The ATO is tightening the rules on holiday homes, meaning most expenses may no longer be deductible if the property is used privately. This new approach applies from November 2025, with a transition period to July 2026. Property owners should review their arrangements now.
Under the new guidelines, the ATO considers most rental expenses relating to holiday homes non-deductible in full. If personal use is prioritized over income production, especially during peak holiday periods, the property will be classified as a 'leisure facility', denying tax deductions for major costs like interest, council rates, and land tax. Simply having an annual rental agreement may not be enough to avoid this rule.
The ATO will begin applying this view from November 12, 2025, with a transitional start date of July 1, 2026, for pre-existing arrangements.
The changes target holiday homes that are only partly used to produce income. The ATO relies on a provision for 'leisure facilities', largely ignored until now, to deny deductions. For those with holiday homes rented out for part of the year but also used for personal enjoyment, the ATO will apply Section 26-50 of the Income Tax Assessment Act 1997.
This section disallows deductions for losses or outgoings, including mortgage interest, council rates, land tax, and maintenance, if they relate to the ownership or use of a leisure facility. Tax depreciation is also not deductible for depreciating assets in a leisure facility. However, denied expenditure can form part of the cost base for CGT purposes.
A leisure facility is defined as land, a building, or part of a building or structure used (or held for use) for holidays or recreation. The ATO states that a holiday home may be considered a leisure facility if it is mainly used for holidays or recreation, including a typical beach house or an apartment in the CBD of a capital city if the owners visit and stay there during their holidays.
The ATO considers a rental property a leisure facility if the private use is prioritized over income generation. The draft ruling emphasizes that occasional rental activity is insufficient to change this conclusion if the overall use reflects a predominant personal or recreational purpose.
This view extends to most holiday homes, even if only occasionally used for private purposes. An example involves a house near the beach that the owners stay in during Christmas and New Year periods and other school holidays. Despite limited stays, the ATO considers it a leisure facility, allowing no rental expense deductions, except for those incurred to generate rental income.
Victorian property owners may be at higher risk of ATO compliance activity regarding Section 26-50, especially if data is shared between the State Revenue Office and the ATO.
There are exceptions to the rules for leisure facilities. If the property is used or held mainly to produce assessable income at all times during the income year, a portion of expenses may still be deducted. This is determined by considering factors like use and time dedicated to income-producing uses.
A part-year exception is also available, allowing part of the rental expenses as deductions if there's a clear change in the main use of the property mid-year. This requires a permanent change in use, not just seasonal private use.
The ATO issued a Draft Practical Compliance Guideline (PCG 2025/D7) alongside the Draft Ruling, introducing a risk-based framework for determining whether a rental property is a leisure facility.
The ATO confined the Draft Ruling to individuals, but the view on leisure facilities applies to any entity owning the property, including trusts. While the Draft Ruling provides no guidance on this, a property held by a trust might be considered a leisure facility under Section 26-50 if mainly used for holidays and recreation by the beneficiaries or controllers.
The Draft Ruling also covers the ATO's analysis of general taxation principles for receipts and outgoings by individuals in rental properties, including common deductible expenses and tax treatment of jointly owned properties. It replaces the previous guidance (IT 2167), now withdrawn.
The ATO will not review expenses incurred before July 1, 2026, if they were under an arrangement existing before November 12, 2025. New properties or arrangements won't benefit from the transitional compliance approach.
Taxpayers should review their arrangements and consider the appropriate methodology to determine deductible expenses. Contact your Pitcher Partners representative for a review and to determine necessary actions based on the ATO guidance.
