New ATO Guidelines for Holiday Homes: What Property Owners Need to Know

The ATO has recently released draft guidance (TR 2025/D1, PCG 2025/D6, PCG 2025/D7) clarifying how income and deductions are treated for individuals who earn money from rental properties, including short-term rentals, rooms in their home, or holiday homes. These updates are particularly important for owners of holiday homes who occasionally rent out their property, as new rules may affect the deductions they can claim.

Income from Rental Properties

The guidance confirms that any amounts received from renting out your property, whether as a full rental or as part of a short-term arrangement, are generally considered assessable income. It also clarifies how losses and outgoings can be claimed as deductions, particularly when the property is used for both personal and income-producing purposes.

Leisure Facility Rules

One of the most significant changes involves the “leisure facility” rules under section 26-50 of the ITAA 1997. These rules may deny deductions for holiday homes that are not primarily used to generate assessable income. Expenses affected can include:

• Interest on loans to acquire the property
• Council rates
• Land tax
• Repairs and maintenance

Even if a holiday home is occasionally rented, deductions may be restricted if the property is mainly used for personal leisure rather than income generation.

Apportioning Expenses

When a property is used partly for personal use and partly for income generation, the ATO expects deductions to be apportioned on a “fair and reasonable” basis. Acceptable methods include:

• Time-based apportionment: Deducting expenses based on the proportion of days the property is rented.
• Area-based apportionment: Deducting expenses according to the portion of the property rented out.
• Combination methods: Using both time and area to calculate deductions.

While property owners may adopt alternative methods, they will need to substantiate that their chosen approach is fair and reasonable to qualify for protection under the ATO guidelines.

Risk Zones for Compliance

The ATO has also outlined a risk-based framework to indicate how they will apply compliance resources:

• Green zone (low risk): High income-producing occupancy, minimal personal use, and active efforts to maximise rental income. These arrangements are unlikely to attract ATO scrutiny.
• Amber zone (medium risk): Increased personal use, underutilised rental periods, or limited attempts to generate rental income. The ATO may review these arrangements.
• Red zone (high risk): Prioritising personal use, restricting rentals during peak periods, or failing to advertise at market rates. These properties are likely to attract closer attention, including audits.

Transitional Arrangements

The ATO has confirmed that it will not review expenses incurred before 1 July 2026 on holiday homes where arrangements were entered into before 12 November 2025. This transitional approach recognises that the new guidance may be surprising to many property owners.

What This Means for Property Owners 

Owners of holiday homes or other rental properties should:

1. Review how their property is used: Ensure that the income-producing purpose is clearly prioritised if claiming deductions.
2. Keep detailed records: Track occupancy, personal use, and rental periods to support apportionment calculations.
3. Consider deductions carefully: Particularly those affected by section 26-50, such as interest, rates, and repairs.
4. Plan ahead: For future tax years, adjust use or rental arrangements to minimise risk and maximise allowable deductions.

The ATO’s updated guidance highlights the importance of using and tracking your holiday home carefully. Proper planning and fair apportionment of expenses can protect deductions and reduce audit risk.

Want to ensure your holiday home deductions are compliant? Contact PPT today to review your property arrangements and optimise your tax position before the next financial year.

Want more information?

To discuss how this may impact your circumstances contact PPT on (03) 5331 3711.

DISCLAIMER: The material and contents provided in this publication are informative in nature only. It is not intended to be advice and you should not act specifically on the basis of this information alone.  If expert assistance is required, professional advice should be obtained.