Holiday homes & Airbnb-style rentals: How the ATO is tightening the deduction rules

Deborah Roscoe
11 minutes ago
4 min read

If you own a holiday house (or rent out your home/part of your home on Airbnb/Stayz), the ATO has released new draft guidance that can significantly change what you can claim — especially where a property has mixed use (some private use and some rental use).

This update is primarily driven by three ATO documents:

TR 2025/D1 (draft ruling) – broader guidance on rental income and deductions, with a major change in approach to holiday homes.
PCG 2025/D6 (draft guideline) – “acceptable” ways to apportion expenses where there’s mixed rental and private use.
PCG 2025/D7 (draft guideline) – a traffic-light risk guide showing when the ATO is more likely to review holiday-home claims.

1) “Holiday homes” may lose major deductions

Historically, many owners have treated holiday houses as “rental properties” and claimed a broad range of costs, even where they also used the home privately.

The ATO is now explicitly focusing on section 26-50 of Income Tax Assessment Act 1997, which can deny deductions for a “leisure facility” (which includes a property used for holidays/recreation). In simple terms:

If your holiday home is mainly for your own holidays (even if it earns some rent), you may lose deductions for major running/holding costs, such as:

interest on the loan
council rates
land tax
repairs and maintenance.

The ATO’s draft guidance says these costs can be fully denied under s 26-50 unless the property is mainly used to earn rental income.

Important: even if deductions are denied, any rental income is still assessable.

2) What does “mainly used to earn rent” actually mean?

This is where many owners will be impacted by the change.

The ATO says “mainly” isn’t just a simple math test like “more than 50% of the year”. They want you to look at the overall pattern and intent of how the property is used, including:

how it is actually used over time
how often it is rented vs held for private use
whether it’s genuinely available for rent (especially at peak times)
whether you block out high-demand periods (like Christmas/school holidays) for yourself.

3) The ATO is also sharpening the “available for rent” concept

Even outside the holiday-home rules, the ATO repeats that being “available for rent on commercial terms” generally involves things like:

broad advertising
commercial rent and conditions
actively monitoring and responding to enquiries.

And the ATO flags red flags such as:

minimal advertising (e.g., word of mouth only)
blocking out peak periods for private use
unreasonable rental restrictions (e.g., “no kids”, “no pets”)
refusing tenants without good reason.

4) Mixed use still means apportionment — but holiday homes are a special case

For “normal” rental situations where you rent part of your home, or rent your property for only part of the year, the ATO guidance reinforces you need to apportion expenses fairly.

PCG 2025/D6: the ATO’s “safe” methods for apportionment

The ATO outlines two common methods:

Time-based (how many days it was rented / available for rent)
Area-based (what portion of the home is rented)

However, the ATO also notes PCG 2025/D6 does not apply to holiday homes unless the holiday home is mainly held to earn rent.

In other words:

If it’s a genuine rental (mainly rental), you apportion.
If it’s mainly a holiday home for you, the bigger ownership costs may be denied altogether (not simply apportioned).

5) PCG 2025/D7 “traffic light” risk: where do you sit?

The ATO has provided a practical risk framework for holiday homes:

Green (low risk): high occupancy (especially peak periods), limited private use, prioritising rental income, commercial rent, making genuine efforts to maximise rental income.
Amber (medium risk): increased personal use, keeping it available for yourself in peak times, limited efforts to rent, accepting lower income to preserve private access.
Red (high risk): peak periods blocked out each year, limited attempts to rent, unreasonable restrictions, poor occupancy with little effort to improve it.

Practical takeaway: if you’re amber or red, the ATO is signalling you may want to change your arrangements (or be prepared that deductions could be denied).

6) Transitional timing: when does this apply?

The ATO includes a transitional compliance approach for s 26-50 and holiday homes:

The ATO says it won’t commit compliance resources to applying s 26-50 before 1 July 2026 where the holiday-home arrangement was entered into before 12 November 2025.
But it also notes it may still apply the views if you seek an amendment or private ruling.

This is a “compliance resources” statement, not a blanket amnesty — so it’s still important to get your position right.

What should holiday-home owners do now?

Here’s a simple action list that may assist as a guide (Note - this is not an exhaustive summary, so seek tax advice specific to your circumstances):

Work out your “position” - Is it genuinely an investment property that you rarely use? Or is it a family holiday house that you occasionally rent?
Check your peak-period behaviour - Blocking out Christmas/school holidays for yourself is one of the strongest risk areas the ATO highlights.
Review your rental settings - Is the property genuinely available on commercial terms? Are restrictions reasonable?
Get your records in order - Keep evidence of: booking calendars (including blocked-out dates and why); listings/advertising history; responses to enquiries; pricing rationale
Expect a trade-off - The ATO is very openly saying you may need to choose between: more private use and limited deductions, or stronger deduction support as an investment property.

Need help? We can review your holiday-home position

If you own a holiday home or short-term rental, we can help you:

assess where you might fall in the ATO’s green/amber/red framework
tighten your record-keeping and “available for rent” evidence
model the tax impact if some deductions are denied
plan changes before the ATO’s 1 July 2026 compliance focus ramps up