The party's state executive met on Monday to consider a request from Premier Peter Malinauskas to repay the money to the CFMEU amid accusations of vandalism, something the union has rejected.
The executive backed the premier's call which also came after a vote last week to effectively merge the SA branch of the union with that of Victoria, run by John Setka.
Mr Malinauskas had resisted initial calls for the cash to be returned but warned the government would not tolerate bad behaviour within the construction industry.
He changed his view on the weekend after learning of allegations that cars belonging to the Master Builders Association had been vandalised on Friday with a CFMEU sticker placed on one.
Explaining his decision, Mr Malinauskas said the incident was a "demonstration of exactly the sort of thing that we don't think is appropriate".
But the union's SA branch secretary Andrew Sutherland said no allegations of vandalism had been put directly to the CFMEU and he called on the premier to provide any proof he had that union officials or employees were involved.
"If the premier has evidence that would assist the CFMEU in investigating the matter, we ask that he provide it to us without further delay," Mr Sutherland said in a statement.
"The CFMEU does not, and has not, authorised, encouraged, or sanctioned any acts of vandalism."
More broadly, Mr Sutherland said the donation made to the Labor party during the recent state election campaign was made by the Victorian-Tasmanian branch on behalf of its 28,000 members, and in cooperation with the SA division's 2000 members.
He said it was not made personally by any official and was no different to donations made by any other union.
"The premier's erratic decision to demand the return of our election donation is a significant betrayal of the CFMEU members who supported him during the election campaign, and who responded to his party's fundraising efforts." Mr Sutherland said.
The SA opposition welcomed the premier's change of heart on the issue, but called for the money to be donated to a domestic violence charity, given Mr Setka's 2019 conviction for harassing his wife.
Federal Opposition Leader Peter Dutton also weighed into the issue, praising the SA premier for returning the money, as he called on Prime Minister Anthony Albanese to do the same.
He said federal Labor had taken "millions and millions" of dollars from the CFMEU over the past decade despite incidents of extortion, assaults and other issues on worksites.
"The prime minister has to show the leadership that the South Australian premier has shown and give the money back," Mr Dutton said.
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