By Richard Holden >>

EDITOR’S PREVIEW

PROFESSOR RICHARD HOLDEN researched the Federal Labor Government’s taxation direction in the 2026 Federal Budget and was horrified to deduce that its effect would be to place extra tax on businesses that are actually improving their productivity. Productivity is – up until now it seems – what Australian Governments encourage.

Productivity improvement has been the cornerstone of Australia’s mantra for genuine economic development for decades, even before the 1998 Act of Parliament that replaced the Industry Commission, the Bureau of Industry Economics and the Economic Planning Advisory Commission.

A generation before that Act, in 1974 the Industries Assistance Commission was established, replacing the problematic Australian Tariff Board, which was simply a name change in 1989 to the Industry Commission, all designed to build business growth through the broadening of free trade globally and the corresponding business productivity growth that is required – and largely achieved competitively – through technological and training improvements.

Professor Holden has spotted something that is an unexpected consequence of taxation changes – mainly directed at restoring a fairer market for home buyers – and Australia should pay attention. >>

Author >> Professor Richard Holden >>

>> NEW economic analysis, released for the first time this week, has found that the tax changes in the 2026 Federal Budget create Australia’s first ever by-design ‘Productivity Tax’.

A Productivity Tax exists when the interplay of different taxes means high productivity businesses pay a higher tax rate then low productivity business.

A high productivity business is a business that grows fast, at a speed above inflation, low productivity businesses grow more slowly, usually at or below the inflation rate.

High productivity businesses create more jobs, and more economic activity. Low productivity businesses do the opposite, often shedding jobs over time.

In a profound oversight, economic analysis released today shows that the new business tax regime announced in last week’s Budget create this exact situation.

Two identical businesses, delivering the exact same service, one highly productive, the other unproductive, will now face vastly different effective capital gains tax rates.

As the example below shows, the high productivity businesses, the business that creates more jobs, and more economic growth, will pay a vastly higher rate of capital gains tax on the sale of the business, than a low productivity low growth business.

Consider the example below:

There are two industrial cleaning businesses started at the same time, by two different husband-and-wife teams. Both couples are in their early thirties.

Business 1 is a low productivity business. Business 2 is high productivity.

They both begin with an initial investment of $450,000. This is the life savings of both husband-and-wife teams. Both businesses generate $2,000,000 of revenue in their first year. Both have 4 employees, and both generate a profit of $150,000 in their first year.

Over the next five years, Business 1 – the low productivity business – grows at 3% a year, ends up generating a profit of a little over $300,000 in the 5th year, and is sold for 4 times that—around $1.2 million. It still employs 4 people. With inflation at 3% a year Business 1 has a taxable capital gain of $680,000. Under the new capital gains tax regime, they pay 47 cents on the dollar, or about $320,000 in CGT. That’s an effective tax rate of 26.6% of the sale price.

Over the same five years Business 2 – the high productivity business – grows at 15% a year each year for 5 years. They end up employing 6 people. They also sell it for 4 times the year 5 profit of $1.05 million, or $4.2 million. They have a taxable capital gain of $3.67 million, pay $1.7 million in CGT, for an effective tax rate of 41.2% of the sale price.

Both businesses took a risk, grew a business, employed people, and paid tax, and both sold for the same multiple of profit. It’s just that Business 2 was more productive.

In return for this high productivity the couple who started Business 2 are punished with a capital gains tax rate more than 55% higher than the owners of Business 1.

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.

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.

Unfortunately, that is the perverse logic of a Productivity Tax, they punish high productivity businesses for doing well, growing fast, and creating more jobs.

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.

(For the full workings of the two examples above, see Annex 1 below).

ABOUT THE AUTHOR

Professor Richard Holden, FASSA FES FRSN, is the vice-chancellor’s professor and chief societal economist at the University of NSW Business School. www.unsw.edu.au

SUPPORTING EVIDENCE

ANNEX 1 — Full workings

Both businesses begin with identical $450,000 initial investment, $2,000,000 Year 1

revenue, 4 employees, and $150,000 Year 1 profit. The only difference is the revenue

growth rate.

Business 1 — Low Productivity Business

Growth rate: 3.0% p.a. | Inflation rate: 3.0% p.a. | Initial investment: $450,000

                           Year 1              Year 2             Year 3             Year 4            Year 5

Revenues        $2,000,000      $2,060,000     $2,121,800      $2,185,454      $2,251,018

Fixed costs     $1,050,000      $1,050,000      $1,050,000      $1,050,000      $1,050,000

Variable costs $800,000        $824,000        $848,720         $874,182        $900,407

Costs                $1,850,000      $1,874,000      $1,898,720      $1,924,182       $1,950,407

Profit                $150,000         $186,000         $223,080         $261,272         $300,611

Employees      4                      4                      4                      4                      4

Cumulative profit (Years 1–5)          $1,120,963

Indexed investment                           $521,673

Sale multiple                               4x Year 5 profit

Sale price                                              $1,202,442

Capital Gain                                          $680,769

CGT @ 47%                                            $319,961

Net gain                                                 $360,808

Effective tax rate                                 26.6%

Business 2 — High Productivity Business 

Growth rate: 15.0% p.a. | Inflation rate: 3.0% p.a. | Initial investment: $450,000

                          Year 1               Year 2              Year 3             Year 4             Year 5

Revenues        $2,000,000       $2,300,000      $2,645,000     $3,041,750      $3,498,012

Fixed costs     $1,050,000       $1,050,000       $1,050,000      $1,050,000      $1,050,000

Variable costs  $800,000       $920,000           $1,058,000     $1,216,700      $1,399,205

Costs                $1,850,000       $1,970,000        $2,108,000      $2,266,700    $2,449,205

Profit                $150,000          $330,000          $537,000         $775,050       $1,048,807

Employees      4                      4                        5                       6                       6

Cumulative profit (Years 1–5)         $2,840,857

Indexed investment                          $521,673

Sale multiple                            4x Year 5 profit

Sale price                                            $4,195,230

Capital Gain                                       $3,673,557

CGT @ 47%                                         $1,726,572

Net gain                                              $1,946,985

Effective tax rate                              41.2%

Summary comparison

Effective tax rate — Low Productivity   26.6%

Effective tax rate — High Productivity  41.2%

Tax multiple (High ÷ Low)                        1.55x

ends