Holiday home tax deductions have been clarified under new ATO draft guidance, with important implications for owners of short-term rental properties and mixed-use holiday homes. The updates explain how rental income and deductions should be treated where a property is used for both income-producing and private purposes, including properties listed on platforms such as Airbnb.

The changes are aimed at reducing overclaimed deductions and providing clearer guidance on what expenses can, and cannot, be claimed.

What guidance has the ATO released?

The ATO has released three draft documents that work together to clarify its position on short-term rental arrangements:

• Draft Taxation Ruling TR 2025/D1
  Explains how individuals who are not carrying on a business should treat income and deductions from rental properties, including holiday homes and short-term rentals.

• Draft Practical Compliance Guideline PCG 2025/D6
  Outlines what the ATO considers a fair and reasonable apportionment of losses and outgoings where a property is used for both income-producing and private purposes.

• Draft Practical Compliance Guideline PCG 2025/D7
  Sets out the ATO’s proposed compliance approach to determining whether a holiday home is mainly used (or held for use) to produce assessable income.

Holiday home tax deductions and denied claims

Under TR 2025/D1, if a rental property is also considered a holiday home, certain deductions may be denied because the property is treated as a leisure facility under section 26-50 of the tax law, unless an exception applies.

Whether a property is classified as a holiday home depends on its actual pattern of use, including:

• use by the owner

• use by family or friends

• periods the property is available for private enjoyment, even if it is not occupied

Where a property is treated as a holiday home, deductions cannot be claimed for expenses relating to ownership or personal use, including (but not limited to):

• interest on borrowings used to finance the property

• council rates

• land tax

• repairs and maintenance

What expenses are still deductible?

Expenses directly connected to earning rental income may still be claimed. These typically include:

• advertising and listing fees

• cleaning and turnover costs after guest stays

• booking platform commissions

These costs must relate solely to income-producing activity.

Exception to the holiday home rules

An exception to the leisure facility rules may apply if the property is mainly used or held to produce assessable rental income throughout the year.

The ATO considers a range of factors, including:

• the proportion of time the property is rented versus privately used

• whether the property is genuinely available for rent

• behaviour during peak holiday periods

• consistency of advertising and booking activity

PCG 2025/D7 explains how the ATO assesses compliance risk across different rental arrangements.

What property owners need to be aware of

The updated guidance makes it clear that:

• Advertising a property alone is no longer enough to justify rental deductions

• Expenses can only be claimed to the extent they relate to non-property costs directly incurred in earning income

• Payments received through platforms such as Airbnb are assessable income

• Discounted or below-market stays for family or friends still count as income and require apportionment

• Blocking out school holidays, rejecting peak-season bookings, or inconsistent advertising may result in deductions being denied entirely

Mixed-use properties will be a key focus area for the ATO. Rental schedules and internal workpapers may need to be updated to reflect the new compliance approach.

What happens next?

These draft rulings signal a stronger compliance approach to holiday home tax deductions, particularly where properties have both private and income-producing use.

Property owners should review:

• how often their property is genuinely available for rent

• how expenses are apportioned

• whether current claims align with the ATO’s updated expectations

These changes may also impact broader cash flow planning for property owners where rental income is seasonal or irregular.

Need help reviewing your rental property position?

If you own a holiday home or short-term rental property, the ATO’s updated guidance may affect how your income and deductions are reported.

We can help you review your rental arrangements, assess your risk under the new guidance, and determine the best course of action based on your circumstances.

Please feel free to contact our office to discuss this further.