This is tricky.
I sometimes share draft work from my own research with students - but mostly in my seminar groups rather than one to one. Although I have shared drafts with PhD students and advanced undergrads. It's about showing them how scholarly writing goes from rubbish first drafts to published essays. However, I'm not still a Masters student & I publish a lot, so I know that my work is OK even at rubbish first draft stage. And I don't give students my draft work as if it is a scholarly authoritative reference although in what crap university is a Master's student supervising dissertations?
So your friend should take this material as assistance in showing her how someone else has approached her topic not as an authoritative reference. If your friend plagiarises her supervisor's draft material, by using it in her own dissertation, she has only herself to blame, and it is cheating. No question.
So your friend shouldn't accept her supervisor's draft work, nor should her supervisor be offering your friend work with the nod & wink that 'here, use this.' If your friend is being pressured by her supervisor to incorporate the supervisor's writing into her dissertation, she must resist. But if it's being offered as "Here's a way I've been working on this material, maybe it will help you" then it should be regarded as any other secondary critical source of scholarly reference. Although not particularly authoritative if it's from an as yet unexamined Masters dissertation.
You could take further local advice by: going to your Student Union/Guild; seeing your Head of Department; seeing the convenor of the dissertation module; or talking to someone responsible for teaching & learning higher up in your Faculty.
Your problem is that it's hearsay. If someone brought this complaint to me, as an HoD, I'd find it quite difficult to investigate, unless it were the actual student who asked me about it.
I'd probably have an informal chat with my colleague (the supervisor) and suggest that other students are getting confused about the situation, and for absolute clarity and being seen to be transparent & fair, the supervisor should not be offering help in this way. It's supervision, not direction; there's a difference. And that the supervisor must be absolutely clear with the student that sharing draft material is to offer her some ideas about how others have approached the topic, not for inclusion in the student's dissertation.