The Albanese government’s planned franking credit crackdown has been referred to a Senate inquiry. 

The proposal to limit franking credits related to capital raisings and share buybacks to $600 million will be examined by a Senate committee, after the Senate this week referred the tax law amendment bill to the economics committee with the support of crossbench and Coalition senators. 

The bill includes provisions that allow the Australian Accounting Standards Board and the Financial Reporting Council to establish sustainability standards for investors and firms. 

The measure would restrict some franking credits paid to retail shareholders and superannuation funds that receive fully or partly funded dividends from an equity capital raising.

Labor's proposed changes have been criticised as a dangerous measure to stop the payment of franked dividends that could have negative effects on the competitiveness of Australian companies. 

Assistant Treasurer Stephen Jones argues that franking credits on corporate balance sheets should not be used as an “asset” by raising capital to immediately pass surplus franking credits to shareholders. 

Some tax experts note that the measure could also prevent companies from attaching franking credits to dividends funded by capital raisings.

The government's proposal to close a loophole used by some of Australia's largest companies to “stream” franked dividends to low-tax shareholders such as superannuation funds was also included in the October budget. 

The measure seeks to align the tax treatment of off-market share buybacks with on-market share buybacks by eliminating franking credits as a large portion of a dividend and capital return to shareholders. 

Treasury estimates that the measure would raise about $550 million over three years.

Corporate tax professionals have largely welcomed the government's move to level the playing field between off-market and on-market share buybacks, but concerns remain about the seemingly modest revenue-raising measure involving capital raisings. 

Some advisers argue that the legislation's drafting could potentially capture many companies that raise equity capital, questioning why the government needs to trace back the funds to determine if franking credits are allowed for shareholders. 

The purpose of the dividend imputation system is to pass through taxed corporate profits as franking credits to shareholders.