The ATO has recently issued a draft ruling (TR 2025/D1) that significantly tightens the tax treatment of short-stay and holiday home rentals. The aim is to stop property owners from claiming full investment property deductions when their properties are mainly used for personal holidays rather than genuine income-producing activity.
The ATO has indicated that it will use its transitional rules and not allocate audit & compliance resources on expenses incurred before 12 November 2025.
The ATO will consider factors such as the number of days the property was rented out compared to private use, whether the property is available during peak periods, realistic market rate pricing, and whether owners reject legitimate booking requests. Property owners who rent the property at discounted rates for friends or family must still apportion deductions based on commercial use.
Whether a property is a holiday home is a question of fact and requires an assessment on the primary usage of the property. The ATO will likely focus on key areas such as where personal use is given priority during peak periods, there are limited or scarce attempts to genuinely make the property available to rent or where the property is advertised well above market rates.
The draft ruling reflects concerns that many holiday homes have been treated as investment properties for tax purposes despite limited rental activity. By enforcing a stricter criteria, the ATO aims to prevent excessive use of deductions and encourage fairer treatment between genuine rental businesses and occasional holiday rentals.
In summary, the ATO is drawing a firmer line between a genuine rental property and a holiday home that generates occasional income. Holiday home owners are encouraged to keep detailed records, accurately apportion expenses & review whether their rental activity meets the ATO’s definition of a rental property rather than a holiday home.
