On 12 November 2025, the ATO released new draft guidelines in connection with the tax treatment of rental property expenses, including strict rules for holiday homes that are also used to earn rental income during an income year.
The new draft guidelines comprise of Draft TR 2025/D1, Draft PCG 2025/D6 and Draft PCG 2025/D7 (“the Draft Guidelines”). Under the Draft Guidelines, the ATO is of the view that most rental property expenses relating to holiday homes are in fact non-deductible.
What properties are being targeted?
For the avoidance of doubt, a ‘holiday home’ is defined as a property that is used (or held for use) for one’s holidays or recreation (or the holidays or recreation of one’s family members and friends for no rent, or at a reduced rate). A ‘property’ refers to land, a building, or part of a building or other structure that you own or lease.
The Draft Guidelines consider that where personal use of a property is prioritised over income production (i.e. rent), particularly during peak holiday periods such as school holidays, Christmas and New Years breaks, the property will be considered a ‘leisure facility’.
Section 26-50 of the Income Tax Assessment Act 1997 (“the 1997 Act”) defines a ‘leisure facility’ as “land, a building, or part of a building or structure used (or held for use) for holidays or recreation”. Examples can include a home on the coast or even an apartment in the CBD or capital city in which the owners only reside in during peak holiday periods.
Who is affected by the Draft Guidelines?
The Draft Guidelines appear to only apply to owners who are individuals. However, it may be that the ATO forms the view that they should also apply to companies and trusts.
For instance, a holiday home held by a trust may be considered a leisure facility under section 26-50 of the 1997 Act if it is mainly used for holidays and recreation by the beneficiaries or controllers of that particular trust.
It is therefore important that owners of holiday homes still consider the effect of the Draft Guidelines even if the holiday home is owned by a related company or trust.
What deductions cannot be claimed?
Section 26-50 of the 1997 Act denies deductions for losses or outgoings incurred by owners of a leisure facility, unless an exception applies. These include deductions for mortgage interest payments, council rates, land tax and maintenance fees to the extent that they relate to the use or ownership of a leisure facility. Such expenditure may form part of the owner’s cost base of the asset for CGT purposes.
However, in the Draft Guidelines, the ATO regards rental property expenses incurred in generating rental income for a leisure facility to be allowable deductions. This can include advertising fees paid as well as commissions and fees paid in connection with cleaning and maintaining a leisure facility for guest stays.
What exceptions are available under section 26-50 of the 1997 Act?
Section 26-50 of the 1997 Act also outlines the available exceptions with owning a leisure facility. This includes if at all times in the relevant income year, a leisure facility is held for sale in the ordinary course of your business of selling leisure facilities, or a leisure facility is used or held mainly to provide any of the following:
(a) in the ordinary course of your business of providing leisure facilities for payment; or
(b) to produce your assessable income in the nature of rents, lease premiums, licence fees or similar charges; or
(c) for your employees to use; or
(d) for the care of your employees’ children.
Points c) and d) above do not apply to employees who are members or directors of the company.
Under section 26-50(4) of the 1997 Act, a part year exception applies in the event that a leisure facility is used or held in any of the above circumstances during part of the relevant income year. This requires a permanent change to the way in which a leisure facility is being used or held, rather than a mere seasonal change of its use.
What does this mean for my clients?
As the ATO will now be cracking down on taxpayers who own holiday homes and continue to claim rental property deductions, it is important to take note of the Draft Guidelines, as the ATO will begin applying the above view from 12 November 2025, with a transitional start date of 1 July 2026 for any pre-existing arrangements in place.
In other words, the ATO has indicated that it will not take action to review rental property expenses incurred and deductions claimed before 1 July 2026, provided that they were incurred and claimed under an existing arrangement prior to 12 November 2025. Any new properties or new arrangements (e.g. new loans) entered into after this date will therefore not benefit from the Draft Guidelines.
It is therefore vital to ensure that clients are only claiming the allowable deductions pursuant to section 26-50 of the 1997 Act.
In the event of an ATO review or audit in relation to this issue, we can assist clients throughout this process and provide clients with tailored advice based on their circumstances.
Public commentary on the Draft Guidelines closed on 30 January 2026.
If you have any questions or require any further information about this article, please do not hesitate to contact our office on (02) 9687 3755.