ATO Tightens Holiday Home Tax Deductions: What You Need to Know

The Australian Tax Office (ATO) has issued new draft guidelines that significantly tighten tax deduction rules for holiday homes. These guidelines, which come into effect from November 2025 with a transitional period until July 2026 for pre-existing arrangements, state that most rental expenses may no longer be deductible if a property is used privately, even occasionally.

Most rental expenses may no longer be deductible if a property is used privately, even occasionally.

Key Changes to Holiday Home Deductions

The ATO is now applying section 26-50 of the Income Tax Assessment Act 1997, which addresses 'leisure facilities'. Under this provision, properties where personal use is prioritized over income generation, particularly during peak holiday periods, will be classified as a leisure facility.

This classification results in the denial of tax deductions for major costs such as mortgage interest, council rates, and land tax. Tax depreciation on depreciating assets within a leisure facility will also be disallowed. However, denied expenditure may contribute to the asset's cost base for Capital Gains Tax (CGT) purposes.

Defining a 'Leisure Facility'

Section 26-50 defines a leisure facility as land, a building, or part of a building used (or held for use) for holidays or recreation. Taxation Ruling TR 2025/D1 clarifies that a holiday home is considered a leisure facility if it is mainly used for holidays or recreation.

This determination applies even if the property is only occasionally used privately, such as a beach house occupied by owners for about a month annually during peak periods but advertised for rent otherwise.

This determination applies even if the property is only occasionally used privately, such as a beach house occupied by owners for about a month annually during peak periods but advertised for rent otherwise.

Exceptions and Compliance

Limited exceptions apply. Deductions may still be claimed if the property is, at all times during the income year, primarily used or held for producing assessable income. A part-year exception exists only for a clear and permanent change in the property's main use, not for seasonal private use.

The ATO has also released Draft Practical Compliance Guideline PCG 2025/D7, outlining a risk-based framework (green, amber, red zones) to assess whether a rental property is considered a leisure facility. Low-risk arrangements typically involve limited on-peak personal use and high occupancy rates.

Application to Trusts and Other Guidance

The draft ruling currently focuses on individuals. While specific guidance for properties held by trusts is not provided, it is assumed the 'leisure facility' view generally applies regardless of the owning entity.

The ruling also briefly covers general taxation principles for rental properties, including deductible expenses, joint ownership, non-arm's length rental terms, and apportionment principles for properties not wholly used for income production.

This new guidance replaces the ATO's previous advice, IT 2167, from 1985.

Next Steps for Taxpayers

Taxpayers owning holiday homes should review their current arrangements in light of these new ATO guidelines to determine the deductibility of their rental property expenses and assess the risk of their property being classified as a leisure facility.