July marks the beginning of the tax season in South Africa, where provisional and non-provisional taxpayers are required to submit their tax returns.
This season marks the occasion where taxpayers who have overpaid will be able to receive a refund on their payment from the South African Revenue Services (SARS). This is usually the case for those who did not work for the full tax year, received allowances, changed jobs during the period, or contributed to medical aid and/ or retirement funds.
For many people, this can amount to an unexpected windfall, and ensuring that these funds are well placed is vital to ensuring that they can adequately contribute to your financial goals.
If you are fortunate to receive a tax refund, it may be likely you hadn’t budgeted on the extra cash, and so it is wise to spend it sensibly. Practical ways to spend your tax refund can include saving for major expenses, settling debt or starting an emergency fund.
Reduce your debt
A practical way to use your tax refund is to settle or reduce debts that attract high interest rates, such as store cards or credit cards.
A small payment can go a long way to bring down your outstanding balance and reduce the amount of interest charged. Making payments on all your outstanding accounts, as well as prioritising overpayments on those with the highest interest rates, can reduce the overall cost of a loan and potentially save money in the long-term.
To maximise your plan, consider using the snowball debt reduction method – read more about how this works in our in-depth debt management guide .
Boost your savings
You can also use your tax refund to boost your existing savings account or open one to start your savings journey.
With a tax-free savings account that are available through most large financial institutions, you can invest up to R36 000 per tax year to a maximum of R500 000 during your lifetime and not pay tax on any interest earned.
Your savings account can take many forms – you might opt to open a money market account or contribute towards an existing savings account or stokvel, or you may even prefer to set up your own emergency fund.
You can also put away your tax refund to cover future big-ticket expenses for your children. By saving your refund in a long term deposit or another safe long-term, interest-earning investment, you can later use it for your children’s tertiary education or their first car.
Improve your home
A novel way to use your tax refund is to enhance an existing asset, such as your home. You can use your tax refund to add value to one of your primary assets by looking at renovation or extension plans, which will not only enhance their market value but also contribute towards your enjoyment of your personal space.
You may even choose to use this capital to enable you to profit from your existing assets – an additional dwelling or room, when added to a plot, could be used to set up income-generating possibilities such as a short or long-term rental.
Pay it forward
You might also consider paying towards a charitable organisation to benefit your community, such as a children’s home, animal shelter, or a community centre that would appreciate funds to continue the service they provide to others.
Donating towards certain registered charities might further entitle you to a tax reprieve in the following tax year. Making use of these donations can both assist your charity of choice and help your personal finances in one move.