‘Tax-on-tax’ or business as usual?: Industry divided on Div 296 franking credits

Financial advisory firm TAG Financial Services has raised the alarm about a possible design flaw in the draft Division 296 legislation, Treasury Laws Amendment (Better Targeted Superannuation Concessions) Bill 2025.

The firm warned that the draft bill, released on 19 December, contained a “technical design issue” in its treatment of franking credits.

Under the draft bill, franked dividends would be included when calculating taxable earnings. The franking credit uplift would increase reported earnings and thus the Div 296 impost. Because the credit could not be used to reduce the Div 296 tax, TAG argued that this would break the link between economic and taxable earnings, effectively imposing a “tax on tax.”

“This isn’t about whether people with large super balances should pay more tax. It’s about whether we’re taxing genuine economic earnings or taxing tax that’s already been paid,” Michelle Griffiths, partner at TAG Financial Services, said.

Industry body CPA Australia similarly argued that the draft Div 296 bill ignored the “fundamental purpose of franking credits” and warned that the current design could distort investment decisions.

“Franking credits exist to ensure income is taxed at the shareholder’s correct tax rate. Ignoring them in the new super tax framework produces an unfair and inconsistent result,” CPA Australia superannuation lead, Richard Webb, said.

“For many super funds, franking credits are effectively a refund of tax already paid. Treating those refunds as irrelevant when calculating earnings is at odds with how our tax system is designed to work.”

However, other superannuation experts aren’t convinced any such design flaw exists.

Simon Gow, Grant Thornton’s national head of self-managed superannuation, said the draft Div 296 bill correctly based the tax on individuals’ “grossed-up dividends” rather than cash earnings, consistent with other parts of the tax system.

“It is standard in Australian tax for grossed‐up dividends to form part of the taxable base regardless of whether the taxpayer receives the full credit as a refund,” Gow told Accounting Times.

“Individuals, SMSFs, and companies are all taxed on the grossed‐up dividend, not the cash component, even though some may not get the entire credit back.”

He said that Div 296 did not break the imputation system at the fund level, but ignored the system when calculating the surcharge at the member level.

“This is why the concept is sometimes referred to as 'tax‐on‐tax', although it does not constitute double taxation. Instead, it reflects an increase in the overall tax applied to superannuation income.”

“Because full franking credits continue to be available at the fund level, only the marginal additional tax is payable, and no tax‐on‐tax or double‐taxation outcome arises.”

He added that the use of grossed-up dividends in calculating fund earnings under Div 296 preserved neutrality across income types and aligned with how franked dividends were taxed elsewhere in the tax system.

“If Div 296 were calculated using only the cash dividend, franked income would receive an additional benefit: franking credits would first offset (or be refunded against) tax at the fund level, and the Division 296 base would then be reduced because the gross‐up is excluded,” he said.

“Ignoring the gross‐up would mean franked dividend income bears less Div 296 than economically equivalent unfranked income (e.g. interest income) – undermining the policy intent.”

The Division 296 tax was first proposed in 2023 in a measure to curb generous superannuation tax treatment and boost intergenerational equity in the tax system. It was set to impose an additional tax on the earnings of superannuation balances above $3 million, applicable to both realised and unrealised gains.

It was altered in December 2025 to accommodate industry feedback, which argued that the tax should only apply to realised gains and the threshold should be indexed to inflation.

The updated bill would impose an additional 15 per cent tax on realised earnings of an individual’s super balance above $3 million, and a further 10 per cent tax on the realised earnings on the portion of an individual’s super balance above $10 million.

Consultation for the updated bill closed last Friday (16 January).