If you own a property that doubles as a holiday home, the Australian Taxation Office has released significant new guidance that directly affects what you can and cannot claim as a tax deduction. The updated guidance, finalised on 20 May 2026, draws a clear and important distinction between properties that are genuinely operated to produce income and properties that are primarily held for personal holidays or recreation.
This distinction matters because it determines whether most property-related expenses such as interest, council rates, body corporate fees, and depreciation are deductible at all. Under the new guidance, a property classified as a leisure facility rather than an income-producing asset may have most of its deductions denied, even if it generates some rental income during the year.
This blog explains the new guidance in plain terms, including what has changed, how the ATO applies its primary purpose test, what you can and cannot claim, how apportionment works, and what record keeping is required from 1 July 2026.
What Has Changed: The New ATO Guidance
On 20 May 2026, the ATO released three new documents that update and clarify how it assesses rental property income and deductions, with a particular focus on properties that are also used as holiday homes.
The three documents are:
- TR 2026/1 (Taxation Ruling): Sets out the ATO’s views on when income from the use of a rental property is assessable and when expenses can be claimed as deductions. This ruling applies retrospectively and replaces earlier ATO guidance on rental properties.
- PCG 2026/2 (Practical Compliance Guideline): Explains how to determine whether a property is being used to produce assessable income on commercial terms, and how to apportion deductions between income-producing and non-income-producing periods.
- PCG 2026/3 (Practical Compliance Guideline): Sets out the ATO’s compliance approach for holiday homes, including the specific risk indicators the ATO will assess when reviewing deduction claims for mixed-use properties.
The ATO’s overview of this new guidance is available on the ATO rental property newsroom page. This guidance is particularly important for owners of properties at the coast, in alpine regions, or in other holiday destinations who rent their property through short-term accommodation platforms or traditional holiday rental agencies.
Who Does This Guidance Affect?
This guidance applies to any residential property owner who uses their property personally for some part of the year and rents it out for the remainder. It covers short-term accommodation through digital platforms such as Airbnb and Stayz, traditional holiday rental arrangements, and any mixed-use property where there is both personal use and rental income.
The Primary Purpose Test
The central question under the new guidance is whether your property is primarily held to generate assessable income, or primarily held for your own holidays and recreation.
The ATO now applies a three-step approach when assessing income and deductions for rental properties that may also be used as holiday homes:
- Step 1: Is the property being used to produce assessable income?
- Step 2: Is this property a holiday home under the ATO’s definition?
- Step 3: What deductions can be claimed, and how should they be apportioned?
A property is treated as a holiday home if it is used, or held for use, for your holidays or recreation, or the holidays or recreation of your family members or friends, at no charge or at a reduced rate.
The primary purpose question is not simply answered by counting how many days the property was rented versus how many days you stayed there. The ATO looks at the overall pattern of use, how the property is advertised, the rates charged, whether you actively pursue bookings during high-demand periods, and whether you are genuinely maximising rental income or primarily treating the property as a personal asset that earns incidental income.
When Deductions Are Denied: The Leisure Facility Classification
If the ATO determines that your property is not used primarily to earn assessable income, it may be classified as a leisure facility. Under this classification, the majority of property-related deductions are not available.
The following types of expenses are denied for a property classified as a leisure facility:
- Interest on the loan used to acquire or improve the property
- Council rates and water rates
- Body corporate fees and levies
- Capital works deductions (the building write-off)
- Decline in value of furniture, appliances, and fittings inside the property
- General maintenance and repair expenses
- Insurance premiums for the property
This represents a significant change for property owners who have historically claimed a proportion of these expenses based on the number of days the property was available for rent. Under the new guidance, availability alone is no longer sufficient if the ATO’s overall assessment is that the primary purpose of holding the property is personal use.
What You Can Always Claim
Regardless of how the property’s primary purpose is assessed, certain direct rental-related expenses remain deductible whenever the property is actually occupied by paying guests. These expenses have an exclusive and direct connection to the rental activity itself and are not denied even when broader deductions are restricted.
Expenses that are always deductible when the property is actually rented out include:
- Advertising costs incurred to find guests or tenants, including platform listing fees
- Cleaning costs incurred after a guest stay
- Booking fees and commissions paid to platforms or rental agencies
- Linen costs incurred specifically for guest use
- Any other costs that arise directly from and only from a specific rental period
These direct rental expenses remain available because they have no private use component. They are incurred as a direct result of the rental activity and would not be incurred at all if the property were not being rented.
When Partial Deductions Apply: The Apportionment Rules
If your property is mainly used to produce income but has a small amount of private use, such as a week or a few weekends during the off-season where there was no booking or a very low prospect of one, you may still be able to claim a deduction. However, expenses must be apportioned and you cannot claim for any period of private use.
The ATO’s guidance makes an important distinction about what counts as private use. A period when your property was genuinely available for rent but simply had no bookings does not automatically count as private use. The key factors are whether the property was available on genuine commercial terms during that period, meaning:
- It was advertised in ways that gave it broad exposure to potential guests
- The rental rate was comparable to similar properties in the area
- Booking requests were actively monitored and responded to
- You did not turn away bookings to preserve the property for personal use
By contrast, periods when you or your family used the property personally, or when access was blocked or reserved for personal use regardless of whether you actually stayed there, are private use periods and must be excluded from any deduction calculation.
How Apportionment Is Calculated in Practice
When apportionment is required, eligible expenses are divided between deductible periods and non-deductible periods. The deductible periods are those when the property was either occupied by paying guests or genuinely available for rent on commercial terms.
A straightforward example of how this works:
- Property available for rent on commercial terms: 46 weeks of the year
- Property used privately by the owner or family: 6 weeks of the year
- Apportioned deduction available: 46/52 of eligible expenses
Note that periods when the property was nominally available but where bookings were restricted, declined, or blocked for personal access purposes are not treated as available for rent. The ATO will look at the actual pattern of use and availability, not just what was stated in advertising.
Risk Indicators the ATO Looks For
PCG 2026/3 sets out the specific factors the ATO will assess when determining whether a holiday home is genuinely income-producing or primarily a leisure asset. The full document is available on the ATO’s legal database. Property owners whose arrangements show the following characteristics face a higher risk of deductions being reviewed and denied:
- Blocking out periods of peak rental demand such as school holidays, Easter, and peak summer or winter seasons for personal use
- Charging family members or friends below-market rates for use of the property
- Limited advertising, or advertising that does not genuinely expose the property to paying guests
- Rental rates that are significantly below comparable properties in the same area and location
- Declining or not responding to booking enquiries in order to preserve the property for personal use
- Significant personal storage, permanently reserved rooms, or other arrangements that reduce the property’s availability as a rental
Properties that do not show these characteristics, where the owner actively maximises the commercial return and only uses the property personally during genuine off-peak periods when there is no realistic prospect of a booking, are in a stronger position to claim the full range of available deductions.
The Transitional Period: What This Means for Your 2025/26 Return
The ATO has confirmed a transitional compliance approach. It will not apply compliance resources to review deduction claims for holiday homes incurred before 1 July 2026, where the property arrangements were in place before 12 November 2025.
This means the 2025/26 income year may be the last year in which existing arrangements are protected from review under the new guidance. For the 2025/26 return covering expenses between 1 July 2025 and 30 June 2026, existing arrangements entered into before November 2025 are generally protected by the transitional approach.
From 1 July 2026, the new guidance applies fully without the transitional protection. Property owners who have been claiming interest, rates, and other property expenses under arrangements that PCG 2026/3 would place in the higher-risk category should review those arrangements before the new financial year begins and before lodging their 2025/26 return.
Record Keeping Requirements
Under the new guidance, property owners who wish to claim deductions for holiday homes must be able to demonstrate the income-producing nature of the property with documentary evidence. Good record keeping is your primary protection in the event of an ATO review.
The records you should maintain include:
- A complete log of all periods when the property was occupied by paying guests, including dates, nightly rates, and total income received
- A log of all periods of personal use, including dates, who used the property, and any charge applied
- Evidence of active marketing during periods the property was available, such as platform listing screenshots, booking portal histories, or communications with rental agents
- Records confirming the rental rates offered were comparable to similar properties in the area
- Receipts and invoices for all expenses claimed as deductions
- Platform booking histories and payout statements for all income received through digital platforms
The ATO’s new guidance specifically looks at whether the property was available on commercial terms and whether your records support that assessment. Without contemporaneous records, it is very difficult to defend deduction claims if the ATO raises a question about your property’s primary purpose.
Official Resources
The following ATO publications and pages are directly relevant to the new holiday home guidance:
- ATO: New Guidance for Rental Property Owners (Newsroom)
- TR 2026/1: Taxation Ruling on Rental Property Income and Deductions
- PCG 2026/3: ATO Compliance Approach for Holiday Homes
- ATO: Residential Rental Properties
- ATO: Rental Expenses You Can Claim
Disclaimer: This article is intended as general information only and does not constitute legal or financial advice. The information is based on ATO guidance including TR 2026/1, PCG 2026/2, and PCG 2026/3 as finalised on 20 May 2026. Tax rules and ATO guidance can change, and individual circumstances vary. You should seek professional advice tailored to your specific situation before lodging your return or adjusting your rental property arrangements.