ATO Targets Holiday Home Deductions: What the New Draft Rulings Mean for You

Federal Governments and Treasury have struggled to implement meaningful changes to the extent of tax deductions available for negatively geared residential rental properties. On 12^th November 2025, the Australian Tax Office (ATO) released 3 documents in draft form in an attempt to bid bon voyage to what it views as excessive negative gearing deductions in relation to holiday home rental properties. These documents are Taxation Ruling TR 2025/D1, Practical Compliance Guide (PCG) 2025 D6 & D7 which are open for comment until 30 January 2026.

The issue of negative gearing and tax deductions has long been a contentious one. Many economists and think tanks such as the Grattan Institute cannot comprehend the extent that it is permitted in Australia. The latter published an article last September pointing out that our laws are far more generous than comparable taxing countries like the US, UK & Canada and that negative gearing deductions are a significant cost to the national budget. 

Briefly, the US & UK do not allow rental deductions to be offset against unrelated wage and salary income, whilst Canada only permits cash expenses against rental income, so no depreciation and building allowance claims for capital expenditure.

The ruling focusses a lot on holiday homes (“leisure facilities” under section 26-50) and private use of rental properties that aren’t caught by the 26-50 leisure facility rules. 

Applying the concept of a holiday home being a leisure facility is a new public stance: the ATO states the following under a subheading of “transitional compliance”: “We acknowledge that views on section 26-50 have not previously been publicly expressed in relation to rental properties…[and] that individuals…may have entered into arrangements that may fall under section 26-50 without realising…”. They go on to state that they won’t apply compliance resources to arrangements for expenditure incurred before 12^th November 2025 for holiday homes that are rental properties before 1 July 2026.

In summary, if your rental property is a leisure facility holiday home, the scope of deductions available against rent is very limited. If your property is mainly held to produce income and not a leisure facility, but you have some personal use during the year then you need to apportion your deductions for private use. The latter point is certainly nothing new.

So what is section 26-50 and what does it do? This section operates to deny most tax deductions in relation to operating a “leisure facility”.  The ATO has stated if your rental property is also your holiday home, then it is a leisure facility and most deductions will be denied unless an exception applies. The main exception, discussed further below, is where the property is held mainly to produce assessable income.

For a residential property that does not meet an exception, the main deductions that would be denied are costs for:

Therefore, to summarise the impact, deductions for renting out a holiday house would be limited to expenses that directly relate to generating rental income, such as advertising fees and cleaning costs after a tenant leaves. Deductions for things like mortgage interest, council rates, land tax, insurance, repairs and other holding costs would not be allowed.

To come under 26-50 the property needs to be considered a “leisure facility”. This means that the property is used (or held for use) for holidays and recreation. To qualify for an exception to 26-50 applying, at all times during an income year you must use your holiday home (or hold it for use) mainly to produce assessable income.

Whether a property is a leisure facility holiday home or one that is mainly held to produce assessable income requires an objective analysis of a number of factors. It is not a simple analysis of the days that it is advertised for use or blocked out for private use. The pattern of use over a long period of time is relevant and it cannot be tested by a subjective intention.

The ATO’s risk assessment framework in relation to 26-50 and use of holiday homes is published in PCG 2025/D7. This table, taken from PCG 2025/D7, summarises their approach and risk ratings based on behaviour:

The key outcome of this is that less emphasis is placed on the concept and practice of the property being genuinely available for rent for the year, but rather being able to demonstrate that the property is mainly held to produce assessable rental income or not.

As noted, the ruling and guides are in draft form and inviting further comment. They may change before being finalised, but it is clear the ATO is going to focus on the purpose and use of holiday homes and whether they are being held mainly to produce income or not.

If your rental property is one that is mainly held to produce income, even if it is in a holiday destination and you still use it privately at times, then you still need to apportion your tax deductions for private use during the year. This is nothing new and taxpayers should be doing this annually already.

As an example, if you have a coastal property that is rented for over 6 months of the year and you use it for 4 weeks of the year, then most of your rental deductions will need to be reduced by 28/365 for the days used privately during the year. PCG 2025/D6 elaborates more on the ATO’s views and methods for apportioning deductions for private use.

A side note for those that hold holiday homes in Victoria: remember that for properties that are not occupied or tenanted for more than 6 months of the year, one of the main exceptions from Vacant Residential Land Tax is that you have used the property as a holiday home for at least 28 days during the year. Therefore, if your rental property was only tenanted for 5 months of the year, then you need to have used it for at least 28 days as a holiday home and would need to adjust your tax deductions for that use.

The impact of section 26-50 can be illustrated using the following scenarios for the same property. In the first scenario, the property is only rented for a few weeks each year and is primarily used as a holiday home. In the second scenario, the property is held mainly to generate rental income and is tenanted for more than six months of the year.

For both scenarios, the property has a land value of $1.6 million and an initial bank loan of $1.6 million (used to estimate land tax and mortgage interest). Rental property deductions have been apportioned for four weeks of private use where applicable.

Under the draft ruling, the holiday home scenario (left column) is no longer able to claim the majority of deductions ordinarily associated with rental properties. Previously, these additional costs—after apportionment for four weeks of private use—would have been deductible, resulting in a negative gearing tax deduction of $90,053.

With section 26-50 now applied, the same arrangement instead results in taxable income of $8,000, demonstrating the significant impact of the ATO’s revised position.

We will continue to monitor this evolving issue and recommend people review their holiday home rental arrangements in light of the ATO’s revised position on holiday homes, regardless of whether it’s the back beach in the summer or the chalet for the snow.

The ATO’s new stance on holiday homes could significantly affect future deductions — but you don’t need to navigate these changes alone. Reach out to the Accru team for tailored guidance on how these draft rules apply to your property and what steps you should take next.