Key points
- The ATO is tightening rules on holiday homes, meaning most expenses may no longer be deductible if the property is used privately.
- Even limited personal use, especially during peak holiday periods, can result in no deductions at all for major costs like interest, rates and land tax.
- The new ATO approach applies from November 2025, with a transition period to July 2026, and property owners should review their arrangements now.
In November 2025, the Australian Tax Office (ATO) released new guidelines on the tax treatment of rental property expenses, including strict rules for holiday homes that are only occasionally used to earn income. Under this draft guidance, the ATO consider that most rental expenses relating to such properties will be non-deductible in full.
Where personal use of a property is prioritised over income production, particularly during peak holiday periods, the property will be considered a ‘leisure facility’, a characterisation that results in the denial of any tax deductions for costs such as interest, council rates and land tax. Simply putting in place an annual rental agreement may not overcome the specific anti-avoidance rule contained in this provision.
The ATO will begin applying this view from 12 November 2025, with a transitional start date of 1 July 2026 for pre-existing arrangements.
What are the changes to the ATO’s approach to holiday homes?
The ATO is relying on a provision for ‘leisure facilities’, that has largely been ignored to date, to deny deductions for holiday homes that are only partly used to produce income. For those that may have a holiday home that they rent out for part of the year but also use for their own enjoyment (e.g. over Christmas and Easter periods), the ATO has said it will apply section 26-50 of the Income Tax Assessment Act 1997.
That section disallows deductions for losses or outgoings, including mortgage interest, council rates, land tax, and maintenance to the extent they relate to the ownership or use of a leisure facility. Tax depreciation is also not deductible in respect of the depreciating assets that are part of a leisure facility. Expenditure that is denied may however form part of the cost base of the asset for CGT purposes.
What is a leisure facility?
Section 26-50 defines a leisure facility as land, a building, or part of a building or structure used (or held for use) for holidays or recreation. In Taxation Ruling TR 2025/D1 (“the Draft Ruling”) the ATO states that a holiday home may be considered a leisure facility if it is mainly used for holidays or recreation. This could include a typical beach house but may also be an apartment in the CBD of a capital city if the owners visit and stay there during their holidays.
In particular, the ATO considers that a rental property will constitute a leisure facility where the private use of the property is prioritised over income generation. The draft ruling emphasises that occasional rental activity will not be sufficient to change this conclusion if the overall use of the property reflects a predominant personal or recreational purpose.
This view would appear to extend to most holiday homes, even if they are only occasionally used for private purposes. An example in the ruling involves a house near the beach that the owners stay in during the Christmas and New Year period and other school holidays. Even though the owners only stay in the property for about a month each year, and otherwise advertise it through sharing platforms, the ATO indicates that it would consider it to be a leisure facility such that no portion of rental expenses are allowable as deductions, other than those specifically incurred to generate rental income such as advertising fees and commissions paid to the platform and fees for cleaning the property for guest stays.
Compliance risks for Victorian properties
Owners of properties in Victoria may have been claiming a holiday home exemption from the vacant residential land tax which broadly requires the private use for at least four weeks in a calendar year. Such properties may be at higher risk of ATO compliance activity regarding the application of section 26-50 where such data is shared between the State Revenue Office (SRO) and the ATO.
Are there any exceptions to the rules for leisure facilities?
A portion of expenses may still be deducted, if at all times during the income year the property is used or held for use mainly to produce assessable income. This is to be determined based on a consideration of several factors include the way the property is used and the time it is dedicated to income-producing uses as opposed to potential private use including during peak seasonal demand periods.
A part-year exception is also available to allow part of the rental expenses as deductions but only where there has been a clear change of the main use of the property part way through the year. This does not apply where there is seasonal private use of the property during a particular year but rather requires a permanent change to the way in which the property is used or held.
Compliance guidelines
Draft Practical Compliance Guideline PCG 2025/D7 was issued alongside the Draft Ruling, setting out the ATO’s proposed compliance approach in determining whether or not a rental property is a leisure facility, introducing a risk-based framework (i.e. green, amber and red zones).
Arrangements that are considered low risk are generally those that have limited on-peak personal use, and high occupancy rates for the remainder of the year. While, unsurprisingly, those that are high involve high periods of personal use during on-peak periods, limited attempts to rent out the property and/or unreasonable restrictions on potential guests. However, no one factor will be decisive.
How do the rules apply to properties held by trusts?
The ATO has confined the application of the Draft Ruling to individuals only. However, it should be assumed that the view about what constitutes a leisure facility applies regardless of the kind of entity that owns the property, including a trust.
While the Draft Ruling provides no guidance on this point, a property held by a trust might be considered a leisure facility subject to section 26-50 where it is mainly used for holidays and recreation by the beneficiaries or controllers of the trust.
Section 26-50 also contains a specific anti-avoidance rule for arrangements that seek to ensure the owner satisfies one of the exceptions, such as ensuring the property is held to earn rent or licence fees. This could potentially apply if a holiday home is held in a family trust that charges the family members for using the property. It is unclear whether the specific anti-avoidance rule can apply to such arrangements, especially if such arrangements have been in place (objectively) without regard to the operation of section 26-50.
What else is covered by the recent guidance?
The Draft Ruling also contains the ATO’s analysis of the general taxation principles relating to treatment of receipts and outgoings by individuals in relation to their rental properties. It covers several key topics, starting with common rental expenses that may be deductible, including rates, land tax, repairs and maintenance, insurance, interest, water charges, body corporate fees, advertising, and agent commissions. The draft ruling replaces the ATO’s previous guidance (IT 2167) which was first published in 1985 and is now withdrawn.
For jointly owned rental properties, income and deductions are generally attributed to the owners based on their ownership interests. In shared household or family situations, the tax treatment of amounts received is generally not considered income where those payments are for shared household expenses or for family care.
The ruling also addresses non-arm’s length rental terms, where rental deductions may be limited to the annual income derived from the rental property. Finally, the draft ruling also considers the principles or apportionment where rental properties are not wholly used to produce assessable income and are not otherwise leisure facilities. In these cases, apportionment may need to be determined based on the particular facts and circumstances on a fair and reasonable basis. PCG 2025/D6 accompanies the draft ruling and sets that apportioning based on time and/or floor space (or a combination of both) would generally be acceptable methods.
When does the guidance apply from?
The Draft Ruling acknowledges that it is the first time the ATO has publicly expressed its views that a rental property may be a leisure facility that is subject to section 26-50, proposing a transitional compliance approach. The ATO have indicated that they will not take action to review expenses incurred before 1 July 2026, so long as it was incurred under an arrangement that existed prior to 12 November 2025. Any new properties or new arrangements (e.g. new loans) would not appear to benefit from the transitional compliance approach.
Because the ruling is stated to only apply to individuals, it is not clear if the compliance approach would extend to properties held in trusts or other entities.
What are the next steps?
Taxpayers should review their arrangements carefully and consider the appropriate methodology to determine what portion of their rental property expenses are deductible where there is some non-income producing use and the risk that the property may be considered a leisure facility according to the ATO view such that no portion of those expenses are deductible for tax purposes.
Please contact your Pitcher Partners representative if you would like to review your existing arrangements and determine what action may be required in light of the ATO guidance.
