MARK RILEY: The Budget’s danger is trust issues hidden in changes to capital gains tax on businesses

The Budget blowback is showing no signs of abating. If anything, it is intensifying.

But senior government advisers tell me this week they aren’t surprised. They thought the fallout would be even worse. Change is difficult, they say.

The electorate demands that governments engage in meaningful reform.

When they do, though, there are always complaints from those who would have done better if things had remained the same.

Those complaints are even greater this time because the reforms are layered on top of a massive breach of trust.

This government is making changes it explicitly promised many times before the election it would not do.

But this is where things get strange. Those advisers expected the biggest outrage to be over the changes to negative gearing and capital gains tax (CGT) arrangements on investment properties.

They are the most obvious and egregious broken promises.

Yet the debate over them has shifted in a way the government didn’t expect.

Almost two weeks after the Budget, powerful interest groups like the Australian Chamber of Commerce and Industry are effectively saying that the negative gearing and CGT changes should remain.

But there is an important caveat. They say the changes should only remain on housing. They should not apply to small business.

And that is the sector that is generating the loudest and most stinging criticism.

The advisers are confident the government can ride it out without suffering too much long-term damage.

They believe this because they say much of the criticism is based on inaccurate and misleading claims about the effect the changes will have on small businesses.

Much of the online protests — so effectively communicated through those “Albo is my business partner” online memes — have been exposed as bunkum.

But there is one major element that is perfectly accurate and now looms as the most dangerous sleeper element of this Budget.

Many small businesses will have to restructure. Particularly if they operate through family trusts and distribute their earnings through bucket companies to attract generous tax discounts.

That has been the traditional way for small businesses to minimise their tax exposure. Not anymore.

The introduction of a minimum 30 per cent tax rate for discretionary trusts has rendered those arrangements impotent.

Many, if not most, of those small businesses will have to rearrange their affairs.

And that could present big and costly problems that small business owners are only now realising as they speak with their accountants.

Transferring control of their businesses from a discretionary trust to a fixed trust or another entity could attract state stamp duties of tens and possibly hundreds of thousands of dollars.

Those duties on the transfer of corporate assets vary from state to state.

Some offer concessions while others don’t just tax the transfer of property but all business assets, including goodwill, stock and equipment.

The level of duty varies. In NSW it is capped at 7 per cent. In Queensland and WA it can be considerably higher depending on the nature of the business and its assets.

So, while the states are worried about the amount of stamp duties they might lose from the dampening effects negative gearing and capital gains tax changes will have on the property market, some are looking at a rich new pot of gold from the wave of business restructuring those changes will cause.

Treasury either knew this would happen and the government didn’t care, or else it was an oversight — what is known as an “unintended consequence”.

Either way it is something that should have been dealt with through a formal process. And it still can be.

The National Cabinet seems the logical forum for the federal government to encourage the states to remove or at least reduce the duties on business transfers forced by its Budget.

The government is giving small business a three-year rollover period from 1 July next year to deal with the capital gains tax changes.

Small business organisations now want that extended to stamp duties to allow them time to negotiate concessions with the states.

But it is really something the federal government should be doing.

It has imposed the changes. It should fix the mess.

And if it doesn’t, that surprising level of contentment among senior government advisers over the Budget blowback might soon disappear.