The ATO crackdown that’s putting your Holiday Home Deductions at risk

The ATO is taking a closer look at how holiday home deductions are claimed and, in doing so, reshaping what counts as genuinely income-producing. In some cases, what once made a holiday home viable may no longer do so.

For many Australians, a holiday home plays two roles. It’s a place to slow down, gather family, and create memories over summer weekends or winter escapes. For the rest of the year, it may be listed on Airbnb or Stayz, not as a full-scale investment strategy, but as a way to help offset the cost of ownership.

That dual purpose is exactly where the complexity now lies. And it helps to explain why the ATO has shifted its focus.

Why the ATO Is Taking a Closer Look at Holiday Home Deductions

The Australian Taxation Office (ATO) has released a suite of new draft guidance — TR 2025/D1, PCG 2025/D6 and PCG 2025/D7 — that clearly signals a tightening approach to holiday home deductions. And while these documents are still in draft, they provide a very clear window into how the ATO intends to assess these properties going forward.

At its core, the ATO isn’t questioning whether holiday homes can produce rental income. What it is doing is drawing a firmer distinction between:

• Properties genuinely held and operated to maximise rental income; and
• Properties that are primarily lifestyle assets, with rental income playing a secondary role.

That distinction now carries more weight than it once did. If the ATO determines that a property is primarily a holiday home rather than a genuinely income-producing investment, it may deny deductions for major expenses altogether. Even if the property earns taxable rental income for part of the year, that may no longer be enough on its own.

For many owners, that’s where the real risk sits. It’s not about losing rental income. It’s about losing the deductions that made the property financially viable in the first place.

Individually, those factors may not determine the result. But together, they shape how the property is viewed. And increasingly, that view determines whether holiday home deductions survive. My experience tells me this is where most well-intentioned owners will find themselves exposed.

Apportionment Still Matters — But Only When It Applies

Historically, many owners have relied on apportionment as the safeguard. Rent the property part of the year, use it privately at other times, and allocate expenses accordingly. That principle hasn’t disappeared. But in my view, it’s no longer the automatic protection it once felt like. PCG 2025/D6 reinforces that apportionment must be fair and reasonable, and supported by evidence. Common approaches include:

• Time-based apportionment, based on days rented or genuinely available for rent; and
• Area-based apportionment, where only part of a property is used to produce income.

Where owners tend to get into difficulty isn’t the method itself — it’s weak records. The ATO has direct access to booking platform data and can readily match calendars, pricing, and income disclosures. If availability, pricing and usage patterns don’t align with the position taken in a tax return, audit risk increases quickly.

Apportionment still matters. But it will not overcome a fundamentally lifestyle-driven pattern of use.

Why This Could Change the Numbers

In practice, this is where the impact becomes real.

A property may still generate rental income but be treated primarily as a holiday home rather than a genuinely income-producing asset. When that happens, broader deductions such as interest, rates, land tax and general maintenance may no longer be claimable in full, or at all. Instead, owners may be limited to direct, incremental expenses associated with rental stays, such as cleaning, advertising, or platform commissions. That’s a materially different outcome.

Imagine a holiday unit earning $30,000 a year in off-peak rent but reserved for private use during the most valuable weeks. Under the ATO’s new lens, it may be treated as a lifestyle asset. That could mean your holiday home deductions fall from tens of thousands of dollars to only a marginal amount, pushing taxable income and tax payable sharply higher. The rental income remains assessable. The cash expenses remain real. But the tax outcome changes.

Co-ownership arrangements and discounted rentals to relatives add further complexity. These aren’t uncommon scenarios, but they can weaken the property’s commercial profile. For some owners, the change won’t disrupt anything. For others, it may alter the long-term feasibility of holding the property at all.

Why This Could Change the Numbers

Although the draft guidance is proposed to apply from 1 July 2026 (with transitional relief for arrangements in place before 12 November 2025), I don’t think this is something to leave sitting on the shelf. The questions worth asking now are straightforward:

• Is the property genuinely operated to maximise rental income?
• Is it advertised consistently, including during peak periods?
• Is pricing aligned with comparable properties?
• Do records clearly demonstrate availability, enquiries and private use?

In some cases, adjusting how a property is run can materially improve its commercial profile. But those decisions shouldn’t be made lightly. A change to the ownership structure, for example, could trigger capital gains tax, stamp duty, and legal costs, so strategy matters.

If transitional relief may apply, documentation will be critical. Without clear evidence, that relief may be difficult to rely on. In my experience, reviewing this proactively provides options. Waiting until an ATO review forces the issue removes flexibility.

Now that you have a better grasp on the ATO’s intent (I hope), know this: Holiday home deductions aren’t being abolished. But from what I’m seeing, the ATO is drawing a much sharper distinction between genuine investment properties and lifestyle assets that happen to earn some income.

For years, many owners relied on a relatively straightforward approach: declare the income, apportion the expenses, and move on. I understand why that felt reasonable. In many cases, it worked. But where the line between lifestyle and investment shifts, the financial outcome shifts with it.

That’s why I’m raising it now. With the right structure, pricing, intent, and record-keeping, many owners will still be able to claim appropriate deductions and maintain cash flow. Reviewing how your property is positioned and documented before the tightened approach takes effect gives you options. Waiting until 2026, or until the ATO raises questions, removes flexibility.

If you’d like me to assess your current arrangements and help you plan ahead, I’d be happy to have that conversation.