For years, many holiday homeowners have operated under a fairly simple assumption: if the property was rented out for part of the year, at least a portion of the ownership and holdings costs could be claimed.

The ATO has now made it clear that this approach will no longer cut it. Instead, they have sharpened their focus on one key question:

Is the property predominantly being held to generate rental income, or is it primarily a private holiday home that occasionally earns some income on the side?

Depending on the answer, it could have a big impact on the deductions.

 

what’s changed?

 

In the past, holiday homeowners could generally claim expenses after adjusting for a private use portion.

A key rule was previously that if the property was ‘genuinely available for rent’, this portion of the costs was generally deductible [assuming usual deduction rules were satisfied].

Example: Property was available for rent for 300 days and used privately for 65 days. The taxpayer would generally claim 300/365 of expenses related to holding the property [e.g. interest, rates, etc.]

Now, simply listing your property on Airbnb, Stayz, or another booking platform won’t be enough.

The ATO’s message is clear – if you are claiming tax deductions, your holiday home needs to be an investment first and a holiday home second.

If it isn’t, some deductions will no longer be available at all.

 

what deductions are at risk?

 

While rental income will remain taxable, owners may lose access to deductions for expenses relating to ownership of the property, such as:

  • Interest on loans
  • Council rates
  • Water rates
  • Land tax
  • Body corporate fees
  • Depreciation
  • Capital works deductions
  • Repairs and maintenance

Owners will still be able to claim costs directly associated with earning the actual rental income.  This will include costs like:

  • Advertising costs
  • Booking platform fees
  • Property management commissions
  • Cleaning costs after guest stays

For highly geared properties, losing these deductions could make the property far less tax effective.

Note: Irrespective of the Government’s negative-gearing announcements, if the gearing is related to a holiday home, you will already not get a deduction for the interest and holding costs of such a property.

 

is your property considered a ‘holiday home’?

 

These new ATO guidelines, limiting deductions on your property, essentially require you to ensure that the property is genuinely held predominantly to produce rental income, rather than for private holiday use.

Some questions to ask yourself:

  • Is the property available during peak demand periods [eg Christmas period]?
  • Are rental rates set at commercial levels?
  • Are bookings actively encouraged?
  • Is the property advertised?
  • Bookings are accepted from the general public?
  • Is private use limited?
  • Does the overall pattern demonstrate that rental income is the primary objective?

These are the questions that will become more important as the ATO begins applying this approach.

 

substantiation

 

Proof of how the property is used is going to become even more important. Being able to provide evidence like the following will become critical:

  • Booking calendars
  • Advertising records
  • Rental agreements
  • Evidence of declined or accepted bookings
  • Records of private use

 

CGT treatment

 

These rules do not change the CGT treatment of holiday homes.

Taxpayers should continue to keep detailed cost base records, particularly where the property has mixed private and income-producing use, CGT will still apply fully to the property.

Note:  Of course, the proposed changes to CGT from 1 July 2027 in the recent federal budget will also be relevant.

Make sure you keep your record of any non-deductible costs incurred on the property so they can be added to the cost base.

 

date of effect

 

As this is an update to the ATO guidelines, these changes apply to both future and previous years.

However, the Commissioner has stated they will not devote compliance resources to reviewing their application to expenses incurred before 1 July 2026.

 

the bottom line

 

If your holiday home is more of a family getaway than a commercial rental or investment property, your deductions, especially around the ownership of the property, will be significantly reduced.

Now is the time to review your arrangements and understand how the revised ATO holiday home deductions rules may affect you before lodging your next tax return.

 

we’re here to help

If you’d like to understand how these changes may impact your situation, our team is here to help.

Reach out to your usual contact at businessDEPOT, email oneplace@businessdepot.com.au or give us a buzz on 1300 BDEPOT.

 

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