CPA Australia has warned the draft legislation for the proposed Division 296 tax risks unfairly penalising retirement savings by mishandling the treatment of franking credits in earnings calculations.
The accounting body detailed these concerns in its formal submission regarding the exposure draft for the Treasury Laws Amendment (Better Targeted Superannuation Concessions) Bill 2025.
The submission argued the current drafting ignores the fundamental purpose of franking credits within the Australian tax system.
Specifically, the professional member organisation contends excluding these credits from the calculation of fund earnings for Division 296 purposes will distort investment decisions and penalise funds holding Australian equities.
CPA Australia superannuation lead Richard Webb indicated the proposed framework would give rise to inequitable outcomes.
Webb noted for many superannuation funds franking credits effectively function as a refund of tax already paid at the company level. Under the proposed model, treating these refunds as irrelevant when calculating the earnings figure for the new impost creates a disconnect with the broader design of the tax system.
“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,” he explained.
The submission warns the draft legislation would penalise funds holding assets generating franked dividends. This is because the methodology could result in a higher tax burden compared to other asset classes, even where the dividends ultimately attract little tax due to concessional rates.
According to Webb, the proposal could result in identical investment returns being taxed differently, simply because one includes franking credits and the other does not. This creates a risk of market distortion.
To illustrate the body’s concerns, the submission included a detailed case study demonstrating how the current policy settings produce higher calculated earnings for equity holdings with franked dividends compared to those with unfranked dividends despite the cash received being the same.
“This creates artificial incentives that could push trustees away from Australian equities, potentially harming both retirement outcomes and capital markets more broadly,” Webb suggested.
As such, CPA Australia has called on the government to amend the legislation to ensure all tax offsets, such as franking credits, are properly recognised in the calculation of the new impost.
Webb pointed out the imputation credit issue is not about gaining an advantage, but about maintaining confidence in the system.
“Given the complexity and long-term impacts of these reforms, it’s essential the final legislation gets the fundamentals right,” he noted.
