In November 2025, the Australian Taxation Office (ATO) released a draft ruling and two practical compliance guides on the income tax treatment of rental properties, including situations where a rental property is also used as a holiday home.
TR 2025/D1 – Rental property income and deductions (individuals not in business)
TR 2025/D1 “Income tax: rental property income and deductions for individuals who are not in business” (the Ruling), outlines the ATO’s draft position on how individuals who are not running a rental property business should treat income and deductions from rental properties.
The earlier ATO guidance in IT 2167 was withdrawn in November 2025 and replaced by this new draft Ruling.
The Ruling applies to:
- Short‑term and long‑term rental arrangements (including properties advertised via online booking or sharing platforms)
- Holiday homes
- Situations where a room or rooms in a home are rented out.
The Ruling explains when rental income is assessable, including amounts such as rent, lease premiums and licence fees, even if the rent charged is not at market value.
For deductions, the Ruling confirms that expenses relating to rental properties are only deductible to the extent they to earning assessable income. If the property has mixed use (both income-producing and private), expenses must be apportioned. This includes private use by the taxpayer or their family.
Broadly, where an individual:
- Uses a property to derive assessable income, and
- Also holds it for another purpose (such as a main residence or holiday home),
ownership expenses (for example, interest on a mortgage) must be apportioned on a “fair and reasonable” basis to determine the deductible portion under section 8‑1 of the Income Tax Assessment Act 1997 (Cth) (ITAA 1997).
If the rental property is used privately by the taxpayer and their family during the year, the ultimate income tax treatment will depend on the specific family circumstances – including how the property is owned and how it is privately used.
The Ruling notes that factors the ATO may accept when apportioning deductions include:
- Actual use of the property
- Time during which the property is genuinely available for rent
- Whether it is available during peak periods
This will vary depending on the nature of the ownership and the taxpayer’s particular circumstances (see Draft Practical Compliance Guide PCG 2025/6, Apportionment of rental property deductions – ATO compliance approach).
Holiday homes
Where a taxpayer’s rental property is a holiday home, certain deductions can be denied because the ATO may regard the property as a “leisure facility” (see section 26‑50 of the ITAA 1997 and paragraph 14 of the Ruling).
Alternatively, the ATO may deny deductions on the basis that the expenses are of a private nature under section 8‑1 of the ITAA 1997.
A rental property will be a leisure facility where it is used for holidays or recreation.
However, if the property is used or held mainly to produce assessable income, deductions for ownership expenses will not be denied.
Transitional rules – holiday home arrangements before 12 November 2025
The Ruling also sets out important transitional concessions relating to holiday homes.
The ATO has indicated that it will not allocate compliance resources to review whether the holiday home rules in section 26‑50 apply to expenses incurred in relation to holiday homes that are rental properties before 1 July 2026, provided the expenses arise under an arrangement entered into before 12 November 2025 (see paragraph 124 of the Ruling).
Whether a particular rental property is a holiday home is a question of fact and requires an objective assessment of how the owner uses and holds the property for holidays or recreation.
This assessment is based on the pattern of use over time, including:
- Use by the owner, family members and friends (including at no rent or reduced rent)
- Periods during which the property is not actively used or is unoccupied.
Example – holiday home not mainly used to derive rental income
The Ruling includes various examples. Example 13 deals with a holiday home that is not mainly used to produce rental income:
“Daniel and Kate have two school‑aged children and own a house near the beach. They live in an apartment closer to the city. The house is in a popular summer holiday area and is advertised for rent via sharing economy platforms.
They block out school holidays for their personal use. Because they use the house for their holidays or recreation, it is a holiday home. If they decide not to use the house, they make it available for rent. Each year they use the house for two weeks over Christmas and New Year, plus another two to three weeks during the year.
As their personal use – and the periods they reserve for it – often fall in peak rental periods, the property is only rented out for limited periods.
The house is a holiday home and is not mainly used to produce rental income. Daniel and Kate must include any rent received in their assessable income but are denied deductions for losses and outgoings to the extent they relate to ownership of the house.
They can still claim 100% of expenses directly related to renting the house out, such as platform service fees or commissions.”
ATO compliance approach – PCG 2025/D7
In November 2025, the ATO also released PCG 2025/D7, Application of section 26‑50 of the Income Tax Assessment Act 1997 to holiday homes that you also rent out – ATO compliance approach.”
From 2026 onwards, the ATO is likely to focus on the ownership and use of rental properties to determine whether a property is in fact a holiday home, particularly where:
- Personal use is prioritised by blocking out dates every year, especially during periods of high rental demand
- There are only limited attempts to rent the property
- Major features (or parts of the property that are being rented out) are unavailable to guests even when the property is let
- There are unreasonable conditions on potential renters that result in low occupancy
- There is little or no effort to increase occupancy and earn rent, lease premiums, licence fees or similar
- The property is advertised at above market rates.
(See paragraph 5 of PCG 2025/D7.)
Key takeaways for rental property owners
From 2026 onwards, we expect to see more ATO audit activity focused on rental property ownership and whether a property is in substance a holiday home. Where the ATO forms the view that a rental property is a holiday home, some ownership and usage deductions may be denied.
Owners of rental properties should:
- Review the character of their rental income
- Carefully distinguish between private and income‑producing expenses
- Consider the main use of any holiday homes to determine whether deductions are available
- Be aware of the transitional relief for arrangements entered into before 12 November 2025.
Next steps
Given the new Ruling and the ATO’s stated compliance focus on holiday homes, taxpayers should closely review their personal use of rental properties and the circumstances of any private use.
If you would like more information or assistance with the current or future use of your rental property, please contact your trusted Nexia advisor.
