Submission
To the Productivity Commission Inquiry into Reducing Barriers to Business Dynamism
How tax policy affects capital formation, innovation, business growth and productivity
Australia’s productivity problem is fundamentally a capital formation problem. Businesses cannot start, grow, innovate or employ without access to affordable productive capital. The Productivity Commission has asked Australians to identify the barriers that prevent businesses from starting, growing, innovating, restructuring and succeeding. Much of the attention in that debate goes to regulation, industrial relations, planning laws and compliance costs. Those things matter.
One of the most important barriers, however, receives comparatively little attention: the cost of productive capital, which is the equity that funds operating businesses.
Businesses cannot innovate without capital. Businesses cannot employ people without capital. Businesses cannot commercialise research without capital. Businesses cannot expand without capital. Capital markets therefore underpin every aspect of business dynamism, and any policy that materially increases the cost of productive capital becomes a barrier to it.
This submission makes two arguments. First, that Australia needs more productive capital formation, not less: the country’s productivity slowdown is, in significant part, a capital problem, and the market that finances productive businesses is already shrinking and internationally contested. Second, that the Government’s capital gains tax (CGT) reforms move in the wrong direction, materially increasing the cost of productive capital for almost every business outside the largest dividend-paying companies. We use those reforms as a detailed case study.
Our central request of the Commission is that it recognise capital formation as a foundational driver of business dynamism, and adopt a simple test against which any future policy affecting investment can be judged: does it make it easier or harder for productive Australian businesses to obtain the capital they need to grow?
Every economy ultimately grows through productivity. Every productivity improvement begins with investment and every investment begins with capital.
For decades, Australia’s productivity debates have concentrated on industrial relations, planning approvals, taxation, infrastructure and regulation. These are all important. Yet relatively little attention has been paid to a simple and prior question: how easily can productive Australian businesses obtain equity capital? Capital markets are not separate from business dynamism; they are one of its foundations. Businesses begin because investors provide capital; they expand because investors provide more of it; they innovate because investors are willing to accept long-term risk; and they employ Australians because capital finances growth.
We make one point clearly at the outset. The Commission’s terms of reference note that the tax framework is not intended to be the focus of this inquiry, and we respect that. This is not a submission about tax for its own sake, rather, it is a submission about access to capital markets and a barrier the terms of reference expressly direct the Commission to examine. The cost of productive capital determines whether Australian businesses can obtain the funding they need to grow. We use one current measure as our worked example only because it is the clearest available illustration of how a policy setting can raise that cost. The principle we ask the Commission to adopt is broader than any single measure.
Wilson Asset Management has said publicly, and in evidence to the Senate, that we support well-designed reform of capital gains taxation, and we recognise that governments must raise revenue and balance fiscal sustainability. We gave evidence supporting change to the capital gains arrangements for housing on a revenue-neutral basis, because there is a respectable case that the current settings, in combination with negative gearing, have directed too much of the nation’s capital towards bidding up the price of existing dwellings rather than building new productive capacity. Our concern is with the application of a housing-oriented measure to every operating business in the country.
Every investment policy changes behaviour. Every Australian deciding where to invest their savings responds to after-tax returns. If the tax system rewards income over capital growth, millions of Australians will rationally redirect their savings away from businesses that reinvest for growth and towards businesses that distribute profits today. That behavioural response, not the legislation itself, is what ultimately raises the cost of productive capital for Australian businesses.
I have spent more than forty years watching how sensitive the supply of capital to smaller and emerging companies is to the incentives that govern it. Australia cannot improve business dynamism while simultaneously increasing the cost of productive capital. This submission explains why capital formation belongs at the centre of the productivity discussion. We welcome the Commission’s inquiry.
Geoff Wilson AO
Chairman
Wilson Asset Management
1. Capital formation: the foundation beneath the five priority areas
The Commission has framed this inquiry around barriers to business entry, expansion and exit, and has identified five priority areas for investigation: the administrative and regulatory costs of starting a business; Australia’s innovation ecosystem; human capital and management capability; capital markets; and the transfer of successful businesses.
Capital markets appear on that list as the fourth priority. We respectfully submit that they are better understood not as one item among five, but as the foundation beneath the other four. A business must be financed before it can be started, before it can innovate, before it can employ and before it can be sold or passed on. The cost and availability of productive capital therefore shapes the outcome in every one of the Commission’s priority areas at once. The table below sets out those links.
Commission priority area Why capital formation is the foundation beneath it.
1. Administrative and regulatory costs of starting a business The availability and price of equity capital determine whether new businesses can start, scale and list. A higher cost of capital is itself a barrier to entry that compounds the regulatory costs the Commission is examining.
2. Australia’s innovation ecosystem Innovative companies fund themselves largely from retained earnings rather than dividends; taxing the resulting capital growth more heavily than dividend income penalises the reinvestment on which innovation depends.
3. Human capital and management capability Lower investment in productive businesses means fewer skilled jobs created and fewer opportunities to build management capability at scale.
4. Capital markets This is the submission’s central concern: how tax and regulatory settings determine whether savings flow towards productive businesses or away from them and what that does to the cost of capital for every company below the largest.
5. Transfer of successful businesses A higher effective tax on realised gains lowers after-tax valuations and makes business exits, sales and succession harder to achieve.
The connecting thread is the inquiry’s own frame of entry, expansion and exit. A business must be financed to start, financed to grow and valued fairly to be sold or passed on, and each depends on the cost of capital. It is worth stating the underlying point as plainly as possible.
Business dynamism is not created by regulation. It is financed.
2. Why Australia needs more productive capital formation
Australia has a productivity problem, and it is now widely accepted as the defining economic challenge of the decade. Productivity growth over the decade to 2020 was the slowest in 60 years. The Commission’s own inquiry rests on the link between business dynamism and productivity and that link runs through capital.
There is a growing body of evidence that the slowdown is, in significant part, a capital problem. Business investment as a share of GDP is now lower than it was in the early 2000s, and the decline has been larger among more productive firms, a sign that capital has become not only scarcer but less efficiently allocated. A key part of the slowdown is attributed to a decline in business dynamism itself, measured by falling rates of firm entry and exit. Each of these is a story about the supply and allocation of productive capital.
What we mean by “productive capital”
By productive capital we mean the equity that funds operating businesses, e.g., the capital that builds factories and software, commercialises research, funds exports and creates jobs, as distinct from capital deployed into passive or speculative assets. We are not defending speculation. We are defending the capital that finances businesses, innovation, technology, employment and exports. It is productive capital that Australia needs more of, and productive capital that the tax system should be most careful not to discourage.
How productive capital drives dynamism
Productive capital finances every stage of the business life cycle. It finances entry: every new business begins with risk capital, and without investors willing to fund entrepreneurs, new businesses never commence. It finances expansion: growing businesses continually raise equity to fund premises, technology, acquisitions, exports and employment, and a higher cost of capital raises the hurdle every one of those projects must clear. It finances innovation: research-intensive businesses reinvest for years before paying a dividend and depend on patient investors seeking capital growth rather than income. It finances productivity itself: productivity improves when businesses invest, and the volume of investment that proceeds depends on its cost. The chain from capital to national prosperity is direct.
Australia does not lack entrepreneurs, ideas or businesses. What it increasingly lacks is a plentiful, affordable supply of productive capital directed towards them. That is why capital formation belongs at the centre of the productivity debate and why the balance of this submission examines the health of the market for productive capital, and the policy settings that shape it.
3. The evidence: a shrinking market for productive capital
If productive capital is the foundation of business dynamism, the state of Australia’s public equity market is a direct measure of it, and the trend is not encouraging. The public market is where growing companies raise capital at scale, where disclosure and price discovery are strongest, and where ordinary Australians can own productive businesses directly. On every measure, it is contracting.
New floats on the ASX fell from around 190 in 2021 to 45 in 2023, against a five-year average of roughly 120 listings a year, and the capital raised through them fell to about $1.1 billion, against a five-year average near $5.4 billion.[1] More fundamentally, the listed-company base itself is shrinking. The Australian Securities and Investments Commission’s 2024 review of the public equity market found that the number of listed companies fell by 145 between the end of 2022 and the end of 2024, the largest two-year decline since the recession of the early 1990s, driven by just 66 new listings against 211 delistings, leaving 1,989 listed issuers.[2] Strikingly, this happened even as total market capitalisation sat near record highs, around $3.0 trillion. Fewer companies carrying more value is the definition of a concentrating market.
A shrinking, concentrating public market is one in which it is harder for new and growing companies to raise equity, and easier for capital to pool in a handful of large incumbents. The exit that growth investors rely upon becomes rarer, and the pipeline of new entrants that refreshes the economy slows. This is the market into which the proposed capital gains tax changes would be introduced and, they would raise the cost of exactly the productive capital this market is already struggling to supply.
[1]ASX, “ASX capital markets: 2023 year in review and 2024 outlook”: 45 new listings raising $1.1 billion in 2023, against ASX’s five-year averages of 120 listings and $5.4 billion a year. The 2021 peak of around 190 floats is from HLB Mann Judd, IPO Watch Australia.
[2]ASIC, Report 807, “Evaluating the state of the Australian public equity market” (2025): the number of listed companies fell by 145 between end-2022 and end-2024 (the largest two-year decline since the early-1990s recession) on 66 new listings against 211 delistings, leaving 1,989 listed issuers with total market capitalisation near record highs of about $3.0 trillion.
