Holiday Homes Under the Microscope
The ATO is not banning deductions for holiday homes, but it is drawing a firmer line between genuine investment properties and lifestyle assets.
Holiday Homes Under the Microscope
What the ATO's New Guidance Means for you
For many Australians, a holidayhome does double duty. It's a place to escape with family and friends, andduring the rest of the year it is listed on Airbnb or Stayz to help cover thecosts.
Until recently, many ownersassumed they could claim most of the usual deductions for the property withoutmuch trouble, provided appropriate apportionments were made. However, thatposition is now under more scrutiny than ever following the release of newdraft guidance by the Australian Taxation Office (ATO) -- TR 2025/D1, PCG2025/D6, and PCG 2025/D7.
What is the ATO concerned about?
In simple terms, the ATO wantsto distinguish between properties that are genuinely held to maximise rentalincome and those that are primarily lifestyle assets with some incidentalrental use.
The ATO confirms that all rentalincome must be declared, even if it is occasional or earned through informalarrangements. However, if the property is really a holiday home and is not usedmainly to produce rental income during the year, the owner cannot claimdeductions for expenses such as interest, rates, land tax, or repairs andmaintenance. If the property is classified as a holiday home by the ATO, ownerscan only claim deductions for limited direct expenses such as cleaning oradvertising.
The ATO is particularly focusedon properties that:
- Are blocked out for private use during peak periods(for example, school holidays or ski season)
- Are advertised inconsistently or at above-market rates
- Generate ongoing tax losses year after year
How expenses must be claimed
Even if the property is notclassified as a holiday home, expenses will often still need to be apportionedif the property is only used partly for income-producing purposes. PCG 2025/D6outlines how expenses should be apportioned -- the key principle is that claimsmust be fair and reasonable. Common methods include time-based apportionment(days rented versus days used privately) and area-based apportionment (whereonly part of a property is rented).
Getting this wrong -- or failingto keep evidence -- increases audit risk. The ATO has access to bookingplatform data and can cross-reference listings, calendars, and reported income.
Practical steps you should take now
Although the guidance isproposed to apply from 1 July 2026, with transitional relief for arrangementsin place before 12 November 2025, now is the time to review your position:
- Test your commercial intent -- is the propertygenuinely available for rent, including during peak periods?
- Set rent at market rates consistent with comparableproperties in the same area.
- Keep strong records -- booking calendars,advertisements, enquiries, and a diary of private versus rental use.
- Review ownership and strategy -- in some cases,changing how a property is operated can improve its tax outcome, but be awareof potential capital gains tax and duty implications.
- Document existing arrangements -- if you may qualifyfor transitional relief, evidence is essential.
The bottom line
The ATO is not banningdeductions for holiday homes, but it is drawing a firmer line between genuineinvestment properties and lifestyle assets. With the right structure, pricing,and record-keeping, many owners can still claim appropriate deductions andimprove their cash flow.
If you own a holiday property, aproactive review could save you from an unpleasant surprise at tax time. Pleasecontact us to discuss your current arrangements.
