It is one of the most natural instincts a parent has: to help a child buy a first home or start a business. And if your Wealth sits largely inside a self-managed super fund (SMSF), it can be tempting to lend some of it to your son or daughter, perhaps even at a fair interest rate. Resist that temptation. Lending SMSF money to your children — or providing them financial help in almost any form — breaches one of superannuation's clearest prohibitions, and the consequences fall on you as Trustee ATO Investment restrictions.

The absolute ban on financial assistance

Superannuation law is blunt here. An SMSF cannot lend money or provide direct or indirect financial assistance to a member or a member's relative ATO investment restrictions. Children are relatives. This is not a matter of degree or reasonableness: even a Loan on full commercial terms, properly documented and secured, is prohibited if the borrower is a member or a relative. The rule exists because super is meant to fund retirement, not to be a family bank.

“Financial assistance” is broader than a loan

The prohibition is not limited to handing over cash as a loan. Financial assistance is interpreted broadly and can include guaranteeing a child's loan, using fund Assets as security for their borrowing, buying an asset from them at an inflated price to give them cash, or paying their expenses. If the practical effect is that fund money or fund assets are used to benefit a member or relative, it is likely caught. Trustees who think they have found a clever structure to help a child usually find the substance-over-form approach defeats it.

Do not confuse this with the in-house asset rule

Some trustees know that an SMSF can have up to 5% of its assets as “in-house assets” — broadly, loans to or investments in related parties — and assume a small loan to a child is fine within that 5%. It is not. The 5% in-house asset allowance applies to certain related-party investments and loans to related entities; it does not create an exception to the separate, absolute ban on lending to or assisting members and their relatives ATO investment restrictions. A loan to your child is prohibited outright, not merely limited to 5%.

The consequences for the fund and for you

Breaching the financial assistance rule is a serious contravention. It can lead to administrative penalties imposed on trustees, the fund being made non-complying with severe tax consequences, and, in serious cases, disqualification as a trustee ATO obligations. Because an SMSF's auditor must report such contraventions to the ATO, these arrangements tend to be discovered. The very act of trying to help a child can jeopardise the retirement savings of everyone in the fund.

Indirect help is caught too

Trustees sometimes try to help a child without an obvious loan, and these indirect routes are exactly what the rule is designed to catch. Using the fund's term deposit as security for a child's bank loan, having the fund buy a car or a Business asset and let the child use it, or the fund paying a child's bills, all amount to financial assistance ATO investment restrictions. The ATO looks at substance, not labels, so dressing assistance up as an “investment” rarely works. If the arrangement would not exist but for the family relationship, and the child benefits from fund money or fund assets, assume it is prohibited unless you have clear advice otherwise.

It also offends the sole purpose test

Beyond the specific prohibition, lending to a child cuts against the sole purpose test — the requirement that the fund be maintained solely to provide retirement (and death) benefits to members ATO SMSF investment requirements. Using the fund to provide a present-day benefit to a family member is close to the opposite of that purpose. So an arrangement can breach both the specific rule and the overarching one, compounding the problem.

Why the rule is so strict

The severity can feel harsh when the intention is loving and the terms are fair, but the logic is consistent with the whole design of super. Concessional tax treatment is granted on the understanding that the money is genuinely quarantined for retirement. The moment fund assets can be redirected to a member's family for present-day purposes, that bargain breaks down — which is why the prohibition is absolute rather than a question of reasonableness ATO investment restrictions. It also protects other members of the fund and the integrity of the retirement system generally. Viewed that way, the rule is less an obstacle than a boundary that keeps the fund's tax advantages intact for the purpose they were meant to serve.

A hypothetical example

Hypothetical: Maria and Joe have $900,000 in their SMSF. Their daughter needs $80,000 for a home deposit. They plan to lend it from the fund at 6% interest, with a signed loan agreement, believing that commercial terms make it acceptable. It does not. The loan is financial assistance to a relative and is prohibited regardless of the Interest Rate or documentation. If made, it is a reportable contravention that could attract trustee penalties and threaten the fund's complying status. The commercial-looking paperwork does not save it — the identity of the borrower is what makes it a breach.

Legitimate ways to help

If you want to help your children, do it with money outside super. You might draw a benefit from the fund once you have met a condition of release — so the money is properly yours — and then gift or lend it to your child personally. You could help from savings held in your own name. What you cannot do is route the assistance through the SMSF while the money is still preserved super. The distinction matters: once benefits are legitimately paid to you, they are yours to use as you wish; while they remain in the fund, they are bound by the rules. Helping family is admirable, but an SMSF is the wrong vehicle for it, and the exception you might hope for simply does not exist. Keep the fund's dealings with members and relatives at arm's length, and keep family generosity in your personal hands.