Rental properties and holiday homes: ATO’s new draft ruling
19/12/2025
On 12 November 2025, the Australian Taxation Office (ATO) released Draft Taxation Ruling TR 2025/D1 which seeks to clarify the assessable income of a rental property, provide stricter deduction eligibility for holiday homes, and clear up expense apportionment rules.
The ruling, titled Income tax: rental property income and deductions for individuals who are not in business (‘the ruling’), along with two practical guidance guides, replaces the longstanding IT 2167. It targets non-business rental properties, especially holiday homes, short-term rentals, and mixed-use properties.
Key points from the draft:
- Assessable income includes receipts from friends and family, even if not at arm’s length rates.
- Expenses must be apportioned between deductible, capital, and private components.
- For properties that are holiday homes that are used to earn income but are not ‘mainly’ used to generate income during the year, some deductions may be denied, even on an apportionment basis.
We provide further commentary on this matter below.
Assessable rental income
Any amounts derived from rent, lease premiums, licence fees or other similar charges are assessable income for a rental property. This includes amounts received through an agent, a sharing or online platform such as Airbnb, or directly from a tenant.
Any of the above amounts received will form part of the property owner’s assessable income, even if the income is not received at commercial arm’s length rates.
Certain amounts received under family arrangements, such as the payment of board to a parent, may not be treated as assessable income.
Deductions and apportionment of expenses
Property owners can claim deductions for losses or outgoings to the extent that they are incurred in gaining or producing assessable income from the property, provided they are not capital, of a private or domestic nature, or prevented from being deductible under another legislation.
As such, property owners may only claim deductions to the effect that it relates to their assessable rental income. For mixed-use properties, where the property owner is also using it for personal or family purposes, then deductions must be appropriately apportioned to account for this private use.
PCG 2025/D6 provides guidance and factors when apportioning costs, including:
- the period of time the property was rented out (peak periods etc.)
- the area of the property used by tenants or guests
- if the property is advertised in ways which gives it broad exposure to potential tenants.
Certain costs such as advertising, property agent fees, and cleaning fees are fully deductible and do not require apportionment.
Holiday homes – increased stringency
The most notable change in the draft ruling is the ATO’s increased stringency on holiday homes.
A ‘holiday home’ refers to a property that is used, or held for use, for a person’s holidays or recreation, or for the holidays or recreation of their family members and friends, either for no rent or at a reduced rate.
Where a person’s rental property is a holiday home, the ATO may regard the property as a ‘leisure facility’ for the purposes of s26-50 of the ITAA 1997 and deny certain deductions such as land tax or council rates. This is to prevent taxpayers from obtaining a tax subsidy for expenditure on their own recreation.
However, the ruling provides an exception to this where the holiday home is used, or held for use, mainly to produce assessable income in the form of rents, lease premiums, licence fees or similar charges.
PCG 2025/D7 provides a risk framework and factors to consider when determining if the property is used, or held for use, mainly to produce assessable income, including:
- Is the property rented during peak seasons and what is the occupancy rate?
- When is the property prioritised for personal use?
- What is the level of commercial and personal use of the property?
- Is there an attempt to maximise income from the property in the form of rents?
Transitional relief
The ATO has allowed a transitional period, during which they will not allocate compliance resources to review whether properties fall under s26-50 before 1 July 2026, provided the relevant expenses arise from arrangements entered into before 12 November 2025.
How SW can help
Property owners should be aware that the ATO will have increased scrutiny on rental deductions.
SW can help assess your property’s position under the draft ruling, review your usage patterns, ensure deductions are correctly apportioned, and provide practical guidance on what evidence and apportionment methods you’ll need going forward.
Our team can provide tailored guidance and help you understand how these changes may affect your properties and tax obligations, ensuring you stay well-prepared and informed.
