Tax deductions will be denied for the costs of holding a property, including interest, for owners who use their holiday home for private purposes if the ATO finalises their recently released draft tax ruling.
The draft ruling, TR 2025/D1, says that holiday homes that aren’t used mainly for the production of income are considered “leisure facilities” in which case the tax deductions will be limited to those that directly relate to earning rental income, such as advertising costs. The costs of owning the property, such as mortgage interest, repairs and maintenance, land tax and council rates will no longer be available to affected owners.
If the ruling is finalised in its current state, the ATO has said it will apply a “transitional compliance” approach. Taxpayers would be expected to comply with the new guidelines from 1 July 2026. The changes open the door to structuring considerations for new property investments.
What is changing?
Under previous guidance, owners of holiday homes were permitted to apportion their deductions for all costs incurred in connection with the property for any private use of said property. This apportionment was generally performed based upon the proportion of days in the financial year that the property was available for private use.
For example, if the owners personally used the property for 28 days during the year, and it was otherwise rented or available for rent for the rest of the year, their tax deductions would be reduced by 28/365ths.
According to the draft ruling, a holiday home will need to be held mainly to produce taxable income for any deduction for holding costs to be available. They will consider the following factors in reviewing whether this is the case:
- The way the holiday home is actually used;
- How often the property is used for private purposes compared to income-producing purposes; and
- The extent to which the property is available to rent during high‑demand periods (e.g. school holidays, and public holidays).
The draft ruling states that a holiday home that is reserved for private use during peak periods, even if the property is rented outside of these periods, could be considered a leisure facility. In an example from the draft ruling, a beach house that is used privately for two weeks at Christmas and for a further three weeks during school holidays across the year, is considered not to be mainly held for rental purposes. In this case, costs of ownership that are not directly related to renting the house would not be deductible.
How will the ATO enforce the draft ruling?
Given that this a is a new interpretation from the ATO, it plans to take a “transitional compliance approach” in applying the ruling. As such, the ATO will not devote resources to reviewing deductions claimed against holiday homes before 1 July 2026, provided that existing property arrangements were in place before 12 November 2025.
New arrangements after 12 November 2025 are not protected and may be reviewed. All taxpayers are expected to comply with the updated guidelines from the 2027 financial year onward (1 July 2026).
Contact Pilot
If you have any questions regarding what these guidelines mean for your property investments, both existing and planned, contact Tom Howard or your Pilot Advisor on (07) 3023 1300.