Australia’s upcoming changes to the capital gains tax (CGT) regime will disproportionately penalize high-growth, job-creating small businesses while rewarding stagnant, low-productivity firms, a leading Australian economist has warned. Richard Holden, a respected professor of economics at the University of New South Wales (UNSW), has slammed the reforms as a “productivity tax” implemented at the worst possible time, as the nation grapples with a prolonged national productivity crisis. “This is the worst possible plan for a country desperate for more jobs and faster economic growth,” Holden said in his analysis, released publicly on Sunday. “It’s a productivity tax dropped right in the middle of a productivity crisis. The perverse logic of this policy is that it punishes high-productivity businesses for succeeding, scaling up, and creating new work for Australians.”
To illustrate the inequity of the new framework, Holden modeled the tax outcome for two hypothetical small cleaning businesses launched by a husband-and-wife pair, each started with the couple’s combined $450,000 life savings, and both sold after five years of operation. The first business follows a low-growth trajectory, expanding just 3% annually and adding no new employees beyond the four founding staff over its five years. When sold, the new CGT regime imposes an effective tax rate of 26.6% on the capital gain from the sale. The second business, by contrast, grows 15% each year, scales to six employees, and delivers far stronger output and profit. When sold at the same four-times-fifth-year-profit multiple as the slower-growing business, the effective CGT rate jumps to 41.2% — more than 55% higher than the tax paid by the low-growth enterprise.
The reforms, passed as part of the federal government’s May 12 budget, will ax the 50% CGT discount introduced in 1999, replacing it with an inflation indexation model applied to all asset classes starting July 1, 2027. The change will apply to investment properties, shares, and privately held small businesses alike. Originally, the Albanese government planned to limit CGT reform solely to residential housing to address a well-documented generational divide in Australian home ownership, a gap that has been confirmed by multiple independent inquiries including a March Senate inquiry report. But just four weeks before budget day, the Department of the Treasury advised the government to extend the changes to all asset classes, a last-minute shift that has triggered sharp criticism from Holden.
While the CGT changes are the most controversial element of the government’s broader “productivity package”, the budget included a suite of pro-business measures alongside the tax overhaul. Officials made the $20,000 small business instant asset write-off permanent, cut redundant data requests from financial regulators, streamlined national retail tenancy rules, and eliminated Australian Standards access fees for construction, occupational health and safety, and product safety businesses, a change expected to save eligible firms up to $1,600 annually. The budget also expanded tax incentives for venture capital investment and introduced a new loss refundability provision for businesses amending prior year tax returns. In total, the government projects the full productivity package will cut business costs by $10.2 billion per year across the country.
Many independent analysts have acknowledged the positive elements of the broader package, even as they push back on the scale and impact of the CGT changes. Analysts from the Commonwealth Bank of Australia noted in their post-budget assessment that the red tape cutting and pro-productivity small business measures are welcome changes. Still, they warned that the full suite of reforms is not large enough to materially lift Australia’s long-term economic growth ceiling or resolve the capacity constraints that are currently contributing to persistent domestic inflation.
Holden called the skewed incentives of the new CGT regime a “profound oversight” that runs directly counter to the government’s stated goal of boosting national productivity, which has averaged just 0.8% annual growth across the last two decades. “Two identical businesses, delivering the exact same service — one highly productive, the other unproductive — will now face vastly different effective capital gains tax rates,” he explained. “Both took a risk, built a business, employed people, and paid taxes, and both sold for the same multiple of annual profit. The only difference is that one business was more productive, and in return, its owners get punished with a tax rate 55% higher than their less productive competitors. Put simply, this new system punishes the businesses most likely to create jobs and grow the economy, and rewards those that are more likely to cut positions and stagnate.”
Treasurer Jim Chalmers has defended the full package, arguing that the reforms deliver progress on 13 of the 17 priority productivity reform areas identified by the independent Productivity Commission. Making the instant asset write-off permanent will save small businesses 376,000 hours of unnecessary tax compliance work annually, Chalmers said, while cutting duplicative regulatory data requests will save businesses a combined $181 million per year.