A new draft ruling from the Australian Taxation Office (ATO) — formally known as TR 2025/D1 — could significantly limit the deductions that holiday-home owners can claim, and understanding the ATO holiday home tax rules has never been more important.

The central issue is classification: whether a property is genuinely held to produce rental income, or whether it is primarily a private holiday home with incidental rental activity.

Under TR 2025/D1, expenses directly related to earning rent — such as advertising, cleaning, and operational costs — will remain deductible for many owners.

Meanwhile, ownership-level expenses (council rates, insurance, mortgage interest, land tax, depreciation, repairs, and maintenance) become deductible only if the property is mainly an income-producing asset, not a place of private enjoyment. This distinction is grounded in the ATO’s interpretation of section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997), which requires that deductions be incurred in gaining or producing assessable income.

And crucially, it is now the owner’s responsibility to prove this purpose.

Proving That the Property Is Primarily for Income

The ATO now requires owners to demonstrate that the overriding purpose of holding the property is to generate rental income. For holiday home tax purposes, some private use is still permitted, but the overall pattern of behaviour must clearly show commercial intent. If a property is accepted as mainly income-producing, normal apportionment rules apply — all rental expenses must be split to exclude private-use periods, consistent with the approach in Taxation Ruling TR 93/32.

But determining whether a property qualifies as “mainly income-producing” under the ATO’s holiday home tax framework has changed substantially.

What the ATO Will Examine

The key is what the ATO considers to be “mainly income-producing” under TR 2025/D1, which may not be as simple as proving the holiday home is available to rent at least 50% of the year.

Instead, the ATO will look at a pattern of behaviour, including:

Peak Period Behaviour

  • Was the property genuinely available to rent during Christmas, New Year, Easter, or school holidays?
  • Or were these high-demand periods blocked out for personal use?

Commercial Rental Behaviour

  • Are enquiries responded to promptly?
  • Are you actively advertising the property?
  • Are you unintentionally discouraging guests (e.g., mentioning remoteness or poor phone reception)?

Commercial Suitability

  • Is the entire property available to guests?
  • Are you charging realistic market rent?
  • Do restrictive conditions (no kids, no pets, limited facilities) deter bookings?
  • Does the location or lack of amenities reduce genuine rental prospects?

The ATO has also indicated it will draw on the Full Federal Court’s reasoning in cases such as Macainsh v FCT when assessing whether a property is genuinely income-producing or primarily held for private enjoyment. All of these factors help the ATO determine whether your property was truly held for income or simply “made available” in theory.

When the New ATO Holiday Home Tax Rules Apply

TR 2025/D1 states:

  • Applies from: 12 November 2025
  • Grandfathering: Arrangements in place before this date are protected until 1 July 2026

This means many owners will fall under the new holiday home tax rules earlier than expected, even before the draft becomes final. Once finalised, TR 2025/D1 will replace the ATO’s previous guidance on this topic and represent the definitive position on holiday home deductibility.

What Holiday-Home Owners Should Do Now

The ATO’s message is clear: if you want ownership-cost deductions under the holiday home tax rules, you must operate your property like a genuine commercial business.

Owners should review:

  • Pricing to ensure it reflects market rates
  • Restrictions that may limit guest interest
  • Availability during peak demand periods
  • Responsiveness to enquiries
  • Full property access for guests
  • Documentation showing genuine efforts to maximise rental income

Importantly, owners should also maintain records that would satisfy the substantiation requirements under Division 900 of the ITAA 1997 — including booking histories, advertising activity, correspondence with guests, and evidence of market-rate pricing.

If you enjoy using your holiday home privately, now is the time to speak with your accountant to determine whether the property truly meets the ATO’s criteria for being “genuinely available for rent” under TR 2025/D1.

Our JD Scott + Co team can talk you through the ATO holiday home tax changes and what they mean for your property. Get in contact with us today.