If you own a holiday home that you also use for personal stays, new Australian Tax Office (ATO) guidelines could significantly affect your ability to claim tax deductions, and the rules are tighter than many property owners realise.
In November 2025, the ATO released draft guidance introducing strict limits on deductible expenses for properties that are only partly used to generate rental income. Under this approach, holiday homes where personal use is prioritised over income production may be classified as a “leisure facility”, a designation that eliminates deductions for major costs including mortgage interest, council rates, land tax, and maintenance.
What is a leisure facility?
Under section 26-50 of the Income Tax Assessment Act 1997, a leisure facility is broadly defined as land or a building used or held for use for holidays or recreation. Critically, the ATO considers a property to be a leisure facility if its private use is prioritised over income generation, even if that personal use is limited.
The ATO’s own example makes the implications clear: a beach house used by owners for roughly one month per year during Christmas, New Year, and school holidays with the property listed on short-stay platforms for the remainder, would still qualify as a leisure facility. The consequence is that most rental expenses would be non-deductible, with only direct income-generating costs like advertising fees, platform commissions, and cleaning charges remaining claimable.
What can still be deducted?
A property can avoid the leisure facility classification if, at all times during the income year, it is held mainly to produce assessable income. The ATO will look at how the property is used, including whether it is made available and actively marketed during peak holiday periods rather than reserved for personal stays. A risk-based compliance framework (green, amber, and red zones) accompanies the draft ruling to help owners assess their exposure.
When do the rules apply?
The ATO will apply this view from 12 November 2025. However, arrangements that existed before that date benefit from a transitional period, with the ATO indicating it will not review expenses incurred before 1 July 2026 under pre-existing arrangements. New properties or new financing arrangements entered into after November 2025 do not benefit from this grace period.
What should you do now?
The key risk for many owners is underestimating how the ATO defines “prioritised personal use.” Even modest personal use during peak periods can shift the classification. Victorian property owners face additional exposure, as holiday home exemption data held by the State Revenue Office may be shared with the ATO. If you have a holiday home with any level of private use, a review of your current arrangements is worthwhile before the July 2026 transition date passes.
