No, Division 296 does not tax franking credits twice
As we move further into the new year, the proposed Division 296 tax remains a critical topic for investors with significant superannuation balances. With the legislation aiming to reduce tax concessions for Total Superannuation Balances (TSB) exceeding $3 million, a complex debate has emerged within the industry. The central question for many self-funded retirees is: Does this new tax effectively double-tax franking credits?
The Core Concern: Is it a Tax on Tax?
There is a prevalent view among some market commentators that Division 296 creates an inequitable "tax on tax." This concern stems from the specific methodology used to calculate "earnings" under the proposed legislation.
For Division 296 purposes, assessable earnings are calculated based on the growth in the member's TSB, which inherently includes the value of franking credits attached to dividend income received during the year. Since franking credits represent corporate tax that has already been paid by the company, critics argue that applying the Division 296 liability (an additional 15% tax on earnings above the cap) to these credits constitutes a form of double taxation on the same economic gain.
The Structural Reality: How Imputation Works
To understand the government's position, it is important to revisit the mechanics of the dividend imputation system. Franking credits were designed to prevent double taxation at the company level, ensuring that profits distributed to shareholders are not taxed once in the hands of the corporation and again in the hands of the shareholder without recognition of the prior payment.
However, these credits have always formed part of the assessable income for the shareholder or the superannuation fund.
Under the proposed rules, the distinction is as follows:
Standard Super Tax (Below $3m): Earnings on the portion of the balance below $3 million continue to be taxed at the concessional rate of 15%. In this environment, franking credits act as a powerful tax offset, often reducing the tax payable to zero or resulting in cash refunds for the fund.
Division 296 Tax (Above $3m): This measure acts as an additional levy on the earnings proportional to the balance above $3 million. While franking credits are indeed included in the calculation of these earnings, the tax is applied to the individual member's total superannuation growth. The legislation views the franking credit as part of the total investment return, rather than a separate tax asset that should be exempt from the calculation.
The Economic Outcome for Portfolios
While the technical and philosophical debate continues, the practical outcome for investors is clear: effective tax rates for large balances will rise.
However, this does not render franking credits useless. In a diversified portfolio, particularly one with heavy exposure to the Materials and Financials sectors—which performed strongly in December 2025, up 6.8% and 3.4% respectively—franking credits remain a valuable component of total return. Even if the tax efficiency is reduced for balances over the cap, the grossed-up yield from fully franked Australian equities remains attractive compared to many other asset classes.
Long-Term Strategy
Investors should focus on the net after-tax outcome rather than the legislative mechanism. Even with the additional tax, superannuation often remains a tax-effective environment compared to personal marginal tax rates, which can reach the highest bracket. The key is to look past the headlines and assess your structural efficiency over the long term, potentially balancing assets between superannuation, family trusts, and personal names to optimize the overall tax position.
Source: https://www.morningstar.com.au/retirement/no-division-296-does-not-tax-franking-credits-twice
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