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........

© WA Today