Key points:
- Under new ATO guidance, properties used mainly for private holidays or recreation may be treated as a leisure facility, even if rented out for part of the year.
- If a property is classified as a leisure facility, most ongoing deductions can be denied, with only direct rental-related expenses generally remaining deductible.
- A transitional compliance approach applies until 1 July 2026, but it does not protect arrangements involving avoidance, fraud, evasion or inappropriate advantage.
The ATO’s new guidance changes how holiday homes are assessed for tax purposes, making it important for owners to review how their property is used and what deductions may still be available. If you own a holiday home, you will find the answers to some of the common questions below, and what the new guidance might mean for you.
Does my property qualify as a “leisure facility” under the ATO’s new definition?
This is the key threshold question considered under the ATO’s guidance products in Taxation Ruling TR 2026/1 and Practical Compliance Guideline PCG 2026/3, both finalised on 20 May 2026. Broadly, the ATO considers a rental property to be a leisure facility where private use is prioritised over income generation. Importantly this can apply even where owners only stay (or let family and friends stay) in the property for only a few weeks per year, such as over Christmas, New Year, and school holidays. Owners need to honestly assess how the property is actually used before assuming deductions are able to be claimed. The ATO considers that property need not be a traditional holiday home such as beachside cottage or ski lodge, and may even extend to an apartment in a capital city if the owners objectively use it mainly for holidays or recreation.
Which of my current deductions are at risk, and what (if anything) can I still claim?
Where a property is characterised as a leisure facility, all deductions for costs such as mortgage interest, council rates, land tax, and maintenance, as well as tax depreciation on assets within the property will be denied in full. No apportionment is available for the part of the year when the property was made available for rent or hire to third parties. Only expenses directly incurred to generate rental income, such as advertising fees, platform commissions, and cleaning costs for guest stays, remain deductible.
Does the transitional period apply to my situation, and am I protected until July 2026?
In the finalised guidance, the ATO has indicated it will not undertake compliance action to review expenses incurred before 1 July 2026. This approach is more concessional than that in the draft, in which the transitional approach only applied to arrangements that existed prior to 12 November 2025. However, the ATO has outlined that this approach will not apply where there is evidence of avoidance, fraud or evasion or inappropriate advantage is taken of this transitional approach.,
If I hold my holiday home in a family trust, am I affected?
While the ATO guidance is confined to individuals, the ATO’s view on what constitutes a leisure facility covers a concept that can be applied to entities other than individuals. 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. A property held by a trust could potentially be considered a leisure facility by the ATO where, for example, it is mainly used for holidays and recreation by the beneficiaries or controllers. There is also a specific anti-avoidance rule in the provisions that could apply where a trust charges family members for using the property in order to avail themselves of one of the exceptions to the rule.
What does the ATO’s risk framework (green/amber/red zones) mean for my property specifically?
PCG 2026/3 introduces a risk-based framework to help taxpayers assess their position. Broadly, low-risk arrangements involve limited personal use of the property during peak periods and high occupancy rates for the remainder of the year, while high-risk arrangements involve significant personal use during peak periods, limited attempts to rent the property and/or unreasonable restrictions on potential guests. However, no single factor is determinative. Owners should apply their circumstances against this framework to understand the likelihood of the ATO reviewing their claims for deductions.
If you have any further questions about how the new guidance might apply to your circumstances, reach out to your Pitcher Partners expert today.
