Understanding the New ATO Guidance on Holiday Homes and Tax Deductions

Cute litte holiday home — A Cute little holiday home set in a idilyic location

The ATO has withdrawn its 40-year-old ruling on holiday homes and replaced it with new draft Taxation Rulings and Practical Compliance Guidelines. These changes tighten the rules on claiming deductions for owning holiday homes, focusing on whether the property is genuinely used to generate rental income or is primarily a “leisure facility.”

The ATO released Draft Taxation Ruling TR 2025/D1 outlining its updated approach to rental property income and deductible expenses, including specific examples of holiday homes and whether they are “mainly used” for renting.
The draft Practical Compliance Guidelines PCG 2025/D6 and PCG 2025/D7 explain how the ATO will assess mixed‑use properties and apply the section 26‑50 leisure facility rules to deny deductions if a holiday home isn’t genuinely income-focused.

Key Principle: The main use must be for Producing Rental Income

Under the new guidance, a holiday home is treated as a “leisure facility.” Normally, costs of acquiring or holding a leisure facility are non-deductible. This means you generally cannot claim deductions like mortgage interest, rates, insurance, repairs, or maintenance if the property is mainly for personal use.

However, there is an important exception if the property is “mainly” used to produce rental income. In that case, you may claim deductions, but the ATO will carefully assess what “mainly” means in your situation.

How Does the ATO Determine if the Property Is Mainly Rented?

The ATO’s approach involves a time-based analysis combined with other practical factors:

Count all the days the property was rented out to unrelated parties on commercial terms.
Add the days the property was vacant but genuinely available for rent (advertised at market rates and open to the public).
Divide this total by the total days in the year to get a rental-use proportion.
Consider other factors such as:
- How the property is advertised
- Whether the rental price is commercial
- Whether peak times (e.g., Christmas, school holidays) are blocked for personal use
- The pattern and frequency of personal use

If the sum of rental days plus available-for-rent days is greater than the days of private use, the property may be considered “mainly” used to generate rental income.

What Does This Mean for Deductions?

If rental use is mainly commercial and genuine, you can claim deductions for ownership costs apportioned based on the rental use proportion.
If the property is mainly for private or leisure use, you cannot claim these deductions at all.

Example Illustration

Suppose Sarah owns a beachside holiday home:

She rents it out to paying guests for 120 days a year.
It is vacant and available for rent for another 60 days.
She uses it personally for 185 days, including blocking out peak holiday periods.
The rental price is market-based, and the property is actively advertised.

Calculation:

Rental days + vacant days = 120 + 60 = 180 days
Private use = 185 days
Total days in the year = 365

Rental use proportion = 180 / 365 ≈ 49%

Since the property is rented for less than half the year, it is not primarily used for rental income. Therefore, Sarah cannot claim deductions for holding costs.

If Sarah had rented or made available the property for rent for more than half the year (e.g., 190 days or more), she could claim deductions apportioned to that rental use.

Practical Tips for Holiday Home Owners

Keep detailed logs of rental periods and personal use dates.
Advertise at market rates and keep evidence of bookings, acceptances, and rejections.
Avoid blocking peak times exclusively for personal use.
Understand that even if you rent for only part of the year, vacant days genuinely available for rent count toward rental use.
Be prepared to apportion expenses based on the rental-use percentage.

Final Thought

This new approach by the ATO is stricter and recognises holiday homes as leisure facilities unless rental income is their main purpose. It’s vital to keep clear records and carefully assess your property’s rental use. Don’t leave your financial future to chance—talk to Umbrella Accountants if you want to understand how these rules apply to your situation.