For many Australians, a coastal cottage or ski apartment serves two purposes. It provides a personal retreat for family getaways and, when not in use, is listed on platforms such as Airbnb or Stayz to offset holding costs.
Historically, owners often proceeded on the basis that, provided they made reasonable apportionments, most standard rental property deductions would be available. That landscape is shifting. The Australian Taxation Office has issued draft guidance in TR 2025/D1, PCG 2025/D6 and PCG 2025/D7, signalling a much firmer compliance stance on properties that mix private enjoyment with rental activity.
Although these documents remain in draft form, they clearly indicate how the ATO intends to approach holiday home claims in the near future.
The Core Issue: Investment Asset or Lifestyle Property?
At the heart of the new guidance is a distinction between properties genuinely operated with a commercial objective of maximising rental returns and properties primarily held for private lifestyle purposes, with rental income playing a secondary role.
The ATO reiterates that all rental income must be reported, regardless of whether it arises from short term stays, occasional bookings, or informal arrangements.
However, the more significant development concerns deductions. Where a property is characterised as a holiday home rather than a bona fide income producing investment, the ATO may deny deductions for holding costs such as interest on loans, council rates, land tax, insurance, and repairs and maintenance.
This denial may apply even if the property is rented at market rates for part of the year. In such cases, deductions could be restricted to certain direct expenses linked specifically to rental activity, such as cleaning or advertising.
In assessing whether a property is genuinely commercial, the ATO is likely to scrutinise factors such as whether peak holiday periods are reserved for private use, irregular or limited advertising, rental pricing that exceeds market comparables, and repeated tax losses over multiple years. These indicators may suggest that rental activity is incidental rather than the primary purpose of ownership.
Apportionment: A Fair and Reasonable Standard
Even where a property qualifies as an income producing asset, expenses must still be divided appropriately if there is mixed private and rental use.
PCG 2025/D6 emphasises that apportionment must be fair and reasonable. Common methodologies include time based allocation, for example by reference to days rented or genuinely available for rent, and area based allocation where only part of the dwelling is rented.
Accurate record keeping is essential. The ATO has increasing access to data from booking platforms and can readily reconcile advertised availability, booking calendars and reported income. Inadequate documentation or aggressive apportionment approaches will elevate audit risk.
Potential Tax Consequences
The financial implications could be substantial. Take, for example, a holiday apartment generating $30,000 annually during quieter months but reserved for personal use during peak school holiday periods. Under the proposed approach, the ATO may determine that the property is essentially a private holiday home. As a result, previously claimed deductions for interest and other holding costs could be significantly curtailed, potentially increasing taxable income by tens of thousands of dollars.
Ownership structures also warrant careful consideration. Income and expenses are generally allocated according to legal ownership interests, not according to who uses the property more frequently. Furthermore, renting to family members at discounted rates can further restrict deductibility.
Recommended Actions Before the Rules Commence
The draft guidance is proposed to apply from 1 July 2026, with transitional concessions available for certain arrangements established before 12 November 2025. Nevertheless, waiting is not advisable.
Property owners should consider whether the property is genuinely operated to maximise rental returns, including during peak seasons. Rental rates should be aligned with comparable properties in the area. Robust documentation should be maintained, including booking records, advertisements, enquiry logs and detailed evidence distinguishing private and rental use.
It is also prudent to assess whether the current ownership and operational model supports a commercial profile, while being mindful of potential CGT, stamp duty and legal implications if changes are made. If seeking to rely on transitional arrangements, contemporaneous documentation will be critical.
Final Thoughts
The ATO is not eliminating deductions for holiday properties. Rather, it is tightening the boundary between legitimate investment assets and private lifestyle holdings.
With appropriate structuring, commercial conduct and comprehensive record keeping, many owners can continue to access deductions that reflect genuine income producing use.
If you hold a holiday property, now is an opportune time to undertake a strategic review. A proactive assessment today may prevent significant adjustments and unexpected tax liabilities in the future.
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By working with us as your professional tax accountant and mortgage broker, you can be confident that your loans are structured to protect your tax position, maximise deductions, and avoid costly mistakes, giving you greater peace of mind and more control over your financial future.
Pitt Martin Group is a firm of Chartered Accountants, providing services including taxation, accounting, business consulting, self-managed superannuation funds, auditing and mortgage & finance. We spend hundreds of hours each year on training and researching new tax laws to ensure our clients can maximize legitimate tax benefit. Our contact information are phone +61292213345 or email info@pittmartingroup.com.au. Pitt Martin Group is located in the convenient transportation hub of Sydney’s central business district. Our honours include the 2018 CPA NSW President’s Award for Excellence, the 2020 Australian Small Business Champion Award Finalist, the 2021 Australia’s well-known media ‘Accountants Daily’ the Accounting Firm of the Year Award Finalist and the 2022 Start-up Firm of the Year Award Finalist, and the 2023 Hong Kong-Australia Business Association Business Award Finalist.
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By Zoe Ma @ Pitt Martin Tax
