ATO Cracks Down on Holiday Home Deductions: What You Need to Know

If you own a holiday home that you also rent out, the Australian Taxation Office has just made it significantly harder to claim deductions on it—and the change could catch a lot of property owners by surprise.

On 20 May 2026, the ATO finalised Taxation Ruling TR 2026/1, together with two Practical Compliance Guidelines, PCG 2026/2 and PCG 2026/3. Together, they set out a much stricter approach to holiday homes that double as rental properties and introduce a provision most owners have never had to think about before.

Here’s what’s changed and what it means for you.

The core issue: is your holiday home really an investment or a leisure facility?

For years, the ATO’s approach to holiday homes was relatively straightforward: apportion your deductions based on how much of the year the property was genuinely rented out, or available for rent, versus used privately.

That apportionment approach still applies—but there’s now an extra hurdle to clear first. The ATO has confirmed it will apply section 26-50 of the tax law, the “leisure facility” provision, to holiday homes that are also rented out.

This provision was traditionally associated with things like company-owned boats and corporate retreats, not the family beach house. Under section 26-50, if your property is treated as a leisure facility, deductions for ownership costs—mortgage interest, council and water rates, land tax, body corporate fees, insurance, and capital works or depreciation—are denied outright, before the usual “was this incurred in earning income?” test is even considered.

The ATO acknowledges this is a shift in its position. In the ruling itself, it concedes that “views on section 26-50 have not previously been publicly expressed in relation to rental properties,” meaning many owners may have structured their arrangements without knowing this rule could apply.

The exception: using your property “mainly” to earn rent

There is a way to preserve your deductions. If your holiday home is used, or held for use, mainly to produce rental income throughout the year, the leisure facility rule doesn’t bite, and you can claim ownership deductions, subject to the usual apportionment for any private use.

The catch is in how the ATO interprets “mainly.” It’s not simply a matter of counting up the number of days rented versus days used privately. The ATO takes a qualitative view, weighing heavily on whether the property is genuinely available during peak demand periods—school holidays, Christmas and New Year, Easter, and other times when holiday-makers actually want to book.

Blocking out those peak weeks for your own use, while renting the property out during the rest of the year, is treated as a strong sign that the property isn’t “mainly” earning you rental income, even if the numbers suggest otherwise.

How this plays out in practice

The ATO’s own examples make the line reasonably clear:

• A property rented out almost year-round, where the owner only stays a night or two during off-peak periods when bookings are unlikely, still qualifies for deductions.
• A beach house advertised for rent all year, but with Christmas, New Year, Easter and school holidays blocked out for family use, and averaging only a handful of rental days annually, fails the test—no ownership deductions at all.
• Even a property genuinely rented for several weeks a year can fail if the owner’s own use lines up with peak season.

The message is consistent: reserving the best weeks for yourself, while renting out the quiet periods, is exactly the pattern the ATO is now targeting.

What’s still deductible either way

Even where the leisure facility rule denies your ownership costs, expenses that relate directly to the act of renting remain deductible. This includes real estate agent commissions, advertising costs, booking platform fees, and cleaning costs after a guest’s stay.

Denied deductions aren’t necessarily lost forever

If section 26-50 blocks a deduction, the amount typically isn’t wasted—it can generally be added to the property’s cost base, reducing any capital gain when you eventually sell.

If you do qualify, apportionment still applies

Where your property does pass the “mainly” test but has some private use—a few off-peak weeks, or having family and friends stay at a discounted rate—the ATO’s established apportionment rules continue to apply.

Expenses are split on a time basis between income-producing and private periods, costs that relate solely to renting are fully deductible, and if you charge below-market rent to family or friends, your deductions for that period are capped at the rent you actually received.

Transitional relief—but the window is narrow

The ATO has said it won’t devote compliance resources to reviewing section 26-50 for holiday home expenses incurred before 1 July 2026.

This gives some breathing room, but there are two important limits: it doesn’t cover cases of fraud or deliberate avoidance, and it can’t be used to open up amendment requests for prior years where deductions weren’t claimed. Given the ruling was only finalised in May, the practical benefit of this transitional period is limited.

What you should do now

If you own a holiday home that you rent out, it’s worth reviewing your arrangements before 1 July 2026:

• Check whether your property is genuinely available for rent during peak periods, not just the off-season.
• Review your advertising and booking records to make sure you can demonstrate genuine efforts to rent the property year-round.
• Keep clear records of private use versus rental use, and of any rent charged to family or friends.
• Consider whether your current pattern of use puts your ownership deductions at risk under the new rules.

Every situation is different, and the right approach depends on your specific circumstances, so it’s worth getting tailored advice before you lodge your next return.

This article is general information only and does not constitute tax advice. Please contact our office to discuss how these changes apply to your specific circumstances.