No, Division 296 does not tax franking credits twice

Sadly the CPA has put out a media release where they appear to disagree

That's a clear explanation but I wonder if someone who doesn't understand franking credits should be running a SMSF.

I understand the maths and it gets more complicated when the TSB is split between Pension Phase where Franking Credits are 100% refundable and Accumulation Phase 15/10% will apply

However I think it is a mistake to pitch this as a Tax on Super - it isn't. It is a "Tax on Wealth" that uses your TSB to determine whether you are "wealthy or not". Wealth Tax, Wealth Levy, whatever you want to call it - the fact that it does NOT have to be paid by the Super Fund, it can be paid from external funds, confirms it is not a tax on Super, so call it out for what it is.

This is a reduction in the generous tax concession for super. What better (and still efficient) way is there to determine when those reductions should kick in?

And granting the same flexibility as Div 293 is bad? You'd prefer to have to reduce your super balance?

No Richard, I would just prefer that pollies either side of the aisle do not change the rules. I planned my retirement carefully and according to the rules of the day. I think I have earned the right of "certainty", during the "time on" I have left, rather than compensate for the innumerate Canberra residents inability, to manage expenses!

Rob, I would also prefer that the rules stayed so heavily in my favour. I just think that that would be naive and greedy on my part.

Tony,
Thanks for a thorough debunking of an elementary misunderstanding of franking credits. Putting up nonsense arguments only weakens the case against Div 296.

Much of the problem with franking credits is the nomenclature. “Dividend PAYE tax” would be more informative and easy to understand

Greg’s point above is spot on, and it also applies to anyone providing advice, financial service, newspaper articles, representation to government etc.

Dividend imputation ensures that a dollar of pre-tax profit is taxed in only one place: in the hands of either the company or the shareholder. In that sense, it fixed the double taxation issue, where part of the dividend was taxed in both.

Div 296 introduces a new form of double taxation, where both the assets and income (all the taxable income, not just franking credits) of one entity (the super fund) are taxed in the hands of that entity and also in those of a separate entity (the fund member), even though the fund member gets no immediate benefit from the assets and income, and may never do so. This is a radical new concept, and not nearly enough has been said about it.

As Rob stated earlier, it's a wealth tax that will apply to ordinary citizens who have managed their affairs well and made wise choices for those having SMSFs. It is clearly evident from the fact that the Section 296 component is payable by the individual, please pay attention, at their marginal tax rate, which may be quite high. So the ATO gets their quid pro quo no matter which way. And the door is left open for further tinkering.
Notably, defined benefit schemes are not subject to this tax. So who are the main beneficiaries of such schemes? Who would have guessed? Politicians, members of the judiciary, public service fat cats and various other chardonnay sippers. One can imagine our Dr Jim declaring: Let them eat cake....but leave the caviar for us.

Sorry Mark, but your are factually incorrect.

Notably, defined benefit schemes are not subject to this tax. So who are the main beneficiaries of such schemes? Who would have guessed? Politicians, members of the judiciary, public service fat cats and various other chardonnay sippers.....

Defined Benefit scheme MOST CERTAINLY ARE subject to this tax. I would refer you to the draft legislation released on 19 Dec 2025. It clearly states that DB fund members are exposed and will be dealt with by regulation. DB members actually will have less latitude to augment the Div 296 exposure as the taxing authority is also their paymaster!

https://consult.treasury.gov.au/c2025-726362

Many of the public service fat cats you refer to are; frontline emergency services (police/fire/Ambo), Nurses, Doctors, park rangers, infantry soldiers, and the like...... the list goes on, who have worked in and for the government for the whole careers.

Actually ,of the 710,000 members of the CSC funds as a whole, statistically very few are Politician's, Judicial Officers, or public service fat cats, by definition probably statistically insignificant numbers.

The main beneficiaries of the state/territory and Commonwealth DB funds, are rank and file type employees of State and Commonwealth bodies, providing services to the communities that we all live in. And, those who's pension arrangements have them with a special value of greater than $3 million will 'generally' be paying the tax. Generally, as there are a few special exemptions for a very narrow cohort of persons to ensure the separation of the branches of government and the Judiciary. As we will need impartial persons to hear and rule on any appeals.....

Unfortunately, the rhetoric surrounding these schemes often lacks detail and therefore validity. Whilst these schemes in their day were generous without doubt, they are generally legacy and measures are being taken to better target the superannuation concessions.

Mark, where did you get the idea that Div 296 tax is payable at the individual's marginal tax rate? That is rubbish.
Please don't some proper research before writing stuff like that.

Agree Jim, terminology throws a lot of people. Particularly the term “franked” or “franking”. Some other suggestions: “refundable tax receipts” or “shareholder tax credits”. Franking credits are also termed “offsets” which causes many people to oppose them, because offsets are usually non-refundable. Once they have reduced tax to zero, any excess is not refunded, like say LITO. Franking credits however, are sort of "super-charged" offsets, where any excess is refunded. And the idea of refundable offsets triggers "something dodgy going on", in some people’s minds.

The whole franking credit system is overly complex and is typical of many tax rules. Far simpler would be to allow distributions to be deducted from company taxable profit and fully taxable in the hands of individual investors.

That would result in a massive revenue leakage for Australia as distributions to foreign shareholders would not be subject to Australian income tax but would be deductible. This explains why the imputation system is designed the way it is

Yes, but the "individual investor" is also a shareholder in the company and therefore is a integral part-owner of the company. The sum of all the shareholders IS the company.

It could not be any more simple. How ever ends up with the cash pays the tax at their marginal rate.

The Div 296 tax is a personal tax liability, paid by individual members at their marginal tax rate but they can ask their super fund to pay it. The tax is calculated based on each member’s share of the super fund’s taxable income. Therefore the super fund’s own tax liability and how much tax the fund has already paid is irrelevant to that calculation.

Franking credits are not just tax credits, they are also additional taxable income for all Australian shareholders, including all superannuation funds.

Thanks Jon, good points. You are right that Div 296 is assessed at the member level and it is a member level personal tax liability. When I refer to the “consolidated tax position” in the numerical example, I am referring to the combined effect of ordinary super tax (at 15%) and the Div 296 overlay on the same earnings, not aggregation across members. The article deliberately strips away complexities of fund structure to focus on economic tax incidence. Whether the tax is assessed at the fund level or the member level does not change the numerical outcome or the logic of the example. The purpose of the example is to show that including franking credits in earnings does not result in a “tax on tax”. The example is equivalent to a single-member fund.

Also, given this is an SMSF example, by “their marginal tax rate”, I assume you are referring to the effective super earnings tax rate resulting from the Div 296 uplift (in the example 21%), rather than the individual’s personal income marginal tax rate.

All this is glaring evidence on why productivity in Australia is totally shot. Too much bureacracy, too much effort having to be spent on compliance, Too much uncertainty, too much tax, too little government attempts to rein in spending.

Another way to look at this might be to say that including franking credits in the TSB for Div296 purposes, goes a long way to "effectively" eliminating refund of excess franking credits. Would that be too cynical?

Thanks, Tony, for providing a clear explanation with worked examples. It took some time for the maths to get absorbed but you are absolutely correct.
You have indirectly said it, but it also works when the taxpayer company provides franking credit at lower rate say 27%. In that scenario, SMSF will end up paying some tax on income earned on excess assets over 3 million.

In the first example, under the SMSF heading,
Line 2 shows super fund taxed at 15% on income including franking credits.
Line 4 shows 296 tax at 6% on the same income including franking credits.

Surly this is a tax on franking credits for a second time? And then there is no franking credit on this second franking credit “income.”

Total rubbish.
Still left with a $6 tax when tax has already been paid.
Amazing what you can do with semantics.

The numerical examples confound me rather than clarify.
When a company imputes tax it paid to its shareholder, it becomes the shareholder's income matched by a receivable asset (tax credit), as the franking credit is with the ATO and not the shareholder. While filing the shareholder's return, this is treated as tax pre-paid.
Under the Division 296 proposal, treating the franking credit as the fund's income without the fund being able to use it for the 296 tax means the imputed credit dematerialises once it moves to the ATO. It then becomes an irrecoverable asset, and must be written off. Arent written off assets eligible for deduction against income?
Hope someone can explain?

Ramani, the franking credit has been applied (refunded) at the fund level. Think of the numerical example as a single member fund where the franking credit has already done its job. So you wouldn't apply it again in the Div 296 calc. A franking credit is not an "asset" of the fund, does not "dematerialise", and cannot be "written off" or "deducted". It is included in earnings via gross-up, fund level tax is calculated, and the credit is applied once as a tax offset. Div 296 then applies to the same grossed-up earnings before offsets, as per the numerical example. Try to consolidate the process by not thinking of Div 296 as an overlay tax, but rather a single tax rate system as is current, with an all-in-rate equivalent to the overall effective rate if Div 296 was applied (as in the article). There is no missing credit and no "tax on tax".

Thanks, Tony. So you are saying that the franking credit imputation does its job as before at the fund level, and with the introduction of Division 296, the same imputation applies again, but sans the ability to count the unreceived (imputed) franking credit towards the Division 296 liability. In other words, this is so because it is defined so.
If I am right, the current mindset of treating the imputed tax as income applies for the former but not the latter. It is only legal because the law is so drafted.
What it does to equity and symmetry is another matter.
Our system is self-assessment based, and auditors apply a materiality threshold (based on assets / income). So much of what goes into taxable income and deductions are inherently incapable of being checked easily or automatically by accountants, auditors or actuaries (think: AMMA attributions whereby taxable income could materially differ from actual receipts, ECPI proportion, the 2017 capital gains exemption elections asset by asset when Transfer Balance Cap was introduced, decades-long memberwise taxed and untaxed components...). Even dismissing deliberate misreporting, systems and human-related errors must be allowed for in any sustainable regime. In my opinion, the regime must retain the trust of taxpayers and not treat similar items asymmetrically. The dichotomy of franking credits before and after Division 296 breaches such asymmetry, only because the government 'can'.
I readily accept this is a much wider discussion that goes into unwitting and wilful misreporting, while your article only sought to deal with the perception of double tax.
For another day, perhaps?
Ramani