The ATO has released Draft Taxation Ruling TR 2025/D1 clarifying how individuals who are not in business should treat income and deductions from rental properties, including holiday homes and short-term rentals.
Draft Practical Compliance Guideline PCG 2025/D6 outlines the fair and reasonable apportionment of losses and outgoings relating to a property used for both income-producing and personal purposes.
PCG 2025/D7 explains the ATO’s proposed compliance approach to determining whether an individual’s holiday home is used (or held for use) mainly to produce assessable income.
Holiday homes
As per Draft Taxation Ruling TR 2025/D1, if the rental property is also a holiday home, certain deductions for costs related to owning or using it will be denied because it is considered a leisure facility, unless an exception applies (s 26-50(1)).
Whether a property is a holiday home depends on its actual pattern of use for holidays or recreation, including by family or friends, even when unoccupied. Deductions cannot be claimed for expenses related to ownership or personal use, including (but not limited to):
– interest on borrowings to finance the property
– council rates
– land tax
– repairs and maintenance.
Costs directly linked to earning rental income, such as advertising or cleaning after guests, are allowable deductions.
Exception under s 26-50
An exception applies if the property is mainly used or held for producing assessable rental income throughout the year, determined by factors like actual use, time dedicated to income production, private use, and availability during peak holiday periods.
The draft guideline, PCG 2025/D7, sets out how the ATO differentiates and manages risk for a range of rental property arrangements to which s 26-50 may apply.
Next steps
The ATO aims to reduce the overclaimed deductions and significant tax breaks for owners, especially for hybrid use properties.
A rental deduction can no longer be claimed by simply advertising the property; owners can now only claim expenses to the extent they are non-property costs and are directly incurred in producing assessable income.
Any payment received through online platforms such as Airbnb or a discounted stay for relatives counts as assessable income, and deductions must be apportioned for non-commercial or below-market arrangements.
Blocking out school holidays, rejecting peak season bookings, or showing inconsistent advertising activity may cause the ATO to deny deductions entirely.
The ATO will especially monitor mixed use properties. Internal rental schedules and workpapers may need to be revised to incorporate the new compliance approach when calculating rental income and deductions.
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Please note that this information is not specific and is general in nature and cannot be relied on as advice. Please contact us for advice specific to you and your circumstances.