The ATO’s new draft rules could change your holiday home tax claims

Do you own a holiday home that you sometimes rent out? The ATO has just released draft guidance that could change how you claim your holiday home rental income and expenses.

The ATO has withdrawn its decades-old guidance on holiday home rentals and released new draft rulings that modernise these rules. The changes reflect current law and court decisions, specifically targeting situations where properties are used mainly for personal holidays but owners still claim substantial tax deductions.

The underlying tax law contains an “integrity rule” for leisure facilities like holiday homes. This rule prevents you from deducting expenses for a property that’s essentially for your personal use. The new draft guidance clarifies how to determine if your property’s considered a holiday home under the integrity rule, and how much you can legitimately claim.

The ATO’s proposed guidance is in three drafts. The first is a taxation ruling that explains how you should declare rental income and claim deductions for rental properties, including holiday homes. It addresses common scenarios like renting to family or friends at reduced rates, and sets out when a property is a “holiday home” for tax purposes.

The other drafts are practical compliance guidelines. They outline what the ATO considers fair and reasonable methods to split expenses between income-producing use and private use; for example, if your holiday home’s rented out half the year and you use it for the other half, you can claim roughly 50% of general costs like interest, utilities and insurance as deductions.

They also introduce a traffic-light system of risk zones. “Amber” covers medium-risk scenarios where you rent the property but also use it personally for a significant part of the year. “Red” covers high-risk arrangements where the property’s mostly used by you or your family, with infrequent or non-commercial rentals. If you’re in the red zone, the ATO will suspect the property is mainly a lifestyle asset rather than a genuine income-producing investment, and will be more likely to investigate or challenge your claims.

Getting deductions right

Properly splitting your expenses between personal and rental use (called “apportioning”) is crucial to getting your deductions right. The draft guidance includes approved apportioning methods. For example, under the simplest, time-based approach, if your property is rented 70 days out of 350 days available, you can claim 20% of yearly costs.

Key points to remember:

• days when you, your family or friends use the home for free count as private use;
• you can only claim deductions where the property’s genuinely available for rent at market rates;
• if you rent to family or friends below market rates, deductions are typically limited to your rental income; and
• expenses that are 100% because of renting can be claimed in full.
  Transitional arrangements
  While these rules are drafts right now, the ATO plans to apply them retrospectively once they’re finalised, with a transitional compliance approach for arrangements in place before 12 November 2025. This should give you time to adjust without immediate penalties.

What to do now

Although these are draft rules, they signal a tougher ATO stance on holiday home claims. Take an honest look at your holiday home usage and review your past claims. Improve your record-keeping by maintaining a log of rental periods, vacant periods and personal use dates. We can help assess how the rules might affect your specific circumstances and ensure you’re maximising your legitimate deductions while staying compliant with the ATO’s expectations.

Most importantly, don’t wait until these rules become final. The ATO is being clear about its intended approach, and proper planning now can help you avoid unwelcome surprises later.

Source: ATO - Draft Taxation Ruling TR 2025/D1; ATO - Draft Practical Compliance Guideline PCG 2025/D6; Draft Practical Compliance Guideline - PCG 2025/D7