Owning a holiday home can be rewarding, offering both personal enjoyment and the opportunity to earn rental income. However, the tax implications are complex and require careful consideration.
Perhaps more so with the issue of a new draft ruling TR 2025/D1 and practical compliance guidelines (PCG 2025/D6 and PCG 2025/D7), the new ruling and guidelines provide a new matrix of consideration for individuals earning income from holiday home rentals.
Under the old ruling, IT 2167, holiday homeowners could claim deductions for periods when the property was not let at a commercial rate but was genuinely available for letting, provided active and bona fide efforts were made to secure tenants. Now, simply advertising the property is no longer sufficient to claim deductions.
All amounts received for the use of a property must be reported as assessable income. This includes formal lets through agents or online platforms, as well as payments from friends or family—even if below market rate. Income from shared household or family situations may be assessable, depending on whether it relates to a lease or license for property use. The ruling clarifies that non-arm’s length arrangements (e.g., discounted rent to relatives) should be included in assessable income.
Now, under the draft ruling TR 2025/D1, if your rental property is also your holiday home, deductions for the cost of property ownership will be denied if it is classified as a ‘leisure facility’, unless an exception applies. The general costs incurred to acquire, retain, or maintain ownership or usage rights—such as interest on borrowings, council rates, land tax, depreciation, insurance and repairs—are generally non-deductible for leisure facilities.
However, expenses directly linked to generating rental income—such as advertising costs, agent fees, platform commissions, and cleaning after guest stays—are deductible. The distinction lies in whether the expense relates to ownership generally or income production directly. These direct expenses do not require apportionment when your property is used for both income-producing and private purposes.
Costs that are capital, private, or domestic in nature remain non-deductible.
If, throughout the income year, you can meet the ATO criteria of using your holiday home (or hold it for use) mainly (more than 50%) to produce assessable income (such as rent, lease premiums, or licence fees), you can claim deductions related to the ownership, proportionate to the amount of income producing use.
The ATO has identified signals that indicate a safe green zone, as well as those that may attract their attention for potential audit, in PCG 2025/D7. Below is a summary of the ATO’s risk ratings and compliance approach:
*Please note that no single factor is decisive, and the weight given to each of these (or other) factors will vary depending on your individual circumstances.
Taxpayers should maintain detailed records of property use, advertising efforts, and rental agreements to substantiate claims. Demonstrating that the property was genuinely available for rent on commercial terms is critical to securing deductions.
Helpfully, the ATO has introduced a transitional compliance approach. Arrangements entered into before 12 November 2025 will not be reviewed for ‘leisure facility’ compliance, for any expenses incurred before 1 July 2026, this provides property owners with time to adjust their practices and ensure future compliance.
Rental income received below market rate is assessable, such as is often the case for property rented to family members, friends or associates. In these cases, the ATO advises it will accept as ‘reasonable’, a claim for deductions related to property ownership costs only up to the amount of rental income received. Payments received in shared household or family situations may also be assessable if they relate to granting a lease or licence for property use.
However, if you can demonstrate that the amount received from a family member or friend is not for the use of your property, but is simply a contribution towards the cost of their upkeep because you are responsible for their care (eg board charged to an adult child), the amount will not be considered assessable income.
Navigating the tax rules for holiday homes can be complex, but understanding the key principles around assessable income, deductible expenses, and compliance requirements will help you make informed decisions and avoid common pitfalls. If you have any questions or need personalised advice, please don’t hesitate to contact your usual Exant advisor, or alternatively our Tax Partner, Jamie Towers on 07 3218 3900.
Author: Lulu Liu