For years, many Australians have balanced lifestyle and investment by renting out their holiday homes when they’re not using them. A few weeks at Christmas with the family. Strong short-stay income over summer. Tax deductions to offset mortgage interest and holding costs.

That equation may be about to change.

The Australian Taxation Office (ATO) has released draft guidance, Taxation Ruling TR 2025/D1, signalling a significantly tougher approach to holiday home tax deductions.

From late 2025, the ATO intends to apply rules more actively that could deny most property deductions if your holiday home is viewed as primarily recreational rather than genuinely income-producing.

For many owners, this could materially affect after-tax cash flow.

The core issue: investment property or leisure facility?

At the centre of the ATO’s approach is section 26-50 of the Income Tax Assessment Act 1997, which deals with “leisure facilities”. If your property is mainly used for holidays or recreation, the ATO may treat it as a leisure facility. If that occurs, most deductions may be denied.

Importantly, this goes beyond simply apportioning rental days and private days. The ATO is focusing on purpose and behavioural patterns, including:

• Are peak holiday periods reserved for private use?
• Is private use influencing management decisions?
• Is rental activity secondary or occasional?
• Is the property genuinely available for rent during high-demand periods?

If private enjoyment is prioritised, even where rental income is earned, the property may be considered recreational in nature.

What deductions could be denied?

If classified as a leisure facility, deductions that may be disallowed include:

• Mortgage interest
• Council rates
• Land tax
• Insurance
• Repairs and maintenance
• Depreciation and capital works

In many cases, only direct rental costs (such as advertising, booking platform fees and cleaning) may remain deductible. For negatively geared holiday homes, this could significantly increase annual holding costs. While denied expenses may increase the CGT cost base when the property is sold, that does not assist with immediate cash flow.

“But we only use it for a few weeks…”

One of the most significant elements of TR 2025/D1 is that limited private use can still create risk, particularly if that use occurs during peak periods such as Christmas, Easter or school holidays.

The ATO has made clear that private use during high-demand periods may outweigh rental availability during off-peak months.

It’s not just how many days you use the property – it’s when and why.

The ATO’s traffic-light compliance approach

The ATO has also released practical compliance guidance outlining a risk-based framework.

The ATO will assess the overall pattern of behaviour, not isolated facts.

Transitional relief: a limited window

The ATO acknowledges this is the first time it has clearly articulated this interpretation.

As a result:

• The new approach applies from 12 November 2025
• Existing arrangements will generally not be reviewed for periods before 1 July 2026
• New acquisitions or refinanced arrangements after 12 November 2025 may not receive transitional relief

This creates a limited opportunity to review current arrangements before compliance activity increases.

What about properties held in trusts?

Although the draft ruling focuses on individuals, section 26-50 is not limited to them.

Properties held in family trusts or other structures may still be caught if beneficiaries or controllers mainly use the property for recreation.

There is also a specific anti-avoidance rule targeting arrangements designed to artificially satisfy income-producing requirements – such as charging family members non-commercial rent.

Changing ownership structure alone will not resolve the issue.

Why this matters for Victorian property owners

For Victorian owners, the compliance environment is tightening more broadly.

Holiday homes seeking exemption from Vacant Residential Land Tax must meet minimum private use requirements. Data sharing between authorities may increase visibility over usage patterns.

Where private use is disclosed for state land tax purposes, inconsistencies with federal income tax claims may attract scrutiny.

Consistency across state and federal reporting is essential.

What should you do now?

Given the potential financial impact, holiday home owners should:

• Review private versus rental usage patterns
• Assess whether peak periods are being prioritised for private enjoyment
• Maintain detailed booking and availability records
• Ensure rental pricing reflects market conditions
• Model after-tax cash flow under revised deductibility assumptions

The long-standing “rent it out when we’re not there” approach may no longer support full deductibility.

The bottom line

The ATO is not changing the law, but it is changing how strictly it intends to apply it.

Holiday homes that sit between lifestyle asset and genuine investment are now firmly under review.

With transitional arrangements running until 1 July 2026 for existing properties, now is the time to assess, model and adjust – before enforcement activity increases.

Review your holiday home tax position

If you own a holiday home in Victoria or elsewhere in Australia, now is the time to review how the ATO’s updated approach may affect your deductions and cash flow.

Our accountants and tax advisers in Blackburn, Melbourne’s City of Whitehorse, can assess your current arrangements, model the after-tax impact and help you plan proactively.

Call us on (03) 9875 2900 or get in touch online to discuss your situation. You can also follow LDB on LinkedIn for updates on property, tax and investment matters.