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How to invest your tax return and make a fortune

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Nearly half of Australian taxpayers are planning to either save or invest their tax refund this financial year, new research reveals.

And with Australians to receive an average refund of $2,571 - that money can go a long way if spent well, ME Bank general manager of deposits John Powell said.

A tax refund isn’t free money, but to a lot of people it feels like it is, added Bell Direct equities strategist Julia Lee, and that’s why investing your tax return could be the smartest thing you do.

“Mentally, [people] account for money in different ways,” Lee told Yahoo Finance.

“When you get what you call a windfall, like money coming back from a tax return, or someone winning the lotto, they actually treat it differently mentally to money that they've saved from week to week.”

The challenge, then, is not to waste your tax return when you receive it.

“People tend to spend it [windfall money] on extra things, and they have less self-control over that type of money, so putting it to use in creating wealth and for longer term wealth accumulation and creation is actually a really good idea.”

Investing can deliver some serious returns, she continued.

For example, if one were to invest $30,000 in the share market, within 10 years that would have grown to be worth $90,000 and after 20 years $115,000.

If they were to add $500 to that original sum month after month, after 10 years the investor would have $170,000 and after 20 years they’d have $400,000.

And while investing an initial $30,000 might be difficult for many Australians, investing a tax return can be a good way to begin scoring compound interest.

Okay, how do I invest in the ASX?

The best way to become wealthy is to automate the process. That is, setting up a direct-debit to funnel a portion of your pay each cycle into a savings account.

The same thing goes for investing. It will be difficult to try to invest every month, so the process needs to be automated.

“That’s just about regularly putting aside money automatically, and that also encompasses the power of compounding,” Lee said.

First, however, investors need to get a broker.

While Bell Direct is a broker, there are also plenty of online brokers online.

“Most of the application process is online, so you just jump online, fill out the form, send in some identification, and then after a few days you'll be ready to go.”

The minimum investment for Australia’s biggest share market, the ASX, is $500, so with a tax return of around $2,500, most first-time investors should be covered.

The next step is to decide what you want to trade. While this can become a little bit more complex, it doesn’t have to be, Lee added.


“If you don't know where to start, exchange-traded funds [ETFs] are a great idea. These give you the benefits of diversification and owning the market,” Lee said.

The STW ETF tracks the benchmark ASX 200 index, meaning you’re buying stakes in the 200 companies on the Australian share market.

If you wanted exposure to the companies on the US stock market, the IVV ETF tracks the S&P 500 and is traded on the Australian share market.

The most important thing, however, is just to start, Lee said.

“Once you have skin in the game, then you do become more interested in building relevant shares, and I think that can be important in itself.”

“Once you've got the $500 in a single investment, if you wanted to add to that investment, it can be anything. It can be $50, $100, it's just that initial investment.”

However, it’s important to recognise that there are brokerage costs that come with any trades made. These generally range from $15 to $200 a trade, with Bell Direct’s minimum brokerage fee $15.

“That's pretty accessible,” Lee said.

“That's a week's worth of coffee. Costs have come down substantially over the past couple of decades.”

Index funds

Index funds are another relatively safe and easy option for those who don’t want to spend too much time managing a portfolio. Here, investors invest in a stock market index, similar to an ETF.

However, Lee said it’s not a bad idea to consider taking a few risks.

“When I started out, I took the view that I might make mistakes for the first couple of years, but I wanted to learn those lessons early because I knew that once I had those lessons, I would have the skills to make money for the rest of my life. I preferred making mistakes earlier on when I didn't have a mortgage or huge financial obligations.”

“But I took it slow, and then as I gained confidence, I took over managing more and more of my money.”


Not everyone will want to invest into an ETF or an index, and interest in shares will likely increase as interest rates fall, bringing savings rates down with them.

“When interest rates are falling, dividend-type of investments become more attractive, and that's because people [who] don't get a lot of interest from the bank are looking for other ways to gain income or yield.”

Most people who are just starting off will look at investing in the major banks as they’re the largest businesses on the ASX.

Lee, however, suggests Macquarie Group (MGQ) is a “little bit sexier and a bit more growth oriented”.

“Macquarie Group is an international financial services firm, which means that as the Aussie dollar drops - as it has been when interest rates fall - it gains the positive impact of the falling Aussie dollar, because a lot of its revenue is made offshore. It's also a company that's very good at adjusting to different market conditions,” Lee said.

Australia’s big four banks, on the other hand, are heavily exposed to the housing market. Any bumps in the housing market will reverberate through those banks.

If investors want exposure to retail, Lee suggested Temple & Webster (TPW).

“It's the largest online retailer in Australia of furniture, home furniture. You can go there and buy a bed, or a sofa. So if you want to try and ride that structural trend - that move from bricks to clicks - TPW's one way that you can play it.”

I’m scared about the market and feel paralysed by the number of choices

These are reasonable concerns, but there’s something to remember; volatility is normal, and it’s important to just get started.

Lee’s rule of thumb is to “never waste a good crisis” as these can be the moments when you make the most money.

“You do get peaks and troughs, so part of investing is being comfortable with those moves and that cycle, but the key is not to let that throw you off. Because the most powerful, I guess the most powerful concept in investing is compounding, and the longer you get that compounding effect, the big effects are really seen in 20 years time, 30 years time.”

And if you’re unsure what you want to do, outside of investing into a broad range of companies through an ETF or index, you can also use filters.

Most brokers will provide filtering tools which filter companies by whether they’re increasing their earnings, for example.

“I might put in a filter for I only want to invest in companies where earnings are growing, that the dividend is growing, and that the size of the company is a large company, so it's in the top 10 per cent of the market and I can adjust at that scale,” she said.

“Then instead of having to look through 1800 options, I might get 20 options that match that and I can manage 20 and I can go through it and find out what I'm interested in then.”

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