Holiday Homes in the ATO’s Crosshairs: What You Need to Do Before 1 July 2026

If you own a holiday home that you also rent out, or are thinking of buying one, the Australian Tax Office (ATO) has recently changed the rules in a way that could significantly affect what you can claim. This is not a minor tweak. In some situations, it could mean losing the ability to deduct interest, council rates, land tax, insurance, and depreciation entirely.

Here is what has changed, what is at risk, and what you should be doing about it before 1 July 2026.

What has changed?

Until now, most holiday home owners who rented their property out for part of the year have been able to apportion their expenses. For example, if the property was available for rent for 48 weeks of the year, you could claim roughly 48/52nds of your running costs. That approach is now under serious threat.

In November 2025, the ATO released three new draft documents: Taxation Ruling TR 2025/D1, and Practical Compliance Guidelines PCG 2025/D6 and PCG 2025/D7. Together, they signal a much stricter approach to holiday home deductions.

The key change is that the ATO is now applying section 26-50 of the Income Tax Assessment Act 1997, which deals with “leisure facilities.” If your holiday home falls into this category, the apportionment approach goes out the window. You can only deduct costs that are directly tied to your rental activity, such as advertising, platform commissions, and cleaning between guests. Everything else, including loan interest, rates, insurance, and depreciation, is denied.

So what makes a property a “leisure facility”?

A leisure facility is broadly any land or building held mainly for holidays or recreation. The ATO’s test is about your predominant purpose as an owner, not just how many days you use the property personally.

The critical question is whether you prioritise your own use over rental income. The clearest indicator of this is reserving the property for personal use during peak holiday periods, such as Christmas, New Year, Easter, or school holidays, when paying guests are most likely to want to book.

This is the part that catches many people off guard. You could personally use the property for as little as a month per year, but if that month is Christmas and school holidays while the rest of the year sits largely empty, the ATO may still classify it as a leisure facility.

The ATO’s own example in the draft ruling illustrates this: a beach house used by the owners during Christmas and school holidays (about a month in total), with the remainder advertised on short-stay platforms. Despite the limited personal use, the ATO’s view is that none of the running costs would be deductible other than direct rental expenses like platform fees and cleaning.

The ATO’s risk zones: where do you sit?

PCG 2025/D7 introduces a traffic-light style framework to help owners assess their exposure:

No single factor decides which zone you are in. The ATO looks at the full picture, including how the property is advertised, how the rental conditions compare to similar properties, and the ratio of rental days to personal use days across peak and off-peak periods.

When does this take effect?

The ATO has confirmed it will apply this view from 12 November 2025, when the draft guidance was released. However, there is a transitional period: for arrangements that were already in place before that date, the ATO has said it will not take compliance action for costs incurred before 1 July 2026.

In plain terms, if you already own a holiday home and have not changed your loan or rental arrangements since November 2025, you have until 1 July 2026 to review and adjust if needed.

If you have purchased a new property, or taken out a new loan, since 12 November 2025, you do not get the benefit of this transition. The new rules apply to you right now.

What about properties held in a family trust?

The ATO’s draft ruling is technically written to apply to individuals only. However, it would be a mistake to assume that trust-held properties are automatically in the clear. The legislation itself is not limited to individuals, and the ATO’s underlying view about what constitutes a leisure facility will almost certainly be applied consistently regardless of the ownership structure.

There is also an anti-avoidance rule in section 26-50 that could apply where an arrangement is put in place primarily to get around the leisure facility test. For example, having a family trust charge family members a nominal rent to tick the “held for income production” box may not be enough if the substance of the arrangement is still one of private enjoyment. If your holiday home is in a trust, it is worth getting specific advice on your structure.

Does the “genuinely available for rent” test still matter?

Yes, but it now operates alongside the leisure facility question rather than replacing it. Even if your property passes the genuine availability test for periods it is not occupied, that alone will not save your deductions if the property is classified as a leisure facility.

The ATO’s existing guidance on genuine availability still applies: setting rents well above market, refusing prospective tenants without good reason, or only advertising outside of peak periods are all indicators that the property is not genuinely available for rent.

What can you do right now?

The good news is that the rules are not a blanket denial of deductions for all holiday homes. They are targeted at properties where the owner’s primary purpose is personal enjoyment rather than earning rental income. If you can demonstrate that your property is run as a genuine investment, your deductions should be safe.

Here is a practical checklist of steps to consider before 1 July 2026:

Capital gains tax: a few things to keep in mind

Even where expenses are denied as deductions, they are not necessarily lost forever. Costs such as interest, insurance, rates, and maintenance that cannot be deducted can generally be included in the cost base of the property when you sell, which reduces your capital gain. This is another reason why keeping detailed records of all costs matters, even in years where no deductions are claimed.

It is also worth noting that the main residence capital gains tax (CGT) exemption may be affected if your property has been used partly to produce income. If you are considering selling a holiday home, the interaction between the partial main residence exemption and the cost base rules is worth reviewing as part of your pre-sale planning.

Thinking of buying a holiday home?

If you are considering purchasing a holiday property and plan to use rental income to help cover the holding costs, this guidance should be front and centre in your planning. You need to be honest with yourself about how you intend to use the property, and whether that is compatible with claiming deductions.

Buying a beach house with the intention of enjoying it over Christmas and school holidays while renting it out during quieter periods is likely to place you in the moderate-to-high risk zone under the new framework. That does not make the purchase a bad decision, but it does change the financial case. The tax savings you were counting on may not materialise in the way you expected.

A sensible approach from the outset, with clear rental management through a property manager, genuine year-round availability at market rates, and disciplined record-keeping, will put you in a much stronger position.

We are here to help

This is a meaningful change, and the consequences of getting it wrong are real. Whether you are an existing holiday home owner, hold a property through a trust, or are thinking about buying, we encourage you to speak with us before 1 July 2026. We can review your current arrangements, give you a straight assessment of your risk, and help you put the right practices and documentation in place before the transitional period closes.