Many Australian taxpayers own properties that sit somewhere between a personal holiday home and a genuine income producing rental. Beach houses, country escapes, ski lodges and short stay accommodation listed on platforms like Airbnb have long occupied a grey area in the tax law. In late 2025, the Australian Taxation Office (ATO) released new draft guidance that significantly tightens its approach to these arrangements, particularly where owners claim interest and other ownership costs as deductions.
The new guidance may materially affect the after-tax cost of holding a property for taxpayers who:
- own holiday homes in coastal, regional or seasonal locations;
- rent out properties on a short term basis;
- allow family or friends to use properties for free or at reduced rates; or
- claim interest and other holding costs despite significant private use.
This article explains what has changed and why interest deductions are now under closer scrutiny.
Recent ATO guidance
In November 2025, the ATO issued a Draft Taxation Ruling, TR 2025/D1 Income Tax: rental property income and deductions for individuals who are not in business (TR 2025/D1), together with two draft Practical Compliance Guidelines (PCG 2025/D6 Apportionment of rental property deductions and PCG 2025/D7 Application of section 26-50 of the Income Tax Assessment Act 1997 to holiday homes that you also rent out). The long-standing ruling IT 2167 originally released in 1985 on this matter, has now been formally withdrawn.
The draft ruling proposes a stricter approach on the tax treatment of rental income and deductions for individuals not carrying on a rental property business.
Why are holiday homes a focus?
The ATO is concerned about taxpayers claiming deductions for properties that are primarily used for private recreation, rather than for earning income. In particular, the ATO has highlighted growth in short-term letting and “blended use” arrangements, where properties are rented out occasionally but kept available for personal use during peak holiday periods.
Under the draft guidance, the ATO draws a sharper distinction between genuine income producing rental properties, and holiday homes that happen to earn some rental income. This distinction is critical because it affects whether ownership costs such as mortgage interest, council rates, insurance and land tax are deductible.
The concept of a “holiday home”
TR 2025/D1 introduces a more structured approach to identifying when a property is a “holiday home”. Broadly, the ATO considers a property to be a holiday home if it is used or held for use for the holidays or recreation of the owner, their family or friends, even if it is also rented out at times.
As a property can still be classified as a holiday home even where rental income is earned, the central issue is determining what the property’s main purpose is. If the ATO concludes that a property’s main purpose is private or recreational, it may be treated as a “leisure facility” for tax purposes under section 26-50 of the Income Tax Assessment Act 1997.
Why interest deductions are at risk
Interest on a loan used to acquire a rental property is ordinarily deductible where the property is used to produce assessable income. However, the draft guidance makes it clear that interest is an ownership cost, and ownership costs are treated differently where a property is classified as a holiday home.
If section 26-50 applies, deductions for ownership costs, including interest, are generally denied, unless the property is mainly used to produce assessable income. This represents a stricter and more explicit application of the law than many taxpayers were accustomed to under IT 2167 which allowed more flexibility in mixed use situations.
What does “mainly used to produce income” mean?
One of the most significant changes in the draft guidance is the ATO’s shift from simply counting the number of days a property is rented or available for rent. Instead, the ATO states that it will take a holistic approach to determining whether a property is mainly income producing and may consider:
- whether the property is genuinely available for rent during peak periods (such as school holidays, Christmas and Easter);
- the extent of private use by the owner, family or friends;
- pricing practices, including charging below market rent;
- the level of effort made to attract tenants; and
- whether the property is deliberately blocked out for personal use.
In popular holiday destinations, failing to make a property available during peak demand periods may weigh heavily against a conclusion that the property is mainly income producing.
Apportionment is not always available
Many taxpayers assume that, where a property has mixed use, expenses such as interest can simply be apportioned between private and rental use. While apportionment remains relevant in some cases, the draft guidance makes it clear that apportionment does not save ownership deductions where section 26 50 applies.
If a holiday home is found to be mainly for private or recreational use, ownership costs may be entirely non deductible, even though some rental income is earned. By contrast, certain running costs directly connected with earning rental income, such as cleaning, platform/agent fees and advertising, may still be deductible to the extent they relate to income producing use.
Transitional compliance approach
Recognising this represents a change in emphasis, the ATO has outlined a transitional compliance approach. The ATO has indicated it will not devote compliance resources to reviewing the application of section 26-50 to certain holiday home arrangements before 1 July 2026, where expenses were incurred under arrangements entered into before the guidance was released.
This does not change the law, but it does provide some administrative breathing room for affected taxpayers while the guidance is finalised.
Final thoughts
TR 2025/D1 signals a clear shift in the ATO’s approach to holiday homes and interest deductions. The message is that earning some rental income is no longer enough. To sustain deductions for interest and other ownership costs, taxpayers must be able to demonstrate that their property is genuinely and mainly held to produce income and not for personal enjoyment.
As the ruling is still in draft form, further refinement is possible. However, taxpayers with holiday homes would be wise to review their arrangements now, consider how their property is used, and assess whether their deduction claims remain defensible under the ATO’s emerging view. If you require any assistance with making these determinations, contact your local Moore Australia office today.
