ATO Targets Holiday Home Deductions
- Kelly Chard
- 3 days ago
- 3 min read
ATO Targets Holiday Home Deductions: What Property Owners Need to Know
Many taxpayers like the idea of owning a holiday home they can enjoy personally while earning rental income on the side.
The concept is appealing: use the property with family a few times a year, rent it out through an agent or platforms like Airbnb when you are not using it, and claim tax deductions for interest and other ownership costs.
Historically, many taxpayers have approached this by apportioning expenses between private use and rental use, adjusting deductions based on the number of days the property is rented.
However, the ATO’s Draft Practical Compliance Guideline PCG 2025/D7 signals a shift in how these arrangements may be assessed.
Rather than relying solely on a simple day-count calculation, the ATO will look more closely at whether the property is genuinely operated as an income-producing rental or primarily a private holiday home, which could mean some deductions are no longer available.
The ATO’s Focus: Lifestyle Assets vs Genuine Rentals
The new guidance focuses on whether a holiday home is genuinely operated as an income-producing investment or whether it is primarily a private lifestyle asset that occasionally earns rental income.
The ATO has revived the concept of a “leisure facility” under section 26-50 of the Income Tax Assessment Act 1997. If a property is mainly used for holidays or recreation, deductions for ownership costs such as interest, rates and maintenance may be denied, even if the property earns rental income.
In other words, earning rental income alone does not guarantee deductions.
The ATO’s Traffic Light Risk Framework
To help taxpayers understand how arrangements may be viewed, PCG 2025/D7 introduces a traffic light risk framework.
Green zone - Low risk
Properties genuinely operated as commercial rentals are more likely to fall in the green zone. Typically, the property is widely advertised, priced at market rates and available for rent for most of the year with minimal private use.
Amber zone - Medium risk These arrangements involve a mix of private and rental use. The property may be available for rent for significant periods, but private use remains a meaningful factor and the ATO may scrutinise these arrangements more closely.
Red zone - High risk Properties primarily used as a private holiday home are likely to fall into the red zone. In these cases, deductions for ownership costs may be denied and the ATO is more likely to review the taxpayer’s claims.
Behaviours That Increase Risk
The ATO’s assessment goes beyond simply counting rental days vs private days. Instead, it looks at the overall pattern of behaviour surrounding the property.
Examples of higher-risk features include:
Owners blocking out peak rental periods such as Christmas, Easter or school holidays for personal use.
Limited efforts to secure bookings or maximise rental income.
Large portions of the calendar being unavailable for rent.
Rooms or areas of the property being locked off or reserved for private belongings.
Rental pricing or advertising practices that make bookings unlikely.
These factors can suggest the property is primarily a private holiday house rather than a genuine rental investment.
What This Means for Property Owners
The ATO is not banning deductions for holiday homes. However, it is drawing a clearer line between genuine rental investments and lifestyle assets.
For taxpayers who expect rental deductions to offset the cost of owning a holiday home, the new guidance could significantly change the tax outcome.
If you own a holiday property, or are considering purchasing one, it is worth reviewing how the property is structured, marketed and used.
At GrowthMD, we regularly help medical professionals and practice owners navigate the tax implications of their investments. If you want to understand where your holiday property may sit under the ATO’s risk framework, our team can help you review the arrangement before the ATO does.
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