Why 'Instant' Tax Refunds Are A Terrible Idea

As tax time looms closer, online ads spruiking an "instant" or "same day" tax refund have likely caught your attention. When it comes to tax returns, now is better than later, right? However, the truth is that many so-called “same day tax refunds” are anything but. In fact, it could be a decision that leaves you thousands of dollars out of pocket. Here are several reasons why these "deals" are best avoided.

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Sadly, there's a reason why “instant tax refunds” sound too good to be true: they don’t actually exist. Tax refunds can only be issued by the Australian Taxation Office (ATO), so a “same day refund” is usually just a short-term, high-cost, high-interest loan from a third-party.

Signing up for a “same day tax refund” contract may put money in your hand a bit sooner, but it also throws in costly fees and hidden late charges inside a legal contact. These fees can really sting you.

Instant tax refund agents can take as much as 20 per cent or more out of your refund, right from the start. They may also charge you a combination of fees and interest that takes an even bigger bite out of your wallet. On top of that, their basic tax return fees are often higher than you’d pay for good tax agent services.

On top of the sign up fees, you could pay additional interest and fees if the ATO delays your refund. There are a number of reasons why your refund could be delayed and most of them are completely out of your control. In some cases, you could wind up paying more than your total tax refund straight back to that “instant refund” tax loan agent.

If the ATO doesn’t give you the refund you expected, then you owe your entire “instant refund” plus the fees and interest.

Here’s a typical example: Phillip is expecting a $1400 tax refund from the ATO. He signs the agreement for a same day refund and gets $1000 in his pocket after initial fees and charges. Later, Phillip gets a message from the ATO: His $1400 tax refund was withheld. He forgot to declare his Centrelink debt (a common case) and the estimated ATO refund will now be zero.

Now, Phillip owes money back to the tax refund business for the loan. He now owes $1000 for the “instant refund” loan plus $290 in fees for a total of $1290 -- and that's if he can afford to pay it all off in one go.

If Phillip can’t pay it back to the company right now, those high interest rates and penalty fees start to kick in. If Phillip can only afford to pay back $100 a month, $52 is sucked up by interest and fees and only $48 goes toward his loan. In the end, Phillip has to pay back his $1000 loan, plus $1694 in fees and interest, over 27 weeks. That is $2694 in total.

This fictional example isn’t even the worst case scenario, there are higher fees, larger returns and people who wouldn’t even be able to pay back $100 a month. It could end up in financial ruin.

In any event, it's important to ask yourself: how long are you really waiting, anyway? Most Australians receive their tax refund from the ATO within six to 10 business days. Do you really need a same day tax loan?

If you use a tax agent (like more than 70 per cent of Australians do), you have the confidence that the return will be done right and that you are getting the best possible refund, plus the agent will send the money straight into your bank account. If you need money instantly, there are safer ways to borrow.


Simone Davis is a senior tax agent at Etax.com.au

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Comments

    There are other risks you take on with 'instant' refunds as well. First, you sign over your refund cheque, which means your actual refund gets deposited into the tax agents back account.

    Which means there is nothing to stop that tax agent from falsifying your claims, getting a big fat refund, and running off into the sunset. And if things go wrong with the ATO, its your responsibility, not the agents.

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