The Australian Taxation Office (ATO) has recently released updated guidance that significantly affects how rental property deductions are claimed – particularly for holiday homes that are rented out part of the year but also used personally.
For property owners, this change is important. In many cases, even limited private use of a holiday property may now prevent deductions being claimed for major expenses such as interest, council rates and land tax. The ATO has signalled that this is an area of increased compliance focus, and property owners should review their arrangements sooner rather than later.
Why holiday homes are under scrutiny
The updated ATO guidance relies on long‑standing rules that apply to “leisure facilities”, which have historically received less attention. Under this approach, a property may be treated as a leisure facility where personal or recreational use is prioritised over income‑producing activity, even if the property is rented out at other times of the year.
This commonly affects:
- Beach houses or regional getaway properties
- Holiday homes used during peak periods such as Christmas, school holidays or long weekends
- Properties advertised through short‑stay platforms while still retained mainly for private enjoyment
Where a property is classified as a leisure facility, most ownership‑related expenses may no longer be deductible for income tax purposes.
What expenses may be denied?
If a property is considered a leisure facility, the ATO’s view is that deductions may be denied for costs such as:
- Mortgage interest
- Council rates and land tax
- Repairs and maintenance
- Insurance
- Depreciation on assets
These costs are considered to relate to the ownership or enjoyment of the property, rather than income production.
Some expenses directly connected to earning rental income – such as advertising fees, booking platform commissions and cleaning between guest stays – may still be deductible, but this will depend on the facts of each case.
What does “private use” really mean?
Private use does not need to be extensive to create risk. The ATO has indicated that using a property during peak holiday periods, even for a relatively short time, may be enough to tip the balance away from income‑producing use – particularly where those peak periods are the most commercially valuable times to rent.
Importantly, simply putting an annual or long‑term rental agreement in place may not override the outcome if the overall facts suggest the property is still being held mainly for personal enjoyment.
When do the new rules apply?
The ATO has stated that this new approach applies from 12 November 2025, with a transitional compliance period extending to 1 July 2026 for arrangements that were already in place before that date.
This means:
- Existing arrangements may have some limited time to be reviewed and adjusted
- New purchases or new arrangements entered into after November 2025 are unlikely to benefit from transitional relief
With this in mind, now is an ideal time to review how holiday properties are being used and documented.
Are any deductions still available?
There are limited exceptions where deductions may still be available, including:
- Where the property is genuinely used mainly to produce rental income for the entire year
- Where there has been a clear and permanent change in how the property is used (rather than seasonal private use)
In some cases, apportionment of expenses may still apply where a property is not considered a leisure facility — however, this depends heavily on individual circumstances and requires careful assessment.
Why this matters for property owners
Many property owners have historically assumed that deductions can be claimed on a time‑based apportionment where a holiday home is rented part‑time. The ATO’s updated guidance challenges that assumption and introduces a much stricter interpretation where private enjoyment is involved.
This increases the risk of:
- Denied deductions
- Amended tax returns
- ATO review activity – particularly where data is shared with state revenue authorities
What should you do now?
If you own a holiday home or short‑stay rental, we recommend:
- Reviewing how and when the property is used personally
- Understanding whether income production is genuinely the main purpose
- Checking whether deductions claimed align with the ATO’s current guidance
- Seeking advice before making changes or lodging upcoming returns
Early review can help avoid surprises and ensure your tax position remains defensible.
How we can help
The tax treatment of holiday homes has become far more complex, and the right approach will depend on your individual circumstances. If you’d like to discuss how this guidance affects you, please get in touch — a short review now could prevent bigger issues later.