The Western Force is reportedly set to be the Australian franchise axed from next year's Super Rugby competition if SANZAAR pushes forward with a proposed restructure.
An announcement on the restructure is expected this week.
McGrath said the Australian Rugby Union (ARU) needs to protect its' five Super Rugby teams even if it means forging a new competition with sides from New Zealand and Asia.
McGrath oversaw the introduction of the Melbourne Rebels into Super Rugby in 2011, Australia's fifth side.
The addition came five years after the Perth based Western Force joined the tournament.
Neither of the two teams has made the playoffs and has proved a heavy financial burden for the ARU.
Peter McGrath said cutting teams and turning back the clock is not the answer.
"I think it's absolutely fundamental that we keep five teams and the ARU should be ensuring that," he said.
"I disagree totally that we don't have enough talent. I believe we do have enough talent."
McGrath believes a new tournament with Australia, New Zealand and Asian sides would be more efficient, with teams not having to do long haul flights to South Africa between games.
Photo: PHOTOSPORT Former ARU boss Peter McGrath