We have been helping many clients recently consider whether to buy a holiday home or a property within a complex that allows 3 months of owner use, as well as other investments with a personal and investment flavour.
The ATO has recently updated its guidance on how it interprets the law in this regard.
The ATO has recently signalled a much stronger focus on holiday homes and residential properties that are used partly for private holidays and partly for rental income. This change affects many people who own coastal homes, farm stays, Airbnb-style properties or seasonal rentals.
The ATO’s concern is simple. Many taxpayers claim significant deductions for a property that, in practice, is mainly used by the owner, family or friends for private enjoyment. As a result, the ATO has released new draft guidance to clarify how these properties will be treated from now on.
This includes:
- TR 2025/D1 – a draft taxation ruling setting out the general rules for rental property income and deductions
- PCG 2025/D6 – a practical compliance guideline explaining how owners must apportion expenses for properties with both private and income-producing use
- PCG 2025/D7 – a guideline explaining when a holiday home may be considered a “leisure facility” under section 26-50, which can deny major deductions
These drafts represent the ATO’s modern approach to holiday homes and signal how compliance activity will be targeted.
When Is a Property Treated as a Holiday Home?
A holiday home is generally a residential property that is sometimes rented out commercially, but is also used for private holidays. The ATO is particularly concerned where:
- The property is rarely genuinely available for rent
- it is listed at inflated prices that discourage bookings
- School holidays and peak seasons are blocked out for family use
- Family and friends stay free or at heavily discounted rates
In these situations, the ATO is likely to question whether the property is truly held for income-producing purposes.
Apportioning Deductions: New Expectations from TR 2025/D1 and PCG 2025/D6
Where a property has mixed use, income and expenses must be divided between private days and income-producing days. The draft guidance confirms:
- A time-based method is generally expected. Owners must calculate the number of days the property was genuinely available for commercial rent and the number of days it was actually rented to paying guests.
- If only part of the property is rented, the ATO expects both time and area apportionment.
- Owners can adopt a different approach, but they must demonstrate that their method is fair and reasonable.
This means deductions can no longer be claimed in full. They must accurately reflect the reality of how the property is used.
When a Holiday Home Becomes a “Leisure Facility”
The most significant change appears in PCG 2025/D7, which aligns with sections 26-50 of the tax law. The ATO may treat the property as a leisure facility if it is not mainly held or used to produce assessable income.
If that happens, many major deductions will no longer be allowed, such as:
- interest on loans
- council rates
- land tax
- repairs and maintenance
- insurance
- some utilities
Only expenses that directly relate to earning income, such as cleaning after guests or advertising fees, may still be deductible. This can drastically change the tax outcome for an owner.
The ATO’s Risk Zones: Green, Amber and Red
To help owners understand how their situation might be assessed, the ATO has introduced a traffic-light model.
- Green zone – low risk
The property is genuinely operated as a rental. It is competitively priced, consistently available, and has strong occupancy in peak periods. Private use is limited. The ATO generally does not intend to review these cases.
- Amber zone – moderate risk
There is a mix of motives. The property is rented, but the owner frequently blocks out desirable dates, uses it personally in peak periods or charges “mates rates”. These cases may be reviewed.
- Red zone – high risk
The property appears to be primarily a private holiday house. It may be rarely available for bookings, significantly overpriced, or largely used by the owner or family. These cases are most likely to trigger an ATO review and possible denial of deductions.
Common behaviours the ATO is now watching for (red-zone indicators)
- Claiming 100 per cent of interest and holding costs despite long periods of private use
- Blocking out school holidays and peak seasons, but still treating the property as an investment.
- Listing the property at unrealistically high prices so that no one books
- Allowing friends or family to stay free or cheaply while still claiming all expenses
- Not keeping records of private stays and periods of genuine availability
- Setting unreasonable conditions, such as long minimum stays in off-peak periods
Transitional Relief
The ATO has acknowledged that its position on holiday homes has not previously been as clearly expressed. For that reason, it has indicated that it will not devote compliance resources to reviewing expenses incurred before 1 July 2026, provided:
- The property was acquired before 12 November 2025, and
- it is genuinely a rental property, even if privately used at times.
After this transition period, the new guidance will take full effect.
What This Means for Holiday Home Owners
For clients who own, or are thinking of buying, a holiday home, several practical implications arise:
- Actual use now determines the deductions. If the property is mostly for private enjoyment, the tax outcomes can change significantly.
- Record-keeping is more important than ever. Owners should maintain booking calendars, advertising records, market-rate evidence and full details of private stays.
- Occupancy, availability and pricing will be examined closely. Blocking out peak seasons or charging unrealistic rates may place the property in the red zone.
- Loan interest and major holding costs may be denied altogether if the property is treated as a leisure facility.
- Owners need to make deliberate choices about whether they want the property to operate as a genuine income-producing rental or remain primarily a private holiday home.
We are here to help.
If you own a holiday home or are considering investing in one, reach out to us. We can help you to navigate the tax implications.
