For a lot of Australians, holiday homes are enjoyed personally for part of the year and, at other times, rented out through platforms such as Airbnb or Stayz to offset holding costs. 

For years, many owners have assumed that as long as rental income was declared and expenses were apportioned, most property deductions would remain available.

That assumption is now being challenged.

The Australian Taxation Office has released a series of draft guidance documents — TR 2025/D1, PCG 2025/D6 and PCG 2025/D7 — signalling a significant tightening of its approach to holiday homes that generate rental income. While still in draft form, these documents clearly outline the ATO’s future compliance focus and should not be ignored.

The ATO’s Concern

At the heart of the new guidance is a distinction the ATO is keen to enforce: whether a property is genuinely held to generate rental income, or whether it is fundamentally a lifestyle asset with only occasional rental activity.

The ATO reiterates that all rental income must be declared, regardless of how frequently the property is rented or how informal the arrangement may be. However, where a property is primarily used as a holiday home rather than operated on a commercial basis, the ATO’s position is that deductions for many common expenses may not be available at all.

This includes interest, council rates, land tax, insurance, repairs and maintenance. Even if the property earns rental income at market rates for part of the year, the ATO may deny these deductions if it concludes that income generation is not the primary purpose of holding the property. In such cases, owners may be limited to claiming only narrow, directly attributable costs such as cleaning or advertising.

Indicators of a “Holiday Home”

The draft guidance highlights several factors that may lead the ATO to classify a property as a holiday home rather than an income-producing investment, including where the property:

• Is reserved for private use during peak demand periods, such as school holidays or ski season
• Is advertised at prices much higher than the market rates
• Consistently produces tax losses over multiple years

All the factors taken together can significantly weaken the case that the property is held to maximise rental returns.

Apportionment of Expenses

Where a property is not classified as a holiday home but is still used partly for private purposes, expenses must be apportioned appropriately. PCG 2025/D6 sets out the ATO’s expectations, emphasising that apportionment must be “fair and reasonable”.

Common methods include:

• Apportioning based on time, such as days the property is rented or genuinely available for rent
• Apportioning based on area, where only part of the property is rented

Errors in apportionment, or poor record-keeping, materially increase audit risk. The ATO has ready access to booking platform data and can readily compare advertised availability, pricing, rental income and claimed deductions.

Why the Financial Consequences Matter

The potential tax impact of reclassification can be substantial. For example, a holiday apartment that generates $30,000 per year in off-peak rental income but is reserved for private use during high-demand periods may be regarded by the ATO as a lifestyle asset. Under this approach, deductible expenses could be reduced from tens of thousands of dollars to only a small fraction, significantly increasing taxable income.

Ownership arrangements also require careful consideration. Income and deductions are generally allocated according to legal ownership interests, not actual usage. In addition, renting the property to relatives at discounted rates can further restrict the deductions available.

What Property Owners Should Do Now

Although the proposed changes are intended to apply from 1 July 2026, with transitional relief for arrangements in place before 12 November 2025, property owners should act now to review their position. Key steps include:

• Assess commercial intent: Consider whether the property is genuinely operated to maximise rental income, including consistent advertising during peak periods
• Apply market pricing: Ensure rental rates align with comparable properties in the same area
• Maintain comprehensive records: Keep booking calendars, advertisements, enquiry records and evidence distinguishing private and rental use
• Review ownership and operating strategy: Changes to how a property is managed may improve its tax profile, but potential CGT, stamp duty and legal costs must be carefully weighed
• Preserve evidence for transitional relief: Documentation will be essential for any reliance on transitional provisions

Final Thoughts

The ATO is not eliminating deductions for holiday properties, but it is drawing a clearer and firmer line between genuine investment assets and properties held primarily for personal enjoyment. With appropriate pricing, documentation and operational discipline, many owners can still access legitimate deductions and manage cash flow effectively.

For holiday property owners, a proactive review now may prevent costly adjustments later. If you would like assistance reviewing your current arrangements or planning ahead, please contact Bates Cosgrave team for tailored advice.