Professor Richard Holden of UNSW says the 2026 Federal Budget has created Australia’s first ever Productivity Tax.
New economic analysis released today by Professor Richard Holden, Vice-Chancellor’s Professor and Chief Societal Economist at UNSW Sydney, argues that the capital gains tax changes in the 2026 Federal Budget have created what he calls Australia’s first ever Productivity Tax, a tax regime where the faster a business grows, the higher the effective rate of tax its owners pay when they sell.
The analysis, released publicly for the first time today, uses a worked example of two identical businesses to illustrate what Professor Holden describes as a profound oversight in the Budget’s design.
The worked example
Two husband-and-wife teams each start an industrial cleaning business at the same time, each investing their life savings of $450,000. Both businesses begin with $2 million in revenue, four employees, and $150,000 in profit in year one. Both sell for four times their year five profit. The only difference between them is their growth rate.
Business 1, the low productivity business, grows at 3% a year, matching inflation. By year five it is generating just over $300,000 in profit and still employs four people. It sells for around $1.2 million. Under the new CGT regime, the owners have a taxable capital gain of $680,000, pay approximately $320,000 in CGT at 47 cents on the dollar, and face an effective tax rate of 26.6% of the sale price.
Business 2, the high productivity business, grows at 15% a year. By year five it is generating over $1 million in profit and employs six people. It sells for $4.2 million. The owners have a taxable capital gain of $3.67 million, pay $1.7 million in CGT, and face an effective tax rate of 41.2% of the sale price.
Both businesses took the same risk. Both sold at the same multiple of profit. Business 2 created more jobs, more economic activity, and more value. In return, its owners pay a capital gains tax rate more than 55% higher than the owners of Business 1.
Professor Holden’s assessment
Professor Holden does not soften his conclusions. “In other words, the new tax system will now punish businesses more likely to create jobs and economic growth, and reward businesses more likely to shed jobs,” he writes. “This is the worst possible plan for a country in need of more jobs, and more economic growth. It’s a Productivity Tax in the middle of a productivity crisis.”
He defines a Productivity Tax as existing when the interplay of different taxes means high productivity businesses pay a higher effective rate than low productivity ones. A high productivity business, in his framework, is one that grows faster than inflation. A low productivity business grows at or below the inflation rate. Under the new indexation model replacing the previous 50% CGT discount, the inflation-indexed cost base applies across the full holding period of the business, which Professor Holden argues dramatically understates the real return investors require to justify the risk they took at the start.
The consequences, he argues, extend beyond the business owners themselves. “Young people will pay the biggest price for this profound policy error, because they will miss out on the jobs, growth, and prosperity that productive businesses create.”
The numbers behind the analysis
The full workings published by Professor Holden show the following comparison:
Business 1, growing at 3% annually, generates cumulative profit of $1.12 million over five years, sells for $1.2 million, and pays $319,961 in CGT for a net gain of $360,808 and an effective tax rate of 26.6%.
Business 2, growing at 15% annually, generates cumulative profit of $2.84 million over five years, sells for $4.2 million, and pays $1.73 million in CGT for a net gain of $1.95 million and an effective tax rate of 41.2%.
The tax multiple between the two outcomes is 1.55 times. The high productivity business pays 55% more tax as a proportion of its sale price than the low productivity business, despite both selling at the same multiple of profit and both having started from an identical position.
Professor Holden’s analysis was produced in his capacity as Chief Societal Economist at UNSW Sydney and represents his independent economic assessment of the Budget’s tax changes.
This article presents the independent economic analysis and opinions of Professor Richard Holden, Vice-Chancellor’s Professor and Chief Societal Economist at UNSW Sydney. Dynamic Business presents this analysis as reported commentary and not as the publication’s own position on the Federal Budget’s tax changes.
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