ATO Targets Holiday Home Tax Deductions. What the New Draft Ruling Means for Property Owners
Many property owners assume that if their holiday home earns some rental income, the costs associated with the property can be claimed as tax deductions. The ATO’s latest draft ruling suggests that may not always be the case.
The Australian Taxation Office has released a draft tax ruling, TR 2025/D1, which clarifies how rental property deductions should be treated where a property has both private use and rental use. The ruling is particularly focused on holiday homes and short-stay properties, where owners may use the property personally while also earning income from platforms such as Airbnb.
Under the draft guidance, the ATO is signalling that properties primarily used as lifestyle assets may not qualify for the same level of deductions as properties genuinely held to generate rental income.
Who will be impacted by the draft tax ruling regarding holiday home tax deductions?
The draft ruling, TR 2025/D1 Income tax: rental property income and deductions for individuals who are not in business, focuses on rental properties owned by individuals who are not carrying on a rental property business.
While the ruling refers to individuals “not in business,” many business owners will still fall within its scope.
At first glance, that wording can be confusing. Many people who own rental properties are also business owners. If you run a business and own an investment property, it’s natural to assume the ruling might not apply to you. However, in many cases, it still does.
What does “not in business” actually mean?
In the context of the draft ruling, “not in business” does not mean the taxpayer isn’t a business owner. Instead, it refers specifically to whether the rental activity itself is considered a business.
For example, someone might run a construction company while personally owning one or two rental properties. The act of owning a business does not make them exempt from this draft tax ruling. In that situation, the ATO generally treats the rental property as an investment activity, not a rental property business.
This means the rules in the draft ruling would still apply, even though the individual is clearly operating a separate business.
When is rental property considered a business?
For rental property income to be treated as a business, the activity usually needs to be significantly larger and more commercial in nature.
This might include situations where someone:
- owns a large portfolio of properties
- actively manages them in a structured and commercial way
- operates short-stay accommodation at scale
- employs staff or systems to manage the properties
These situations are relatively uncommon. The majority of people who own one or several rental properties are treated as investors rather than operators of a rental property business.
Why the ATO released this investment property draft ruling
The draft ruling mainly focuses on holiday homes and properties with significant private use.
In some situations, property owners have claimed full deductions for expenses such as interest, council rates, maintenance and insurance, even though the property may be used privately for a substantial part of the year.
The ATO’s view is that if a property is not genuinely held to produce rental income, those ownership costs may not be fully deductible. Just like vehicle expenses cannot be claimed for personal use, property expenses must reflect how the asset is actually used. If a property is partly private and partly income-producing, deductions may need to be reduced accordingly.
What deductions are unlikely to change
For many property owners, this draft ruling will not significantly alter how deductions are claimed.
If your property is held primarily as a long-term investment and genuinely rented to tenants, the usual deductions remain available. This generally applies where the property is:
- rented on a long-term basis
- not used privately by you, your family or friends
- clearly held with the intention of generating rental income
In these situations, property owners can typically continue to claim deductions such as:
- loan interest
- council rates and land tax
- repairs and maintenance
- property management or agent fees
- depreciation
- insurance costs
As long as the property is genuinely held to produce income and not used for personal leisure, the draft ruling is unlikely to change the way these deductions are treated.
Where the ATO may deny deductions
The proposed changes are mainly aimed at holiday homes and mixed-use properties, where the property is partly used for private purposes and only rented occasionally.
If a property is primarily used as a lifestyle or recreational asset, the ATO may take the view that it is not genuinely held to produce income. In these cases, some ownership costs may no longer be fully deductible.
Depending on the circumstances, deductions that could be reduced or denied include:
- loan interest
- council rates and land tax
- insurance
- repairs and maintenance relating to private use
- cleaning, gardening or upkeep outside rental periods
In practice, this means expenses may need to be apportioned between private and rental use, rather than fully claimed.
A simple example
Imagine a business owner who purchases a coastal holiday house.
They rent the property on Airbnb during school holidays but also use it themselves for long weekends and several weeks each year.
In the past, they may have claimed most or all of the property’s costs as deductions. Under the ATO’s proposed approach, those expenses may need to be reduced to reflect the private use, and in some situations certain ownership costs may not be deductible at all.
How the ATO decides if your property qualifies for deductions
When reviewing rental property deductions, the ATO looks at the overall pattern of how the property is used, not just whether it earned some rental income during the year.
Some of the factors they typically consider include:
- how many days the property is rented compared with the number of days it is used privately
- whether the property is available for rent during high-demand periods, rather than blocked out for personal use
- whether the advertised rental price reflects normal market rates
- whether the owner accepts genuine booking enquiries from tenants
- whether the property appears to be held primarily as an investment or as a lifestyle asset
If private use makes up a significant portion of the year, the ATO may conclude that the property is not mainly held to produce rental income, which can lead to deductions being reduced or denied.
Practical steps property owners can take now
If you own a rental or holiday property, there are a few simple things worth reviewing.
Make sure the property is genuinely available for rent
The ATO looks at whether a property is realistically available to tenants. This means advertising it publicly, pricing it in line with the market and making it available for reasonable periods.
Keep clear records of private use
If you or your family use the property, track those dates so expenses can be correctly apportioned.
Understand whether the property is an investment or a lifestyle asset
A property primarily held as a holiday home may be treated differently from one purchased specifically as a long-term investment.
Review deductions with your accountant
If a property has mixed private and rental use, it may be worth reviewing how expenses are currently being claimed.
Investment property or lifestyle asset? The distinction matters
For many investors, nothing will change. Long-term rental properties that are clearly held to generate income should continue to qualify for the usual deductions.
Where this draft ruling becomes relevant is for properties that sit in the grey area between an investment and a lifestyle asset, particularly holiday homes that are only rented occasionally.
If you own a holiday home or short-stay rental, it may be worth reviewing how deductions are currently being claimed. The team at Bonerath & Co. can help you assess your position and ensure your property is structured and reported correctly.
