Former federal treasurer Peter Costello has argued against banning the use of direct borrowing within superannuation, saying the reasons for the proposal are not factually based and not enough credit has been given to SMSF trustee competency.
“[Financial System Inquiry chair David Murray] raised the question that if it [SMSF borrowing] grew into a large thing, it could present a risk to the financial system,” Costello said at a recent leadership lunch in Sydney.
“But I think he would agree there is no evidence here to be talking about something that could hypothetically happen in the future.”
He went on to say the use of direct gearing within an SMSF had to be examined in the context of who trustees tended to be and the skill sets they possessed.
“The people who go into SMSFs by and large are people who know how to run a business. They by and large are people who manage to put a few assets together and they like to manage their own assets,” he said.
“They can manage their own assets as well as anybody in a public offer fund or an industry fund and taking on some debt would not be unusual for these types of people.”
He added the banning of direct borrowing within a fund could be counterproductive and actually result in a higher level of risk to the financial system. “Suppose we say you’re not allowed to take on any debt inside your fund, nothing’s stopping you from taking on debt outside [the fund],” he said.
“In fact, inside the fund it can be non-recourse; outside the fund [can have] other recourse [components] and they can gear over 100 per cent, we all know that, and get a full tax deduction if they did do that against marginal tax rates. If you put that rule in place, you might just be shifting the gearing and may even be shifting into more risky areas.
“So the recommendation is a valid recommendation I think is worth discussing, but I think it needs a lot more discussion before I’d sit down and do it.”