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The short answer is that a fund cannot lend money, or provide any financial assistance, to a member or a relative of a member. Not at commercial rates. Not with a signed agreement. Not temporarily. Not if you pay it back next week.
It is section 65 of the Superannuation Industry (Supervision) Act, and it is one of the few genuinely absolute rules in the system.
Despite that, the practice is growing. The ATO has reported that prohibited loans in the SMSF sector jumped from around $252 million to around $398 million in recent years, and it has said plainly that it will not be sympathetic when it finds them.
Why it happens
Almost never through greed. Usually through cash flow.
A business hits a rough month. There is money sitting in the fund doing nothing. The trustee is the same person as the borrower and the paperwork feels like a formality. The intention is genuinely to pay it back, and often it is paid back.
None of that matters. The breach happens the moment the money leaves.
What it costs
Several things, and they stack.
The loan is an immediate breach of section 65, and the auditor is obliged to report it to the ATO through an auditor contravention report. That is not the auditor being unhelpful. They have no discretion.
If the money went to a member who has not met a condition of release, it may also be illegal early access, which brings the amount into the member's assessable income and can carry further penalties.
Administrative penalties apply to the trustees personally, from 5 to 60 penalty units depending on the breach, which is roughly $1,650 to $19,800 for offences after 7 November 2024, and they cannot be paid from the fund.
For serious or repeated breaches, the ATO can disqualify you as a trustee of any SMSF, and disqualified trustees are named publicly.
In the worst cases the fund can be made non-complying, which triggers tax on the fund's assets at the top marginal rate. That outcome is rare and reserved for serious cases, but it exists.
The related question people ask next
What about lending to my company, or to a trust I control?
Different rule, and it is not a flat prohibition, but it is tightly limited. Loans to and investments in related parties are in-house assets, and in-house assets cannot exceed 5 per cent of the fund's total market value. Exceed it at 30 June and you have to prepare a written plan to reduce it and act on that plan. There are exceptions, including for genuine business real property leased to a related party on commercial terms, but they are specific and they need to be got right.
If it has already happened
Repay it, immediately and in full, and document everything: what happened, when, why, and what you did about it. Then tell your accountant before the audit rather than hoping it is not noticed. It will be noticed.
The ATO's response to a trustee who identifies and rectifies a breach and discloses it is materially different from its response to a trustee who is found out. That difference is worth a great deal and it is entirely within your control.