If you own a holiday home that is also rented out, whether through Airbnb, Stayz or a local agent, the Australian Taxation Office has clarified how the tax rules apply to these arrangements. The updated guidance may affect your ability to claim deductions such as interest, council rates, insurance and maintenance expenses.
The focus is on section 26-50 of the Income Tax Assessment Act 1997. This provision can deny deductions where a property is mainly used for private holidays or recreation rather than to generate rental income.
Why the increased attention?
Section 26-50 is intended to prevent taxpayers from claiming deductions for what is essentially private lifestyle expenditure. With the growth of short-term rental platforms, many properties are now used partly for income and partly for private purposes. The ATO has responded by clarifying how it will assess these mixed-use arrangements.
Under the legislation, a holiday home is treated as a leisure facility. As a result, deductions for ownership costs can be denied unless the property is mainly used to produce assessable income.
The central issue: main use
The key question is whether the property is mainly used, or held, to earn rental income.
This assessment is not based solely on the number of days rented. The ATO considers the overall pattern of use, including:
- How frequently the property is genuinely rented
- The extent of personal or family use
- Whether the property is available for rent during peak periods such as school holidays
- Whether earning rental income is prioritised over private use
Blocking out peak periods for personal use or declining bookings to retain private access may indicate that the property is not mainly held for income producing purposes.
There is no single decisive factor. The ATO considers all relevant circumstances before forming a view.
The traffic light framework
In Practical Compliance Guideline PCG 2025 D7, the ATO outlines how it will approach compliance activity using a traffic light framework.
Green zone
Generally applies where the property is rented for most of the year, personal use is limited and usually outside peak periods, and income generation is clearly the priority. These arrangements are unlikely to attract review.
Amber zone
Applies where there is regular private use, income is forgone to allow personal access, or the property is used privately during high demand periods. These arrangements may receive closer scrutiny.
Red zone
Applies where the property is primarily used as a holiday home, peak periods are consistently blocked out, or rental activity appears minimal. These cases are more likely to attract ATO attention.
Timing and transitional relief
While the legislation itself is not new, the ATO has acknowledged that this interpretation has not been consistently applied to holiday rentals in the past. Transitional relief is therefore available.
The ATO has indicated it will not dedicate compliance resources to reviewing holiday home deductions before 1 July 2026, provided the arrangement was entered into before 12 November 2025.
From 1 July 2026, and for new arrangements entered after 12 November 2025, the compliance framework will be applied more actively.
Practical next steps
If you own a holiday home that generates rental income, it is prudent to:
- Review the extent of private use
- Ensure the property is genuinely available for rent during peak periods
- Maintain clear records of bookings, availability and pricing
- Seek advice where the property has both investment and personal elements
The way a property is used can directly affect the deductibility of expenses. A considered review now may prevent issues later. Speak with us to find out more.
