Important ATO Update - Tax deductions for holiday homes.
Dear Client, The Australian Taxation Office (ATO) has recently released new draft guidance that significantly changes the tax treatment of holiday homes and short‑term rental properties, including properties listed on platforms such as Airbnb and Stayz. These changes apply from November 2025, with a transitional compliance period running to 1 July 2026 for existing arrangements. The ATO has made it clear that holiday homes will be an ongoing focus area for review and audit activity.
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WHAT HAS CHANGED?
The ATO has withdrawn its long‑standing guidance (dating back to 1985) and replaced it with Draft Taxation Ruling TR 2025/D1, supported by new Practical Compliance Guidelines. Under this new approach, the ATO is taking a much stricter view of properties that are used for both:
- for private enjoyment, and
- to earn occasional or seasonal rental income.
A key shift is that many holiday homes are now treated as “leisure facilities” under the tax law. Where this applies, most ownership‑related deductions may be denied entirely, even if the property earns rental income during part of the year.
WHAT IS A “LEISURE FACILITY”?
A leisure facility broadly includes land or buildings used or held for use for holidays or recreation. Under the ATO’s new guidance, a property may be classified as a leisure facility where:
- the owner (or family and friends) uses the property privately, particularly during peak holiday periods, and
- Rental activity is secondary to personal enjoyment.
Importantly, even limited private use (for example, reserving Christmas or school holiday periods for family use) may be sufficient for the ATO to treat the property as a leisure facility.
IMPACT ON TAX DEDUCTIONS
Where a property is classified as a holiday home/leisure facility:
- Ownership and holding costs such as mortgage interest, council rates, land tax, insurance, repairs, and maintenance are generally not deductible.
- Depreciation on assets forming part of the holiday home is also not deductible.
- These denied costs may instead form part of the property’s capital gains tax cost base.
This represents a significant tightening compared to prior practice, where partial or time‑based deductions were often claimed.
IS THERE AN EXCEPTION?
Yes. An important exception applies where the property is mainly used or held for use to produce assessable rental income.
In determining whether this test is satisfied, the ATO will consider a range of factors, including:
- actual days rented versus private use
- whether the property is genuinely available for rent
- whether it is made available during peak holiday periods
- the level of advertising activity and pricing strategy
- whether personal use is prioritised over rental opportunities
A simple time‑based calculation alone will not be determinative; the ATO will look at the overall pattern of use.
