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Why tax refunds are actually bad for you

A woman working on her laptop.

This time of the year sees many Australians doing their tax return, salivating at the thought of getting a refund back.

Who doesn't like receiving money, right?

But some people deliberately arrange their tax affairs so that they owe money when they submit their return.

Why would you do this? For the simple reason that any refund is actually your money in the first place.

"Obtaining a tax refund means that you have paid more tax during the year than what you are actually liable for," Chartered Accountants ANZ senior tax advocate Susan Franks told Yahoo Finance.

"This means that the ATO has had use of your money instead of you."

UNSW School of Taxation lecturer Kathrin Bain said if you receive a refund, the government has used your money for a year and not compensated you for it.

"Normally, a tax refund means we are just claiming back money we’ve lent the government, interest-free."

So in principle, it's good to underpay tax during the year then pay off the remainder upon your tax return lodgement.

But in reality, according to Franks, this is only practical if you're a "good saver" and confident of having what you owe the Australian Taxation Office available in your account when you're asked to pay up.

If you're not a good saver and just spend whatever you have in your bank account, owing money to the Tax Office each year might get you into trouble.

How to pay less tax during the year

There are several ways your pay-as-you-go (PAYG) tax obligation during the year can be reduced by contacting the ATO.

If you earn income from a business or investment – and the ATO's tax estimate for you is less than $8,000 and you don't need to be registered for GST – you can choose to PAYG tax annually rather than the default quarterly interval.

"The benefit of this option is that you do not pay tax on your business and investment income during the year and you can use the money during the year – but make sure that you have the money at year end to pay your tax bill," said Franks.

"If you want to take this option you need to watch your timing since you have to make this decision before the due date of the first quarterly PAYG instalment, which is usually 28 October."

PAYG tax can also be reduced by reporting actual income to the ATO quarterly, to stop it from using the previous year's figures. Change in circumstances – like the sale of an investment property – can be reported to also bring down the PAYG amount.

But again, anyone reducing PAYG must be confident they have the capability to pay whatever tax they owe at the end of the year.

"These options require detailed knowledge of the tax law and it is best to discuss your personal circumstances with your Chartered Accountant," Franks told Yahoo Finance.

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