Written by Timothy Reece | Associate Director | Accounting
The Australian Taxation Office (ATO) has recently released Draft Taxation Ruling TR 2025/D1, providing updated guidance on how individual property owners should treat rental income and deductions.
Crucially, the ruling introduces stricter views on “holiday homes”- properties that are used for both private enjoyment and short-term rental. If your property falls into this category, the ATO may deny several common deductions you’ve previously relied on.
Here is a breakdown of what the draft ruling means for you.
1. The “Holiday Home” Trap: Are Your Deductions at Risk?
The most significant part of TR 2025/D1 relates to Section 26-50, which deals with “leisure facilities.” The advice clarifies that a holiday home is considered a leisure facility if it is used (or held for use) for recreation by you, your family, or friends at no or reduced rent.
The Rule: If your property is a “holiday home,” deductions for “holding costs” (ownership expenses) are generally denied unless you can prove the property is used (or held for use) mainly to produce assessable income.
What expenses might be denied
- Interest on mortgage loans and borrowings.
- Council rates and land tax.
- Repairs and maintenance.
- Insurance (building, contents, and public liability).
What can you still claim?
Direct costs that do not relate to the ownership or general maintenance of the facility, such as advertising for tenants, cleaning costs after a guest stay, or platform commissions (e.g., sharing economy platform fees), remain deductible to the extent they are incurred in producing income.
2. Is it “Mainly” a Rental?
To claim full ownership deductions (apportioned for any private use), you must show the property is used mainly for rental. The advice suggests the ATO will look at:
- Actual Use: How much time was it dedicated to income-producing use versus private use?
- Availability: Did you block out the property during peak periods (Christmas, Easter, school holidays)? If you only make it available when demand is low, the ATO may argue it is not “mainly” held for income.
- Restrictions: Do you reject applicants frequently or place unreasonable conditions on bookings?
3. Renting to Family and Friends
The advice clarifies “domestic arrangements” and how they differ from assessable rental income:
- Board/Shared Costs: If a family member pays a small amount to cover food and electricity (Example 1), this is generally not assessable income, and you cannot claim deductions.
- Below-Market Rent: If you rent to a relative at a “mate’s rate” (Example 6), you must declare the income. However, you must apportion your deductions because the reduction in rent represents a non-arm’s length purpose of assisting a family member.
4. Apportionment is Key
Even if your property isn’t a “holiday home,” you must apportion expenses if the property has mixed uses.
- Example 7: If you rent out the bottom floor of your house but use it as part of your residence when not rented, you must apportion deductions on a fair and reasonable basis to exclude the private/domestic use.
Key Dates & Compliance
The advice notes a transitional compliance approach in Appendix 2. The Commissioner will generally not devote compliance resources to reviewing holiday home expenses incurred before 1 July 2026, provided those expenses relate to arrangements entered into before 12 November 2025.
Next Steps
Tax laws regarding rental properties are under increasing scrutiny. This ruling is currently in “Draft” status, with the public comment period ending on 30 January 2026.
Detailed Information:
You can read the full draft and review the 14 practical examples on the ATO website here.
Does this impact your property?
Tax treatment depends heavily on your specific facts and circumstances. To ensure you aren’t hit with unexpected penalties or denied deductions, we recommend you contact your tax advisor to review your current rental arrangements in light of this new draft ruling.
