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Calculating the business cost of Australia’s new 'productivity tax'

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

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, a new economic analysis shows that the new business tax regime announced in the recent federal budget creates 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.

How the 'productivity tax' works in practice

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.

Business 1: Low productivity business, with a growth rate of 3% p.a., inflation rate of 3% p.a. and initial investment of $450,000:

Business 1: profit, capital gain and effective tax rate:

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.

Business 2: High productivity business, with a growth rate of 15% p.a., inflation rate of 3% p.a. and an initial investment of $450,000:


Business 2: profit, capital gain and effective tax rate:


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.

 

Richard Holden is Vice-Chancellor’s Professor and Chief Societal Economist at UNSW Sydney. He is also Director of the Economics Manos Institute for Cognitive Economics, and President Emeritus of the Academy of the Social Sciences in Australia.

This article was originally published by UNSW’s BusinessThink research platform. 

 

  •   3 June 2026
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14 Comments
Joe A.
June 04, 2026

It’s hard to understand how two similar businesses established with exactly the same parameters at the same time could enjoy such different levels of productivity.
That aside, in my opinion the comparison of the two businesses measures the wrong thing, which is the level of tax paid. The correct thing to compare is the net capital return, the high productivity business has a marginal positive capital return of $1.586M over the low productivity business in spite of the much higher effective tax rate. In addition it has enjoyed much higher profitability on the way through.
I know which business I would have preferred to own, regardless of effective tax rate.

7
Malcolm
June 06, 2026

Could not agree more. The data has an in built and purposeful bias, and distorts the reality of the two situations. You could apply the same mathematical logic to basic personal incomes, Person A earns $2M and pays $900K income tax, Person B earns $1M doing the same job and pays $400K tax. Which person do you want to be, A with $1.1M in his pocket or B with $600K?

Geoff
June 05, 2026

So if a higher tax rate disincentivises, we should see progressive PAYE having the same effect... but weirdly enough, folks still want to earn more money.
Rich/greedy folks, of course, spend a lot of time and effort arranging their affairs to avoid paying as much tax as poorer people - which is probably what your hypothetical multimillionaire cleaning couple will do.

4
Ian Radbone
June 04, 2026

Funny, I thought productivity was a measure of output over input, not growth.

3
Steven Jackson
June 04, 2026

Indonesia has far and away lower taxes and commensurately less services, this country was a shining example of an egalitarian system but it lowered the share of the pot for capital holders post war and increased the share to labour to the highest level of all times some suggest, this egalitarianism is gone and we have a burgeoning homelessness problem that even extends to housing strain on a registered nurse living in Western Sydney or similarly the Northern or Western suburbs of Melbourne earning $90k pa who still has a HECS debt when previously for late boomers it was free for a period and the chance of the nurse being able to buy her self a house is slipping away from her rapidly.


Now we hear howls of complaint when a tiny tinkering of the balance is being attempted after the very large transfer of wealth to capital in the last 30 years. What sort of country do we want, an egalitarian country like I grew up in or an American style country were you go bankrupt for medical care if unemployed hence uninsured?

3
Alex
June 04, 2026

We did not grow up in an egalitarian country. We grew up in a country of opportunity. The only way everyone's wealth in this country can recover and then grow is through the effective investment of Capital. This is now under aggressive attack. Opportunity is being suffocated.
We all have differing capabilties, talents, interests, hopes, dreams, desires, work ethic, priorities, discipline, intellect and energy.
The notion that everyone has to somehow be 'equal' is ridiculous. It has failed every single time regimes have attempted to engineer it throughout history.
You are where you are in life because of the decisions you have made.

5
Steven Jackson
June 05, 2026

Alex, it is equal opportunity that was available in the past and is lacking today and even being equal in the eyes of the law could be said to have disappeared also as representation is no longer available to all.

1
Old super hand
June 04, 2026

These are both very productive case studies, with even the supposed low productivity having a large increase in profits and a subsequent capital gain.
If the couple paid the amount of tax in the worked examples they would be very poorly advised by their accountant. There are various concessions that apply when a small business is sold where the capital value is under $6 million.
https://www.ato.gov.au/businesses-and-organisations/income-deductions-and-concessions/incentives-and-concessions/small-business-cgt-concessions/small-business-cgt-concessions-eligibility-conditions
A bigger question is what is a fair rate of tax to pay if your investment value increases nearly 10 fold in a five year period. Pretty academic in any case for a husband and wife cleaning team in their 30s!

2
John G
June 04, 2026

Why should it be any different to two employees working for the same company? One worker stays in the same role for 5 years and the other increases their qualifications and subsequently gets promoted with commensurate increase in income and tax bracket.

2
Angus B.
June 06, 2026

Absolutely correct. You cannot argue with the disincentive. Plenty of young people start businesses thinking they are going to hit the lights out, and sure most of them don't go on to become 10 baggers or 100 baggers. That's irrelevant, what is important is that people have a go. Now with the expectation of close to 50% tax accompanying any success, there is a huge disincentive to look at doing something else or going somewhere else.

2
Jarrod Lilkendey
June 04, 2026

Whatever came of the productivity summit anyway?

1
Stephen
June 04, 2026

Higher taxes.

11
Pietro Mirco
June 09, 2026

Yep.
This is definitely gonna convince the faithful to give up their motivations and live on Centrelink!
Earn more money, pay more tax, enjoy both the benefits- higher personal income/wealth and a more prosperous society

 

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