The prohibition is broad and firm

Superannuation law prohibits an SMSF from lending money to, or providing any financial assistance to, a member or a member's relative. This covers direct loans, but also indirect help such as using the fund's Assets as security for a relative's loan, or acting as guarantor. The ban exists because the fund's money must be preserved for members' retirement.

Why even a properly documented Loan breaches the rules

The prohibition applies regardless of the terms, the paperwork or the interest rate. A carefully drafted loan agreement does not cure the breach; the mere fact that the fund has lent to or assisted a member or relative is the problem.

The penalties are personal

Administrative penalties for this kind of breach are imposed on trustees personally and cannot be paid or reimbursed from the fund. Lending to members or relatives is among the breaches carrying 60 penalty units. From 1 July 2026 a penalty unit is $364, so 60 units is $21,840. Where a fund has individual trustees, each can be penalised separately for the same loan, so a single arrangement in a two-trustee fund could result in $43,680 in penalties across both.

A hypothetical example

Consider a hypothetical fund run by a couple, Raj and Meera, as individual trustees. Their adult son faces a short-term cash problem, so they lend him $30,000 from the fund, intending it to be repaid. Despite the intention and the promise to repay, this breaches the prohibition on financial assistance to a relative. Both trustees can face their own administrative penalty, be directed to rectify the breach, and see it reported by their auditor.

The wider consequences

Beyond the administrative penalty, the ATO can issue a rectification direction requiring the loan to be unwound, and an education direction requiring the trustees to complete an approved course. In serious or repeated cases, trustees can be disqualified, or the fund can be made non-complying, which carries severe tax consequences.

The definition of 'relative' is broad

The term relative is wider than many trustees assume. It extends well beyond a spouse and children to include parents, siblings, grandparents, grandchildren, aunts, uncles, nieces, nephews and their spouses, among others. This means arrangements that feel distant — helping a sibling's spouse, for instance — can still fall within the prohibition.

How the breach comes to light

SMSFs are audited every year by an independent, ASIC-registered approved auditor whose Job includes examining exactly these transactions. A payment out of the fund to a relative, or an asset used as security, shows up in the fund's records and bank statements. When identified, the auditor may be required to report the contravention to the ATO.

Legitimate alternatives

Personal savings held outside super are available to lend or give to relatives; the SMSF's assets are not available for this purpose. The in-house asset rules and the arm's-length requirements also restrict many dealings between the fund and related parties more broadly.