Will the new super tax mean my franking credits are taxed twice?

I’m concerned about the proposal to tax unrealised capital gains in my super fund. If the fund holds franked shares, my understanding is that the ATO refunds the franking credits because the tax has already been paid at the company level. In other words, franking exists to prevent double taxation. Is that correct? If so, how can the franking refund be counted in the year-end balance as a ‘contribution’? Surely it should be excluded from the closing balance when calculating the amount subject to the proposed new tax.

That’s not exactly how the franking system works. When a super fund receives a franked dividend, the dividend statement shows two components: the cash dividend (which is credited to the fund’s bank account unless it’s being reinvested) and the franking credit.

It may seem like Labor’s new proposal might be taxing you twice, but that’s not the case.Credit: Simon Letch

The franking credit is not a separate contribution – it’s a tax credit that becomes part of the fund’s taxable income. The franking credit is then used to offset any tax the fund owes. If the credit exceeds the tax liability, the surplus is refunded to the fund in cash.

Together, the cash dividend and the franking credit either increase the fund’s bank balance or reduce its tax payable – both of which improve the fund’s net position. But this isn’t double taxation; it’s the mechanism that prevents it.

Regarding the proposed extra tax on earnings for super balances above $3 million, I agree the unrealised capital gains tax is a real problem and a complete diversion from everything we know and understand about taxing profit. I thought I had a reasonable grasp of it until I read your article. While I understand that any tax paid on unrealised gains won’t be refunded if the value falls the following year or later, I assumed it would at least be offset against CGT when the asset is eventually sold.

However, your article surprised me when you said: “When you do eventually sell those assets and realise a profit, you will pay capital gains tax. And no, there is no credit for the tax you have already paid on the unrealised gains …” Surely this can’t be correct? There must be either a credit for the tax already paid, or at the very least a cost base adjustment to reflect the revalued amount on which the unrealised capital gains tax was calculated and paid.

You need to keep in mind that the tax on unrealised capital gains is calculated by taking the difference between the opening and closing values – adjusted for withdrawals and contributions for the financial year ending June 30, 2026.

This is simply a method of calculation. It does not alter your cost base for capital gains tax purposes. In other words, when assets in your fund are eventually sold, normal CGT rules will still apply.

Taxation of specific assets within your fund is an entirely separate issue from the government’s decision to levy a tax on the difference in valuations.

I understand there is a lifetime cap on transfers to pension accounts, which is currently $1.9 million for the 2024-25 financial year and will increase to $2 million from July 1. Amounts transferred above this cap are currently taxed at 15 per cent – is that correct? Given this, anyone with $3 million in the accumulation phase is already limited by the transfer cap and subject to the 15 per cent tax on earnings in accumulation.

If the federal government’s proposed legislation passes, would it impose a further 15 per cent tax on top of this, effectively bringing the tax rate to 30 per cent? Or will the proposed new tax only apply to the portion of their superannuation balance above $3 million that remains in the accumulation phase? Could you also explain whether the proposed new tax will affect, or interact with, the existing lifetime transfer balance cap in any way?

The transfer balance cap is simply a mechanism to limit how much can be transferred into pension phase within superannuation. It’s unaffected by the proposed changes.

An example may help: suppose you have $3.6 million in super – $2 million in pension phase and $1.6 million in accumulation – at June 30, 2026. If your total balance then rises to $4 million, the increase is $400,000.

However, only $1 million is above the $3 million threshold, so just 25 per cent of the gain is taxable. That means the proposed tax of 15 per cent would apply on $100,000, resulting in a $15,000 tax bill.

I understand that to qualify for the $540 spouse contribution tax offset I need to make a $3000 non-concessional contribution on my spouse’s behalf. My spouse may also be eligible for the $500 government co-contribution if they make a $1000 non-deductible contribution themselves. But if their super is already in income stream (pension) mode, do either of these incentives still apply?

You are correct in as much as a person cannot contribute to a fund in pension mode, but many superannuation fund members have both an accumulation account and a pension account. Funds can be contributed to the accumulation account.

Noel Whittaker is the author of Retirement Made Simple and other books on personal finance. Questions to: [e-mail]

• Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.

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