Tax season has begun, with taxpayers set to receive an average $2,600 in refunds each.
However, when it comes to managing our money, there’s a huge problem with this, Commonwealth Bank head of behavioural economics Will Mailer has warned.
“Surveys show that most Aussies have good intentions around how they want to spend their upcoming tax refunds. Unfortunately, as with new year resolutions many of these good intentions won’t be realised over time,” Mailer told Yahoo Finance.
Also read: Surprising date you’ll get $1,080 tax breaks
Also read: What the ATO is scrutinising this tax time
“When a large deposit arrives it can be easy to go with the flow, forget about our long term goals and trade-offs, and spend less mindfully.”
He said people spend money differently depending on how they receive it. For example, while we consider our regular pay as money for day-to-day items within the budget, a bigger injection of cash is more likely to be considered ‘fun money’.
“Think about how you might treat an extra $50 a week, compared with a $2,600 annual deposit for example - although they’re equivalent,” he said.
“The mental spending rules that we apply to the small change in regular income don’t seem to apply to large infrequent deposits.”
And while it may be fun to splurge using your tax refund, if you were planning to put the money to work, you’ll need a strategy to tackle this mental trick.
It’s a rebate, not a bonus
Mailer noted a University of Chicago study which found people were four times more likely to spend money framed as a bonus, as opposed to a rebate.
He said while a tax refund feels like free money, it’s just our own money being handed back.
“When we think of it this way we may be more likely to save it, or allocate it in ways that are more consistent with our regular household budgets and longer term goals,” he said.
Commonwealth Bank is currently testing several financial ‘nudges’ designed to prompt better saving and spending habits, including spending notifications, alerts for upcoming bills and assistance in setting up pre-commitments.
The bank is also allowing customers to set up reminders to use their tax refund to pay down debt or add to their savings, so that when the $2,600 does hit accounts, it’s easier to put it to its intended purpose.
“Nudges can be really inexpensive to implement, and because they are easy to override or avoid they keep all choice with the customer, while making better decisions easier,” Mailer said.
It’s your money you’re getting back… without interest
If you receive a tax refund, it also means you’ve simply paid too much in tax throughout the year.
And to add insult to injury, the money you get back is money you could have spent investing or using to enhance your life in the meantime.
However, if you’re confident that you will have enough money to cover any outstanding tax payments you need to make, there are ways to ensure you pay less tax over the course of the year.
For example, if you’re earning money from an investment or business, you can choose to pay your tax in yearly rather than quarterly instalments.
Another way to keep more money in your pocket is to report your income to the ATO quarterly, giving it a better idea of how much you actually owe.
But it’s important to remember that one way or the other, the tax needs to be paid, and it’s worth seeking professional advice before attempting to change the way you pay your tax.