Holiday home owners in firing line as ATO cracks down on deductions

A new draft ruling from the Australian Taxation Office may significantly reduce the deductions holiday home owners can claim against rental income from the property, limiting it to advertising, cleaning, and other costs directly related to earning the rent.

You cannot claim ownership costs such as rates, insurance, depreciation, interest, land tax, nor even repairs and maintenance, unless the property is “mainly” used to produce an income and is not held for private purposes.

The onus of proof is now on home owners to show that the main purpose of the property is to earn holiday rent.

If you can meet the ATO’s criteria of holding a property mainly to produce income but use it occasionally for a holiday, then the only restriction is that you cannot claim the portion of expenses and ownership costs that relates to the period of time you stay there.

There is no hard and fast rule on when a holiday home is considered to be mainly used to produce income. It is not just based on a certain number of weeks. The ATO says it will look at the percentage of peak periods such as Christmas and Easter that the home is available for rent or is used for private purposes.

The Tax Office will also consider other aspects such as how proactive you are in promoting the property to potential guests. For example, do you talk the place down by being honest and telling prospective guest that there is poor mobile access in the area? Do you answer all enquiries promptly?

Is the whole of the property available for guests to use? Is there internet access? Is the rent too high? Is the property not in a suitable location for a holiday rental? Do restrictions on the property such as no pets or no children make it unattractive?

You need to consider how many days it earns income compared with private use, and whether you’re monopolising the peak rental time.

The onus of proof is now on you to show that the main purpose of the property is to earn holiday rental income and that you are taking every opportunity to achieve this.

If your holiday home is mainly used to produce income, you are entitled to a deduction for a portion of the ownership expenses. But how do you apportion out the private use? Is it just by counting the number of days you have booked the property out for yourself?

What about the days that no one occupies the property – do they count as private or deductible days? This is not straightforward, you need to consider how many days it earns income compared with private use, and whether you are monopolising the peak rental time.

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All these points need to be considered to decide if it was genuinely listed for rent at the times it was sitting vacant before those days can be on the income side of the apportionment calculation.

This is only a draft ruling, just released, but it states that this approach will apply from November 12, 2025. There is a carve-out for arrangements entered into before that date. This ruling will not apply to them until July 2026.

Nevertheless, the ruling for many will apply before the start of the consultation process, and before it is finalised.

Julia Hartman founded BAN TACS Accountants more than 30 years ago and is still passionate about all things tax.

• Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.

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