The former treasurer, Peter Costello, says the Financial System Inquiry’s (FSI) proposed banning of lending inside self-managed super funds is unnecessary.

“People who go into SMSFs are people who know business…taking on some debt is not unusual for these people. They by and large are people who’ve put together a few assets and are by and large people who like to manage their own money.

“So if you [ruled out borrowing in super] you may just be shifting the gearing into more risky areas. You have either non-recourse loans inside super or full recourse outside super,” Costello said during a panel discussion in Sydney on Friday.

“They can gear to over 100 per cent and will get a full tax deduction against marginal tax rates. So the recommendation [to ban borrowing inside super] is a valid recommendation, I think it’s worth discussing, but I think it needs a lot more discussion,” Costello said.

“You can legitimately disagree on principle, but one of the things [Murray] looked at was whether SMSFs should be allowed to borrow, and raised the question that if it grew into a large trend it could present a risk for the financial system.

“But I think he would agree there’s no evidence that has occurred. We’re talking about something that might hypothetically occur in the future.”

Murray responds

David Murray, head of the FSI, responded by saying he does not oppose all types of borrowing in super, that the inquiry’s findings had been oversimplified. “We said that super funds should not be able to have direct leverage. They can have indirect leverage.”

“They should be able to borrow for short term liquidity needs, they should be able to undertake the sort of leverage involved with managing risk. But they should not be able to borrow to augment the asset base,” Murray said.

The main issues he would seek to address through controlling lending inside superannuation are problems with the concentrations of portfolios

“You’ve magnified your risk through the cycle by borrowing. Our concern was that in the financial system, we have leverage or borrowing risk in the banking system, we don’t want to exacerbate that in the super system…borrowing magnifies risk,” he said. “Our view, very clearly…is that it shouldn’t happen in all super funds.”

Murray believes it also comes down to issues of fairness. “To the extent that you’ve got this super fund and are potentially well placed in retirement, by leveraging that fund you, have leveraged up your take from the government on the generous taxation of superannuation funds.”

Caution on tax concessions

Murray called for caution regarding the awarding of tax concessions for super fund trustees.

“My starting point is that market capitalism is the only thing we know that has the best chance of a good long term solution. But there’s two sides you’ve got to studiously avoid and that’s crony capitalism and the nanny state.

“We’re not in an ideal world. It would be better if you could tax [super] on the way out. The question is: to what extent do people still need these concessions?”

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