The ATO crackdown on holiday property deductions

Technical Update
Published: 

The Australian Taxation Office (ATO) has restricted its view on when some tax deductions are allowable for taxpayers who own a holiday home or an investment property that is leased on a short-term stay/holiday let income producing basis. It is assumed that these arrangements have been brought to the ATO’s attention due to the explosion of the Airbnb and other short-term letting arrangements, in lieu of the more traditional long-term rental operations of investment properties. Accordingly, the ATO has released three publications to address the taxation implications of these arrangements:

Denial of tax deductions for property holding costs

The ATO has emphasised its view that the leisure facility rules in section 26-50 of ITAT 1997 may disallow expenses relating to holding the rental property, such as interest, council rates, and insurance. The leisure facility rules are aimed at preventing taxpayers from obtaining a tax subsidy for expenditure on their own recreation, unless the leisure facility falls under an exception, such as where your holiday home is used (or held) mainly to produce assessable rental income or similar.

TR 2025/D1

TR 2025/D1 provides guidance for individuals who earn income from rental properties, are not using the rental property in carrying on a business, and are generating income through property rentals, including from both:

  • Short-term arrangements such as holiday homes and letting out rooms within a primary residence, and
  • long-term leases of a property or part of a property.

The ruling outlines when rental income is assessable, how deductions should be claimed and apportioned, and the specific rules that apply to holiday homes under the leisure facilities rules in section 26-50 of the ITAA 1997.

Of significance is that TR 2025/D1 replaces Taxation Ruling IT 2167 Income Tax: Rental properties – non-economic rental, holiday home, share of residence, etc. cases, family trust cases, which was issued in 1985 but is now withdrawn. This is significant, as the ATO’s approach in TR 2025/D1 is more restrictive than IT 2167.

The overall theme in TR 2025/D1 is that all rental income must be declared, regardless of whether the arrangement is commercial or an informal arrangement, such as discounted rents for family and/or friends. Assessable income includes rent, lease premiums, and license fees, even if the amounts charged are below market rates. This includes amounts received from a property: through an agent; through a sharing or other online platform; directly from a tenant.

However, amounts received from household or family members may not be considered assessable if they relate to shared expenses or care arrangements or amounts that are a contribution towards a shared household expense. However, where the payment is for a lease or license to occupy the property, the payment is likely to be assessable.

For properties with mixed use, where only part is rented or only available for rent for part of the time, losses or outgoings must be apportioned on a fair and reasonable basis so that they are only claimed as deductions to the extent that they are incurred in the course of gaining or producing assessable income.

Holiday Homes

Where a rental property is also a ‘holiday home’, certain deductions relating to holding it, like interest, council rates, and insurance, will be denied because it is a leisure facility (under subsection 26-50(1) of the ITAA 1997) unless an exception applies. This is an important difference between TR2025/D1 and withdrawn IT 2167.

A leisure facility is defined as land, a building, or part of a building or other structure, that is used (or held for use) for holidays or recreation (section 26-50(2)). The ATO considers a rental property to be a leisure facility if it is a holiday home.

There are exceptions, including where the property is used or held mainly for producing rental income throughout the year or during specific periods.

TR 2025/D1 states that whether a property is a holiday home is a matter of fact, which requires an objective analysis of how a property is used, or held for use, for holidays or recreation.

The factors to consider when determining whether a holiday home is used mainly to produce assessable income include, (but not limited to) the: the times the holiday home is used or available for either income-producing use or for private use; whether these times are at peak holiday periods such a seasonal times, school and public holidays; and whether the rent is market-based pricing.

Example of the new legislation in practice

Joe and Jen own a holiday home in a beachside town and have it available for rent at market prices except for the Christmas-New Year period and school holidays to keep it available for their use and their family and friends. Because it is not available for rent in peak times, it is on average only rented out at commercial rates for three weeks a year. This holiday home may be considered to be a leisure facility by the ATO, and therefore Joe and Jen may not be entitled to claim property holding costs, like interest, council rates, and insurance. (based on example 12 in TR 2025/D1).

Transitional compliance approach

The ATO understands that their views on section 26-50 have not been previously publicly released. Accordingly, the ATO will not devote compliance resources on whether section 26-50 applies to expenses incurred in relation to holiday homes that are rental properties before 1 July 2026, where those expenses are incurred under an arrangement entered before 12 November 2025. This transitional period allows taxpayers time to adjust to the new rules.

PCG 2025/D7: Section 26-50 and Holiday Homes

The purpose of PCG 2025/D7 is to provide support to taxpayers with managing their compliance risks with respect to the leisure facility rules in section 26-50 of the ITAA 1997.

PCG 2025/D7 introduces a risk-based compliance framework based on risk zones as follows:

  • Green (low risk): High level of usage of a property to produce income combined with limited non-income producing use. That is, the property is mostly rented, with minimal private use.
  • Amber (medium risk): Increased personal use of the property by the individual, family and friends, forgoing income generation to make the property available for private use and/or available for private use during peak times.
  • Red (high risk): Little or no commercial exploitation of the property to produce income though income producing activities and the non-income producing use is usually prioritised. That is, property is primarily for personal use, with limited or token rental activity.

The zone determination is based on a consideration of the factors outlined in PCG2025/D7 and no single factor will be determinative. The factors may have different weighting depending on the factual circumstances in each case.

While any relevant factor will be considered, they can be broadly considered in 2 main groupings:

  • Commercial exploitation of the property: which reflects the extent to which the property is used to produce income in preference to any other use of the property
  • Non-income-producing use of the property: which reflects the extent to which the property is used or held for other uses in preference to income producing activities. Factors influencing risk classification include high occupancy during peak seasons, genuine commercial rental activity, limited personal use, and market-based pricing.

PCG 2025/D6: Apportionment of Deductions

PCG 2025/D6 is a complementary ATO publication that outlines acceptable methods for apportioning expenses when a property serves both income-producing and private purposes. The ATO recognises that mixed-use scenarios are common and provides practical guidance to reduce disputes.

Approved methods include the time-based method of apportionment (where deductions are calculated based on the proportion of days rented versus private use), the area-based method of apportionment (when only part of the property is rented), and the combined method for complex cases involving both time and space variations.

The draft ruling contains a range of examples to illustrate these apportionments, including combined area and time-based methods. 

Key takeaways for property owners: Navigating ATO guidelines on mixed-use and holiday homes

The release of these new ATO guidelines reflects the ATO’s revised focus as a result of the rise of short-term rental platforms. Presumably, outlining the rules around holiday homes and mixed-use properties, is aimed at curbing aggressive tax claims where there is personal usage and ensures that deductions align with genuine income-producing activity.

Taxpayers should be aware of the importance of record-keeping and transparency to clearly differentiate between personal and commercial use of the property. Property owners should maintain detailed logs of rental and private use, keep evidence of market-based pricing and booking acceptance, avoid blocking peak periods for personal use, and use ATO-approved apportionment methods. Failure to comply can result in denied deductions and penalties.

How BDO can help

Should you have any questions regarding this new guidance, please contact your BDO tax adviser for further guidance, or visit our tax services page to see how we can help.

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