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Top tips for investing your tax refund
May 03, 2022

It’s that time of year again: tax time! With the 31st of March signifying the end of the financial year for most, if you’re eligible for a tax refund, it isn’t far away! From mid-May until the end of July, the Inland Revenue Department (IRD) will be paying refunds to those who have overpaid tax during the year. Gone are the days of manually claiming your refund – the IRD now does it automatically – though if you’ve earned any income outside of your permanent salary or job, or if you’re self-employed, you’ll need to file an IR3 individual tax return with the IRD before the 7th July. You can find more about tax returns from the IRD here.

While you may feel like your tax refund is ‘free money’, it’s important to remember that you have actually earned it – you’re being refunded money you’re owed because you’ve overpaid tax during the year. So, before you go spending up large, consider how you might put it to better use, in a way that will benefit you in the long run.

Shouldn’t I just keep it saved in the bank?

Saving money is a great habit to get into and is a great step towards achieving financial freedom. In saying that, inflation is the highest it’s been in 30 years, sitting at 6.9% meaning every year, the money you have sitting in the bank is worth that much less. So, keeping your money in the bank, where you’ll only receive an average of 2-3% interest in return, may not be the best idea.

Historically, share markets return an average of 8%, which is more than enough to match inflation and maintain the value of your savings. Investing your tax refund is therefore something to consider. Depending on your risk appetite, you may opt for a higher risk portfolio, with potentially higher returns, or you might go opt for a lower risk portfolio, with potentially lower returns. You can find out more about your risk appetite and wider investor profile here.

In saying this, it’s important to remember that share markets go up and down. The markets are relatively volatile at the moment due to a range of factors, including the war in Ukraine and the wake of Covid-19. They may go down in the short-term, which is why it’s important to keep a long-term view.

Before you invest your tax return

Pay off any outstanding debt: High inflation also means interest rates on outstanding debt is increasing, so you want to get it paid off as soon as you’re able. It’s unlikely that returns from investing your tax return will match the amount you have to pay on a high-interest debt, so prioritise that first.

Make sure you have an emergency fund: Financial advisers generally recommend you have 3-6 months worth of living expenses saved up in case of an emergency. Having liquid savings (money that can be easily accessed) is important for those times when you really need it, such as unexpected car repairs, or a job loss. This way, you don’t have to take out a loan and incur additional interest payments, or sell investments earlier than anticipated, risking worse returns than you might expect in the longer term.

Tips for investing your tax return

Top up your KiwiSaver: KiwiSaver continues to be the most common form of investment among Kiwis. Did you know you can make manual or lump-sum payments into your KiwiSaver, on top of your regular contributions? Plus, the Government is matching 50% of your investment, up to $521, which is a great way to make some additional cash out of your tax refund. Make sure you’ve contributed at least $1042 to your KiwiSaver by 30 June to get the most out of Government contributions.

Do your due diligence: When you spend most of your waking day working to earn money, the least you can do is take some time to research where you spend it. In an investment context, due diligence is about reading all the information provided and making sure you’ve thoroughly understood a business before investing in it. For more, we’ve written another blog post on all things due diligence.

Diversify: We’ve all heard the saying, “Never put all your eggs in one basket.” The same applies to investing. Having a diversified portfolio means you have lots of different investments, preferably of different types (for example shares, bonds and property), as well as different sectors of the economy (for example technology, healthcare and agriculture). This helps reduce your risks if there is a downturn in any one business or type of investment. Additionally, a portfolio made up of different kinds of investments will increase your chances of benefiting from an investment that outperforms the rest of the market. If you already have an existing portfolio, consider investing your tax refund in a new industry or type of investment, or, if it’s your first time investing, consider investing in a fund that will spread your investment into a ready-made diversified portfolio.

Invest on a licensed stock exchange: When choosing investments in individual businesses, you get better protections if you choose investments listed on a licensed stock exchange. Licensed stock exchanges have rules and regulations in place to protect investors and ensure they’re receiving full and transparent information about their investment(s). The last thing you want after receiving your tax refund is losing money because you weren’t given all the information you need to make a good decision. New Zealand has two licensed stock exchanges, the NZX and the Catalist Public Market. Like the NZX, Catalist is a licensed financial product market and is regulated by the FMA, meaning you’re protected under the Financial Markets Conduct Act 2013 and will receive quality information to make informed investment decisions. For more on this, have a read of one of our earlier blog posts. To invest in businesses listed on the NZX, you can use broker platforms such as Hatch or Sharesies, and to invest in smaller businesses listed on Catalist, you can do so directly through our website.

Invest for the long term: Investing is largely about playing the long game. This is especially relevant in the current volatile market conditions. By ignoring short-term price fluctuations and instead looking at the long-term horizon, over time, the peaks and troughs of a volatile market will iron out. While it’s easy to feel tempted into short-term trading, or “day-trading”, this creates major risk for investors with the potential for significant losses. Even professionals have a hard time ‘timing the market’ in this way, so remember, if you decide to invest your tax refund, slow and steady wins the race.

Consider investments in small-to-medium businesses (SMEs): SMEs are the backbone of the New Zealand economy, making up more than 97% of all Kiwi businesses. By using your tax refund to expand your portfolio and invest in SMEs, not only are you helping to support these businesses, but you get to invest earlier in their growth journey, with the potential for higher returns. Catalist is a stock exchange designed specifically for investing in SMEs. We’re building new opportunities for investments that you may not have previously been able to access. To stay updated on upcoming investment opportunities, sign up for a Catalist account and opt in to our newsletter.

However you decide to use your tax refund, we hope you’re feeling a little more clued up on what some of your options are. If you’ve got a sizable refund, don’t feel like you have to put it all in one place either – it can be split multiple ways. Ultimately, have a think of what’s going to benefit your future self the most, and do that.

The legal stuff: The advice in this blog is generic and doesn’t take your individual circumstances into account. If you’re interested in getting individual investment advice, check out the Government’s Sorted website for more on how to find a financial adviser.

By Holly Smith