Mar 19, 2026 Joel Hernandez

ATO Cracks Down on Holiday Home Deductions

Holiday homes often serve dual purposes: they provide a personal retreat for part of the year and operate as a short-term rental during the rest, often listed on platforms like Airbnb.

Historically, many owners have claimed property deductions by reasonably apportioning these against income derived from their property. However, recent ATO draft guidance, outlines a much stricter approach to deductions where rental activity is only occasional.

The ATO’s Concern

The ATO wants to clearly distinguish between:

• properties genuinely held to maximise rental income, and
• lifestyle assets used mainly for private enjoyment with only incidental rental use.

If the ATO considers that a property is primarily a holiday home and the rental income is only incidental, it will disallow deductions for ownership related expenses such as interest, council rates, land tax and repairs. Only limited direct rental expenses such as cleaning and advertising would be deductible.

The ATO’s Focus

The ATO is particularly focused on properties that:

• Are blocked out for private use during peak earning periods such as school holidays
• Are inconsistently advertised or listed at above-market rates,
• Show recurring tax losses year after year.

With access to booking platform data, the ATO can now cross-check listing history, availability, pricing and usage.

The Potential Financial Impact

Consider a holiday home that earns $20,000 a year in off-peak rent but is reserved for private use during peak season. Under the proposed approach, the ATO may classify the property as a holiday home. Deductions that previously totalled thousands could be reduced to a small amount, significantly increasing the owner’s tax bill.

What Owners Should Do Now

Owners should review their position ahead of the new rules:

• Ensure the property is operated in a genuinely commercial manner
• Advertise consistently, including during high‑demand periods
• Set rental rates in line with comparable local properties
• Maintain detailed records—booking calendars, ads, enquiries and private‑use logs
• Review ownership structure and long‑term strategy
• Document existing arrangements if relying on transitional relief

The new ATO approach is to apply from 1 July 2026, with some transitional relief available for arrangements already in place.

 In Summary

The ATO is not removing deductions for holiday homes, but it is tightening the distinction between genuine investment properties and lifestyle assets. With the right approach to pricing, record-keeping and usage, many owners will be able to continue to access appropriate deductions.

If you would like assistance reviewing your holiday home arrangements, your RDL advisor is here to help.