The great divide: Will Div 296 risk ‘unfair penalisation’?

According to the professional accounting body, it wanted to raise “serious concerns” with the current exposure draft legislation, Treasury Laws Amendment (Better Targeted Superannuation Concessions) Bill 2025 and argued the current approach disregarded the purpose of franking credits.

In addition, CPA believed it could also distort investment decisions and lead to inequitable outcomes for super funds where franking credits were excluded from the calculation of fund earnings for Div 296 purposes.

“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.”

The divide

As reported by Accounting Times yesterday, there was a clear divide within the industry regarding the tax and whether it would operate as a “double tax” or if everything would be “business as usual”.

The article revealed financial advisory firm TAG Financial Services had “raised the alarm” about a possible design flaw in the draft Div 296 legislation in its treatment of franking credits.

In contrast to both TAG Financial and CPA, superannuation experts from Grant Thornton and the super industry slammed the idea that such a design flaw existed.

Simon Gow, Grant Thornton’s national head of self-managed superannuation, said the proposed 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.”

However, CPA warned the draft legislation would “penalise super funds holding assets that generate franked dividends, even where those dividends ultimately have little or no tax due to superannuation’s concessional tax rates”.

“In practice, the proposal could result in identical investment returns being taxed differently, simply because one includes franking credits and the other does not,” Webb said.

“This creates artificial incentives that could push trustees away from Australian equities, potentially harming both retirement outcomes and capital markets more broadly.”

CA ANZ also shared its concerns with the proposed changes and expressed that these concerns captured the complexity, fairness and long-term impact of the proposed measures on the superannuation system.

According to CA ANZ, “the draft laws introduce unnecessary administrative burdens and risk, creating inequitable outcomes for fund members”.

The three professional accounting bodies, CPA, CA ANZ and the Institute of Public Accountants (IPA), submitted a joint submission to the Treasury regarding the draft legislation.

The main concerns outlined within the joint submission included requiring small superannuation funds to obtain actuarial certificates to perform “relevant calculations and provide the attribution share”, excluding franking credits from Division 296 earnings, restricting notional pension income and the absence of a commissioner’s discretion.

CA ANZ said given the complexity of the proposed legislation, and its related but yet to be seen regulations, it had “good reason to believe that unintended and currently unforeseen adverse consequences could arise”.

“It will be essential for the government to promptly amend the law to remove these faulty, missing or defective elements as soon as they are identified in order to ensure the implemented law reflects the intended operation of the measure and interacts harmoniously with the other areas of the retirement savings ecosystem.”

What tax experts say

Speaking to Accountants Daily in further detail about the matter, IPA senior tax advisor Tony Greco said that, despite the decision to revise the Div 296 tax and improve the original proposal being widely welcomed, there were both respectable and less respectable aspects of the draft legislation.

Greco said the government should allow more time to address “widespread concerns” to get the balance right.

“The reworked Division 296 framework was never going to be a walk in the park for the treasury as it has to navigate a complex environment of dealing with different types of funds (SMSFs and APRA) and pension schemes (allocated and defined benefits),” he said.

“We have always maintained that the government could have dealt with excessive balances in superannuation with a legacy issue as the current gaps in place will restrict accumulation of high balances going forward.”

Greco added that the main issue that would be dealt with was the current gaps in place, which could restrictthe  accumulation of high balances going forward.

“The government has recently legislated an objective for super, so introducing more complex administration for the whole of the superannuation system could have been avoided if other options were considered.”