Holiday Homes Under the Australian Taxation Office (ATO) Spotlight

In late 2025, the ATO released three draft documents:

• TR 2025/D1 (Rental property income and deductions for individuals not in business),
• PCG 2025/D6 (Apportionment of rental property deductions)
• PCG 2025/D7 (Application of section 26-50, holiday homes also rented out) signalling a major shift in how holiday homes and short-stay properties are treated for tax purposes.

According to recent commentary from tax-advisory firms and accounting bodies, holiday homes that are only occasionally rented or used heavily by the owners themselves may lose most of the tax benefits previously claimed.

Note: These are draft proposals from the ATO

Key Changes & What They Mean for Owners

1. Mixed-Use or Private Holiday Homes: Deductions Could Be Denied

Under the new draft rulings, if your holiday home is primarily used for personal or family holidays especially if you block out prime times (Christmas, school holidays, Easter, peak season). The ATO may treat it as a private leisure property rather than a rental.

In such cases, ownership expenses such as mortgage interest, council rates, land tax, insurance, maintenance and capital works may be non-deductible. Only costs directly tied to actual rental activity e.g., advertising, agency fees, cleaning may remain deductible.

2. Advertising or Listing the Property Isn’t Enough

Simply listing your home on a short-stay platform like Airbnb or Stayz does not guarantee deductions. The ATO’s new view emphasises actual rental activity, occupancy rates, and whether the property is genuinely offered on commercial terms.

If you or your family block out peak periods, charge above-market rates, impose restrictive conditions (e.g. “no kids,” long minimum stays), or otherwise limit bookings. This may be flagged as a “leisure use” property rather than a genuine rental.

3. Section 26-50 & The “Leisure Facility” Classification

The heart of the new approach is the re-application of Section 26-50 ITAA 1997, originally a provision meant to deny deductions for properties used mainly for recreation. Under PCG 2025/D7, many mixed-use holiday homes may now fall under this provision.

That means unless your holiday home is shown to be used mainly to produce rental income, ownership and holding costs may be denied even if at certain times the property is rented.

4. New ATO “Risk Zones”: Green, Amber, Red

To help owners self-assess risk, the ATO (through PCG 2025/D7) has conceptualised a Green–Amber–Red risk framework:

• Green zone (Low risk): property is mostly rented, minimal private use. High occupancy during peak seasons. Genuine commercial intent.
• Amber zone (Medium risk): some private use, some rental use; mixed personal/rental purpose, especially during high-demand periods.
• Red zone (High risk): primarily private use. Frequent block-out of peak demand times, limited genuine rental activity, potential red flags (e.g. overpriced, restricted bookings, minimal effort to secure guests).

Owners whose properties fall into Amber or Red zones are likely to attract compliance attention  and deductions may be denied.

What Is Still Deductible (in Some Cases)

Even under the new rules, not all deductions are wiped out. Costs directly connected to producing rental income — such as advertising fees, agent commissions, cleaning costs, and other running expenses incurred when the property is genuinely rented — may still be deductible.

However, holding costs (interest, rates, maintenance, capital works) are at serious risk of disallowance if the property is treated as a “leisure facility” under section 26-50.

Timeline & Transitional Relief

The ATO’s new approach is expected to apply from 1 July 2026.

For properties already operating as rentals before that date, and where agreements (mortgage, rental arrangement) existed prior to 12 November 2025, some transitional relief may apply, meaning immediate compliance action may be delayed.

Still, owners are strongly encouraged to review their arrangements now, adjust where needed, and keep full records of usage, bookings, advertising and private-use days.

What This Means for Short-Stay and Holiday-Home Owners

• If your holiday home is mainly used for your family’s holidays or frequently blocked out for personal use around school holidays or peak seasons — deductions may be denied under the new rules.
• Simply listing the property on a short-stay platform is unlikely to satisfy the ATO’s test of genuine rental activity.
• If you’re relying on negative gearing or significant interest deductions, you could lose a large portion of your tax benefit (or incur tax payable instead).
• Accurate, contemporaneous record-keeping (bookings, cleaning, advertising, occupancy, private-use days) will be more critical than ever.
• For mixed-use properties, apportionment of deductions must be reasonable, justifiable and defensible under audit.

What Owners Should Do Now: Prepping for 2026

1. Review how often your holiday home was rented vs used privately, especially during peak seasons.
2. Pull up all advertising, booking records, pricing history, occupancy rates. Check if your rates were market-based.
3. Log all private-use days, and document days when property was available for rent.
4. Separate and tag expenses: those directly tied to genuine rentals (cleaning, agent fees, advertising) vs holding costs (interest, rates, insurance, maintenance).
5. Consult a tax professional or accountant. The new rules are complex, and what counts as “mainly used for income generation” may not be obvious.
6. Re-evaluate whether it still makes financial sense to claim deductions or continue renting or whether you should treat the property as a private holiday home.

Conclusion

The ATO’s 2025 draft rulings and practical compliance guidelines mark a fundamental change in how holiday homes and short-stay rentals are treated for tax purposes. The era of broad deductions for holiday-home ownership is coming to an end.

If your property is used heavily for personal holidays, blocked out during peak seasons, or only occasionally rented — you may soon find many of your deductions disallowed. Many short-stay and holiday-home owners will need to reconsider their rental strategy, improve their record-keeping, or potentially shift to long-term rental or private use.

Given the complexity and compliance risk, seeking professional advice before lodging your next return is now more important than ever.

Source: ATO, Property Council of Australia

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