If you own a holiday home that you also rent out — whether through a property manager, Airbnb, Stayz or a similar platform — a significant shift in ATO guidance released in November 2025 could materially change what you can claim at tax time. 

The change takes full effect from 1 July 2026, and property owners need to act now.

What has changed?

The ATO released Draft Taxation Ruling TR 2025/D1 in November 2025, replacing a 40-year-old ruling (IT 2167) that had governed rental property deductions. The new approach is considerably stricter, particularly for properties that owners also use personally.

The key change involves the application of the 'leisure facility' rules under section 26-50 of the Income Tax Assessment Act 1997. 

Under these rules, if the ATO determines that your holiday home is primarily used for your (or your family's) holidays and recreation, rather than primarily to generate rental income, certain deductions for holding the property will be denied entirely. 

These denied deductions include mortgage interest, council rates, land tax, insurance, and repairs and maintenance. Notably, this rule is not new law but the ATO acknowledges it has never previously made its views on this provision public. That changes from 1 July 2026.

What is a 'leisure facility' in the ATO's view?

Under TR 2025/D1, a rental property will be treated as a leisure facility if it is used, or held for use, mainly for your holidays or recreation (or those of your family and friends at no charge or at a reduced rate). 

The ATO determines this by looking at the overall pattern of use across a period of time, not just a single year.

Red flags that increase your risk of being classified as a leisure facility include:

• Blocking out dates during peak periods (school holidays, Christmas, Easter) for personal use
• Advertising the property at above-market rates in peak periods in a way that deters bookings
• The property being occupied personally, or by family and friends at a reduced rate, more than it is rented commercially
• The property generating very low rental income relative to its holding costs

By contrast, a property is unlikely to be classified as a leisure facility if it is consistently available to the public at market rates throughout the year — including during peak holiday periods — and is genuinely managed as an income-producing asset.

What deductions are still allowed?

Even where a property is classified as a leisure facility, certain deductions remain available. These are expenses directly related to earning rental income, such as real estate agent or platform commissions, advertising costs, linen and cleaning after guest stays, and a proportional share of utility costs attributable to rental periods.

The broad holding costs, including interest, rates, insurance and general maintenance, are what become non-deductible. groups have recognised that while most Australians are happy to tap their card or phone, around 10–15% still prefer to use cash, particularly older Australians and those in regional or remote areas.

The transitional period and why you need to act now

The ATO has provided transitional relief: it will not devote compliance resources to reviewing whether section 26-50 applies to properties owned and arrangements entered into before 12 November 2025, for income years ending before 1 July 2026. This means the 2025-26 tax return is likely your last year of protection for pre-existing arrangements.

From 1 July 2026, the new rules will be actively applied. New arrangements, including new loan facilities taken out after 12 November 2025, are not protected by the transitional concession.

What should you do before 30 June 2026?

• Review how your holiday property is being used and rented. 
• Consider whether it genuinely produces income as a priority over personal use.
• Ensure your records clearly document all rental periods, personal use periods, and evidence of genuine availability at market rates. 

If you are relying on rental deductions to offset income from other sources, the impact of losing those deductions under the new rules could be significant. Please contact us to review your specific situation.

Please contact us if you have any questions - email us or phone our team on 02 9899 3044.