cautious – rebuilding their nest egg and paying down mortgages after enduring prolonged economic stress in the wake of Covid.
If you’re in this boat – having dipped into your emergency fund or savings account over the last few years – a tax refund presents a good opportunity to top up your cash buffer.
Whilst cash isn’t a strong long term asset class, especially with most banks offering rates that lag inflation, it is still a necessary evil. Holding cash can be crucial for meeting short-term goals or avoiding the need to liquidate investments at an inopportune time.
Pay down debt
A key consideration when allocating your tax refund is evaluating your level of ‘bad’ debt. Mark explores the semantics of ‘good’ vs ‘bad’ debt in detail in this article. In short, good debt refers to borrowing to acquire assets like a house or an education. On the other hand, bad debt is associated with financing consumption like personal loans or credit cards.
High-interest debt like credit cards charge an annual percentage rate (APR) which Canstar estimates to average 20% in Australia. Paying down outstanding personal debt with higher rates should generally take priority over other forms of cheaper debt.
Almost 3 million Aussies are currently shouldering an average of $27,640 in outstanding HECS debt. Despite the recent 20% slash on outstanding amounts, large amounts can still cause psychological stress. It’s common to consider allocating your refund to paying some of this down.
The cost of the HECS is based on the lower of the Consumer Price Index (CPI) or Wage Price Index (WPI). Barring the last few years, historically this has been quite low – around 3%. This makes it one of the cheapest forms of debt you can take. Albeit, not without consequence.
Outstanding HECS is one of the many large hurdles facing first home buyers. Banks have historically treated these amounts like personal loans or credit card debt which significantly reduce your borrowing power.
However, this is steadily shifting. After updated guidance from regulators APRA and ASIC, lenders can now disregard certain debt repayments like HECS-HELP when assessing mortgage serviceability, as long as the debt is expected to be paid off in the near term. However, this will likely only benefit a handful of applicants enter the market given the average individual has time required to pay HECS debt has increased to almost 10 years.
If you have high-interest personal debt, it might be wiser to prioritise paying that off before your HECS-HELP. Tackling interest on personal loans often outweighs the benefits of reducing your outstanding low cost debt. Ultimately, the choice to pay down your debt with a tax refund will largely depend on your unique goals and circumstances.
Invest
Finally, if you’re in a comfortable position with your savings, emergency fund and personal debt, investing your tax refund becomes the natural next step.
Consider scenario 1: A 25 year old starts with $40,000 in their superannuation. Assume they’ve hit their income cap at $100,000 per year and go on to earn a 7% return over 40 years until they’ve hit retirement.
With 12% compulsory employer contributions, they’d retire with approximately $2.6 million in super.
Now if we consider scenario 2: The individual diverts $2000 surplus cash from their refund (net $1700 after 15% tax) into their super every year. On top of employer contributions, their ending balance over the same period would be almost $3 million. Given a longer time horizon, small contributions can have a significant impact – in this case $300,000 – on retirement outcomes.
Hypothetical superannuation balance for two scenarios. Source: Author calculations.
If you plan on contributing your tax refund to super, it’s important to submit a Notice of intent to claim or vary a deduction for personal super contributions.
You may be eligible to claim a tax deduction if you’ve made personal super contributions and haven’t met the concessional contribution cap ($30,000). An after-tax payment can be considered a concessional contribution to receive the maximum tax benefit.
