ATO Draft Guidance on Holiday Homes: What Property Owners Need to Know

The Australian Taxation Office (ATO) has released a draft Practical Compliance Guideline (PCG) that could significantly affect how tax deductions are claimed for holiday homes that are also rented out. 

The draft guideline, known as PCG 2025/D7, explains how the ATO intends to apply section 26-50 of the Income Tax Assessment Act 1997 to holiday and recreational properties that have both private and rental use.

Although this guideline is still in draft form, it provides a clear signal of the ATO’s compliance approach moving forward.

What is Section 26-50?

Section 26-50 is designed to limit tax deductions for expenses relating to holiday or recreational properties. In simple terms, it denies deductions unless the property is mainly used to earn rental income or used for certain employee-related accommodation purposes.

This provision is aimed at preventing taxpayers from claiming deductions for what are primarily private holiday homes.

The ATO’s Traffic Light Risk Zones

The draft guideline introduces a three-zone risk rating system to describe how likely your property is to attract ATO scrutiny.

Green Zone – Low Risk

This category reflects arrangements that are unlikely to attract ATO compliance activity. Characteristics include high levels of genuine rental occupancy, limited personal or non-commercial use, commercial market-rate terms, and a clear focus on earning income from the property.

If your situation clearly fits within the green zone, the ATO has indicated it is unlikely to devote compliance resources to applying section 26-50.

Amber Zone – Medium Risk

Properties in this category sit in a higher risk area and may attract attention. Features include increased personal use, blocking off peak rental periods for private use, reduced efforts to maximise rental income, and periods where the property is unavailable to the public.

If you fall into the amber zone, the ATO is more likely to engage compliance resources to assess whether deductions should be limited.

Red Zone – High Risk

This category represents the highest compliance risk. Red zone arrangements typically show a clear priority given to private use (particularly during peak demand periods), minimal effort to rent the property, major parts of the property being inaccessible to renters, and unreasonable or restrictive conditions placed on potential tenants.

Taxpayers in the red zone are significantly more likely to face ATO reviews and denial of deductions under section 26-50.

Retrospective Application of the Guideline

Once finalised, the ATO has proposed that the guideline will apply both before and after the official date of issue.

However, transitional relief has been provided. As outlined in paragraph 124 of TR 2025/D1, the Commissioner has stated that the compliance approach will not be applied to expenses incurred before 1 July 2026.

This provides property owners with time to review and adjust their arrangements before the new compliance framework is actively enforced.

Draft Status – Important to Note

PCG 2025/D7 is currently a draft Practical Compliance Guideline. This means it is not yet law, it may be amended before being finalised, and the ATO’s final approach may change.

Taxpayers should treat the guideline as a strong indicator of future ATO compliance behaviour, but not a final position. The Guideline is due to be completed mid-2026.

What Property Owners Should Do Now

If you own a holiday home that is also rented out, it is a good time to review how often the property is genuinely available for rent, assess how much personal use occurs each year, ensure rental arrangements are commercial and market-based, and keep strong records of rental activity and advertising efforts.

Making adjustments early can help reduce compliance risk once the guideline is finalised.

How We Can Help

If you’re unsure how these changes may affect your property or would like help assessing your risk zone, we can assist. Our team can help you review your current arrangements and ensure your tax position is compliant and defensible.