Holiday Homes: ATO’s “Leisure Facility” Test Is Coming for Deductions

From 1 July 2026, draft guidance indicates that some properties may be treated as “leisure facilities” under section 26‑50 of the Income Tax Assessment Act 1997, which would cut off key ownership deductions unless the home is mainly used to generate rental income.​

What is changing?
Under Draft Taxation Ruling TR 2025/D1, deductions for interest, council rates, insurance and many holding and maintenance costs can be denied where a holiday home is primarily held for private use rather than for commercial renting. The ATO is explicit that it will focus on how the property is actually used and made available in practice, with particular attention on popular seasonal locations such as beach and ski areas.​

The “leisure facility” label is more likely to apply where:

• The property is blocked out for owner or family use across school holidays and other peak periods.

• Occupancy is low because genuine efforts to attract paying guests are limited or inconsistent.​

How the ATO will assess you
TR 2025/D1 and Practical Compliance Guideline PCG 2025/D6 set out a pattern‑of‑use approach: the ATO looks at overall behaviour, not just stated intentions. Warning signs that increase the risk of deductions being denied include:​

• Minimal or token attempts to rent the property (for example, narrow advertising, long blackout periods, or limited booking channels).

• Keeping parts of the property off‑limits to guests, such as locked rooms or restricted facilities.

• Setting nightly rates significantly above market levels so that bookings are unlikely.

• Renting to relatives or friends at well‑below‑market “mates’ rates”.

Where these factors are present, the property is more likely to be treated as a leisure asset, and ownership deductions can be denied under section 26‑50.​

Practical steps for holiday‑home and STRA owners
Owners of coastal, alpine or regional properties used both personally and for short‑stay letting have an 18‑month window to get house in order. Key actions to consider include:​

• Availability: Ensure the property is genuinely available for rent during peak demand periods, not just shoulder or off‑season.​

• Advertising: List on mainstream platforms, maintain active listings and respond promptly to enquiries.​

• Pricing: Set realistic, market‑aligned nightly rates rather than “deterrent” pricing that keeps occupancy low.​

• Guest conditions: Avoid unnecessary restrictions such as “no children”, “no pets” or heavy reference requirements that make the property effectively unavailable.​

• Record‑keeping: Keep detailed records of bookings, enquiries, blocked‑out dates and personal use to support how expenses are apportioned between private and income‑producing use.​

Timeline and next moves

• 12 November 2025: ATO issues draft TR 2025/D1 and PCG 2025/D6 outlining its proposed approach to holiday‑home deductions.​

• Now–mid 2026: Adjustment period while guidance remains in draft; commentary indicates the ATO will focus on forward‑looking behaviour rather than past‑year arrangements entered into before 12 November 2025.​

• 1 July 2026: Proposed start date from which holiday homes that are not mainly income‑producing can be treated as leisure facilities, with ownership deductions denied accordingly.​

Bottom line
For short‑stay and mixed‑use holiday properties, the tax risk profile is shifting. The closer a property looks to a genuine commercial short‑stay asset—bookable in peak seasons, properly marketed and priced at market rates—the stronger the case for ongoing deductions; where the pattern points to “holiday house first, rental second”, the ATO’s draft rules signal a much higher chance of deductions being refused from 1 July 2026

This article is for general information only and is not financial, tax or legal advice. It does not take into account your personal objectives, financial situation or needs. You should not act on the information contained here without obtaining professional advice from a qualified tax adviser, accountant or lawyer who can consider your specific circumstances.