ATO draft ruling restricts deductions for short term rental properties
Holiday rentals have been the subject of ATO scrutiny for several years, with the existing guidance needing a refresh to provide taxpayers with greater certainty on the ATO’s approach.
The rapid expansion of online platforms such as Airbnb have undoubtedly influenced the landscape of the Australian property market.
Approximately 250,000 or 2 percent of the nation’s housing stock is currently held for the purposes of operating as short-stay or holiday accommodation.
Many of these properties are negatively geared, providing potentially significant tax breaks to owners and investors.
The Australian Taxation Office (ATO) has released a draft ruling (TR 2025/D1) clarifying how individuals who are not in business should treat income and deductions from rental properties, including holiday homes and short-term rentals.
The ruling, which replaces IT 2167, sets out when rental income is assessable and how deductions must be apportioned.
Holiday rentals (particularly via online platforms) have been the subject of ATO scrutiny for several years, with the existing guidance needing a refresh to provide taxpayers with greater certainty on the ATO’s approach.
Key elements
Assessable Income
• All amounts received for the use of a property must be reported as assessable income.
• This includes formal lets through an agent or online platform and any other amounts paid even when significantly below market rate including payments for use from friends and family members.
Deductibility of home ownership costs
• The ruling introduces stricter limits on deductions for properties used personally by the property owner.
• If a property is classified as a “holiday home”, deductions for ownership costs (such as interest, rates, and maintenance) will generally be denied unless the property is mainly used to produce rental income throughout the year.
Deductions remain available for running costs of holiday homes incurred in deriving rental income
• Owners can continue to claim expenses to the extent they are non-property costs and are directly incurred in producing assessable income.
• This means that some deductions for costs related to holiday home’s which are partially used for personal purposes will still be available such as advertising and agent/platform fees and cleaning the property to the extent that this expense is directly related to deriving rental income.
• Costs which are capital, private, or domestic in nature remain non-deductible.
Impact to owners
Holiday home-owners
• The biggest change is for owners who mix personal and rental use. Simply advertising a property for rent is not enough – availability during peak holiday periods and actual rental activity including owners rejecting requests to book the property will be scrutinised.
• Owners who block out periods of peak demand such as school holidays may lose access to deductions for all ownership costs.
Proportioning expense deductions
• Owners with some personal use will need to ensure that they document not only the actual running costs incurred but also the basis for any apportioned expense claims expected to justify any deductions they wish to take.
Family arrangements
• Renting to relatives at below-market rates still counts as assessable income, but deductions must be apportioned to reflect the non-commercial nature of the arrangement.
Compliance burden
• The ATO will apply a transitional compliance approach for arrangements entered into prior to 12 November 2025 but, from 1 July 2026 onwards it is likely that enforcement will tighten with a likely focus on record-keeping and evidence of genuine intent to rent the property.
Action checklist for owners
Review property use
• Assess whether your property is genuinely available for rent during peak periods. If private use dominates, expect deductions to be denied.
Plan ahead
• Maintain detailed logs of rental income, advertising efforts, booking calendars, and private use dates on a contemporaneous basis. If your record keeping is not sufficient, get this up to date ahead of the end of the transitional relief on 30 June 2026.
Apportion deductions
• Use fair and reasonable methods to split running cost expenses between private and income-producing use, consider whether you need to change your approach to managing your ongoing tax affairs in relation to anticipated income figures.
Seek advice
• The ATO will be releasing detailed practical compliance guides to support owners however, properties with mixed personal and rental use can create complex tax and compliance obligations and we recommend seeking professional advice.
