Borrowing and SMSFs: Costello versus Murray

Peter Costello
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(Pictured: Peter Costello)

It’s funny how likable politicians become after they leave office. Take Peter Costello. Even though he is still in public life, as chair of the Future Fund no less, his charm has now surpassed his smugness. He is even self-deprecating. Helped by interviewer Peter Switzer, Costello took about 400 people on an entertaining tour of finance and politics at a lunch last Friday.

The annual Switzer/ AMP Capital lunch in Sydney, which raises money for the eating disorder charity Butterfly Foundation, canvassed many issues facing little super funds and big ones. The speakers were Costello, David Murray, former NSW Premier Kristina Keneally and chief executive of AMP Capital, Stephen Dunne.

An interesting divide was apparent between Future Fund chair and former Treasurer, Costello, and Financial System Inquiry chair and former CBA managing director Murray.

Asked by Switzer, who’s financial planning and newsletter business focuses on SMSFs, about whether or not they should be allowed to borrow for property or other purposes, Costello said: “Murray’s recommendation [to ban non-recourse loans by super funds] is a valid one and worth discussing, but it would need a lot more discussion if I was the Government before I did anything about it.” He prefaced his response with: “David is a good friend of mine, and he’s in the room.”

Costello said: “David would argue, though, that there is no evidence that borrowing for property or other purposes by SMSFs has put the system at risk. The people who go into SMSFs tend to know how to run businesses. A lot of them have their own business and taking on some debt is not unusual for them. Of course, there is also nothing to stop them from taking on debt outside the fund.”

Murray said: “Super funds shouldn’t be allowed to borrow except for: short-term liquidity; and, managing risk through the use of derivatives. They should not be able to borrow to augment their asset base… Borrowing concentrates the portfolio and magnifies risk through the investment cycle. Our view among the team [FSI Inquiry members] is that it shouldn’t happen among super funds – all super funds.”

Costello had also said that the GST was the “biggest tax reform in Australia for the past 50 years”. He said: “People ask me now why we can’t do more tax reform now. I say: ‘are you kidding me?’ With the current state of politics, all you can do is start with padding.”

Asked about the current and previous governments’ broken promises and acceptance of gifts from developers, in the case of NSW, he said: “Let me tell you I remember every bottle of Grange I received. And I enjoyed them too.”

Keneally said: “Eddie Obeid was like a 100-year flood. His corruption, according to evidence presented to ICAC, was of a scale which is seldom seen.”

She said that the nature of corruption was such that it started with people making “small decisions” and then along the way they end up in a very dark place.

“The thing that dismays me about Eddie Obeid is that he used his personal position as he did… But at the same time, you have the Liberal Party operating what appears to be a corrupt enterprise [for fund raising].”

Dunne reflected on the differences in the industry between when he became head of AMP Capital in 2003 and now: “it was a different time, then,” he said. “Now we need to be wired into how we manage money for individual customers. It’s also incumbent upon the leadership in the industry to improve the level of trust.”

He said that AMP, along with the rest of the industry and investors, was continuing to move more of its business offshore, such as with the joint venture announced last year with China Life, the world’s largest insurance company, and expanding its infrastructure investment offering around the globe. AMP Capital’s infrastructure fund had returned, on average, 10.5 per cent a year, after fees, since inception in 1996.

Dunne said that the SMSF market, in which AMP is the biggest provider, would continue to grow and providers needed to think about how they delivered their expertise. “We think of ourselves not so much as fund managers but more about delivering investment insights.”

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