For many Australians, a holiday property serves two purposes — a place to unwind with family and friends, and an income-producing asset listed on platforms such as Airbnb or Stayz during the rest of the year.
Historically, provided income was declared and expenses were reasonably apportioned, most owners were comfortable claiming standard property deductions. However, following the release of new draft guidance from the Australian Taxation Office (ATO) — TR 2025/D1, PCG 2025/D6 and PCG 2025/D7 — the compliance landscape is tightening.
While these documents are still in draft form, they clearly signal a stronger compliance focus on holiday homes from 1 July 2026 (with transitional relief available for certain arrangements in place before 12 November 2025).
What Is the ATO Focused On?
The ATO’s primary concern is distinguishing between:
- Properties genuinely held to maximise rental income, and
- Lifestyle assets that generate only incidental rental income.
The ATO has reaffirmed that all rental income must be declared, even if earned occasionally or through informal arrangements.
However, where a property is primarily a holiday home and not genuinely operated as a commercial rental property, the ATO may deny deductions for major holding costs — including:
- Interest
- Council rates
- Land tax
- Repairs and maintenance
In these cases, owners may be limited to claiming only direct expenses associated with earning income, such as cleaning and advertising.
Importantly, this position may apply even where the property is rented at market rates for part of the year.
The ATO has indicated particular concern with properties that:
- Are blocked out for private use during peak periods (e.g. school holidays or ski season),
- Are advertised inconsistently or at above-market rates, or
- Generate ongoing tax losses year after year.
With access to booking platform data, the ATO can compare listing history, availability calendars and declared income with increasing accuracy.
Apportionment of Expenses: “Fair and Reasonable” Is Key
Even where a property qualifies as income-producing, expenses must still be apportioned where there is mixed use.
Under PCG 2025/D6, claims must be based on a “fair and reasonable” methodology. Common approaches include:
- Time-based apportionment — based on days rented or genuinely available for rent.
- Area-based apportionment — where only part of the property is rented.
Poor documentation or unsupported assumptions increase audit risk. Detailed record-keeping is no longer optional — it is essential.
The Financial Impact Can Be Significant
The tax consequences of misclassification can be substantial.
For example, a property earning $30,000 in off-peak rental income but reserved for private use during high-demand periods may be viewed as primarily a lifestyle asset. In that scenario, deductible expenses could be significantly reduced — potentially increasing taxable income by tens of thousands of dollars.
Additional complexity arises where:
- The property is co-owned (income and deductions generally follow legal ownership interests), or
- The property is rented to relatives at discounted rates (which may further limit deductions).
Practical Steps to Take Now
Although the proposed changes are not yet law, early preparation is prudent.
We recommend reviewing the following:
1. Commercial Intent
Is the property genuinely being operated to maximise rental returns? Is it consistently available, including during peak periods?
2. Market Pricing
Rental rates should align with comparable properties in the same location and season.
3. Documentation
Maintain comprehensive records, including:
- Booking calendars
- Advertisements
- Enquiry history
- A clear diary of private versus rental use
4. Ownership and Structure
In some cases, revisiting how the property is owned or operated may improve its commercial profile and tax outcome. However, any restructuring must consider CGT implications, stamp duty and legal costs.
5. Transitional Relief Evidence
If your arrangement predates 12 November 2025, ensure supporting documentation is retained.
The Bottom Line
The ATO is not removing deductions for holiday properties. Rather, it is drawing a clearer distinction between genuine investment properties and lifestyle assets.
With the right commercial approach, appropriate pricing and robust documentation, many owners will still be entitled to claim legitimate deductions and manage cash flow effectively.
If you own a holiday property, now is the time for a proactive review.
At L Jack & Associates, we work closely with property owners to assess risk, strengthen compliance positions and ensure tax outcomes align with commercial reality.
Please contact us if you would like a review of your current arrangements or guidance on planning ahead.