ATO Finalises Holiday Home Deduction Rules
New taxation rulings issued in May 2026 draw a hard line around when rental property expenses can be claimed. If you own a holiday home, the rules have changed significantly, and the clock is already ticking.
TR 2026/1 - Primary Ruling
1 Jul 2026 - Compliance Date
3 Documents - ATO Guidance Released
12 Nov 2025 - Transitional Cutoff
In Brief
From 1 July 2026, holiday home owners who cannot demonstrate their property is mainly used to produce income will lose the ability to claim ownership-related expenses — including mortgage interest, rates, and body corporate fees — as tax deductions.
What has the ATO released?
In late May 2026, the Australian Taxation Office finalised its long-anticipated guidance on deductions for rental properties that double as holiday homes. The package consists of three documents that replace the previous guidance under IT 2167.
TR 2026/1
The primary taxation ruling — sets out when rental income is assessable and when expenses can be claimed as deductions.
PCG 2026/2
Practical compliance guideline on what makes a property genuinely "available for rent" on commercial terms.
PCG 2026/3
Practical compliance guideline on correctly apportioning expenses between income-producing and private use periods.
The core rule: "mainly" used for income
The key concept underpinning the new rulings is the word mainly. Under the Income Tax Assessment Act 1997, deductions for a rental property are only available where the property is mainly held or used to produce assessable income.
Previously, the ATO's approach permitted owners to apportion deductions across all expenses based on days of private versus rental use. That approach has now changed for holiday homes where private use is significant.
Key Change
Where a property is not mainly used for income production, the ATO may classify it as a "leisure facility" under section 26-50 of the ITAA 1997. In that case, ownership expenses are denied entirely — regardless of how many days the property was rented out.
Which deductions are affected?
The distinction between deductible and non-deductible expenses is now much sharper for holiday homes that fail the "mainly income-producing" test.
No Longer Deductible
Mortgage interest
Council and water rates
Body corporate fees
Capital works deductions
Decline in value (depreciation)
Land tax
Repairs and maintenance
Still Deductible
Advertising and listing fees
Booking platform commissions
Cleaning after a guest stay
Property manager fees (income periods)
What does "available for rent on commercial terms" mean?
PCG 2026/2 outlines the objective factors the ATO will look for to determine whether a property is genuinely being made available for rent.
Positive indicators include
Advertising through channels that provide broad exposure to potential renters
Rental rates comparable to similar properties in the same area
Actively monitoring and responding to rental enquiries
Making peak holiday periods available for rental — not blocking them for personal use
Maintaining a booking calendar that supports the income-producing claim
Key dates and transitional arrangements
12 Nov 2025
Arrangements in place before this date are protected under the ATO's transitional approach. Deductions claimed for periods before 1 July 2026 will not be reviewed.
After 12 Nov 2025
New arrangements entered into after this date are not protected and may be reviewed, even for the pre-July 2026 period.
1 Jul 2026
Full compliance with the finalised guidance is expected for all taxpayers — the start of the 2026–27 financial year.
FY2027 Return
The first lodgement period where the new rules will be fully enforced. Records and apportionment calculations must be in order.
What should holiday home owners do now?
Review how your property is used
If you are claiming ownership deductions, the primary purpose of holding the property needs to be clearly income-producing. Limiting personal use to off-season periods only is the guidance the ATO has provided as an example of minimal private use.
Strengthen your records
Occupancy logs, booking platform records, communications with potential guests, and pricing evidence will all be relevant if the ATO queries your deductions. Start maintaining these now if you are not already doing so.
Revisit your apportionment calculations
Even if your property passes the "mainly income-producing" test, expenses must still be correctly apportioned between income and private periods. PCG 2026/3 provides updated guidance on how this should be done.
Consider the structure of new investments
For anyone considering purchasing a holiday property, the new rules should be factored into the investment analysis from the outset. The previous assumption that all ownership costs could be apportioned and claimed is no longer reliable.
Disclaimer
This article is intended as general information only and does not constitute tax advice. Every property owner's situation is different. We recommend speaking with a qualified tax adviser to understand how these changes apply to your specific circumstances.
Not sure where your property stands?
Our team can review your holiday home arrangements against the new ATO guidance and help you understand what changes need to be made before July 2026.