Refreshed ATO Guidance Puts Holiday Homes Under the Spotlight

OCTOBER 2025

The ATO has sharpened its focus on short-term rental properties, releasing a suite of draft guidance designed to reset the rules for Australians claiming deductions on holiday homes and mixed-use investment properties.

In a market where short-term rentals have become part of the lifestyle and income strategies of many Australians, the tax office is signalling a new standard: only genuinely income-producing properties will qualify for meaningful deductions.

A New Era for Short-Term Rentals

The ATO’s draft releases — TR 2025/D1, PCG 2025/D6, and PCG 2025/D7 — collectively reshape how individuals must treat income and expenses tied to rental properties not used in a business.

The initiative aims to curb long-standing overclaims, particularly for homes that double as private escapes. For many owners, this marks a noticeable shift in compliance expectations, with documentation, transparency and real-time evidence now front and centre.

Holiday Homes Under Closer Scrutiny

Holiday homes — a staple of the Australian coastal lifestyle — come with new responsibilities under the draft ruling.

TR 2025/D1 draws a clear line: if a property functions as a leisure retreat, even intermittently, deductions for major ownership expenses may be denied. Interest on borrowings, rates, land tax, repairs and maintenance all fall into the non-deductible category unless the property is used mainly to produce income.

The ATO will look beyond intent, focusing instead on actual behaviour — patterns of private stays, unadvertised peak periods, or locked-out holiday blocks all shape the determination.

When an Income-Producing Purpose Can Be Proven

Relief exists under s 26-50, but only where the property is genuinely held or used to earn assessable income for most of the year.

PCG 2025/D7 sets out a tiered risk framework examining factors such as:

Days occupied by paying guests
Availability during peak demand
Private use versus commercial use
Advertising consistency
Market-aligned pricing

Properties that fail to meet these benchmarks will fall into higher-risk categories, with deductions increasingly exposed to challenge.

Apportionment Rules Tighten

With PCG 2025/D6, the ATO is bringing a more rigorous lens to properties that serve both personal and rental purposes. Owners will need to rely on fair and defensible apportionment methods supported by records that show:

Booking requests and confirmed stays
Dates and reasons for blocked-out periods
Comparable market rates
Communication with potential guests

Simply listing a property on a booking platform is no longer enough.

What It Means for Property Owners

The ATO’s refreshed stance signals a wider compliance shift across the short-term rental market. The implications are significant:

All payments — Airbnb bookings, mates’ rates, discounted family stays — are assessable income.
Deductions must be apportioned where income is reduced by non-commercial arrangements.
Rejecting peak-season bookings or limiting availability may lead to deductions being denied entirely.
Mixed-use properties will face ongoing ATO monitoring and higher scrutiny thresholds.

For many owners, this will require a rethink of their rental strategy and a more disciplined approach to record-keeping.

The Landscape Ahead

As the ATO moves to tighten compliance, short-term rental owners need to be proactive. A more polished, market-aligned operating model — supported by evidence, consistency and transparency — will be essential to maintaining full deduction entitlements.

The refreshed guidance also signals broader policy intent: reducing aggressive tax positions and restoring fairness between full-time landlords and casual holiday-home investors.

Contact Us

If you own a holiday home or short-term rental, now is the time to review your arrangements.

Our team can assess your position under the draft guidelines and help structure a compliant, tax-effective strategy tailored to your circumstances.