You’ve built wealth through smart decisions. Maybe you own a beachside property in Noosa, a retreat in the Hinterland, or a Blue Mountains escape. You rent the property out when you’re not using it, claim the usual deductions, and sleep well knowing you’re playing by the rules.
However, in November 2025, the ATO quietly rewrote how holiday home deductions work. And if you’re reserving peak periods for personal use while claiming holding costs like interest, rates, and insurance, your next tax return might look very different this year.
Understanding the new rules means you can structure your affairs properly, claim what you’re genuinely entitled to, and avoid the surprise of denied deductions or future audits. You’ve earned the right to know exactly where you stand.
What Actually Changed
On November 12, 2025, the ATO withdrew 40-year-old guidance and released new draft ruling TR 2025/D1. The shift? They’re now asking a harder question: Is your property genuinely an income-producing investment, or is it a holiday home that happens to generate some rent?
The difference matters. A lot.
Under the new “leisure facility” rules (section 26-50), if your property is deemed a holiday home, you can’t claim holding costs like mortgage interest, council rates, insurance, or land tax. You can still claim direct rental expenses like Airbnb fees, cleaning costs, and agent commissions. But the big-ticket deductions? Gone.
The Legislative Background
Section 26-50 isn’t new legislation. It was originally introduced in 1974 as section 51AB of the Income Tax Assessment Act 1936, then rewritten as section 26-50 when the legislation was modernised in 1997. The provision has always been there to prevent taxpayers from claiming tax deductions for properties that are primarily used for personal recreation.
What’s changed isn’t the law itself, but how the ATO intends to apply it. For decades, the ATO’s practical approach was relatively relaxed. IT 2167, issued in 1985, provided guidance but didn’t strictly enforce the “leisure facility” denial of deductions for mixed-use properties.
The explosion of short-term rental platforms like Airbnb and Stayz changed the landscape. Suddenly, thousands of property owners were claiming rental deductions for properties that were primarily holiday homes with occasional rental income. The ATO noticed.
TR 2025/D1 and the accompanying practical compliance guidelines (PCG 2025/D6 and PCG 2025/D7) represent the ATO finally saying: we’re going to enforce this law as written. If your property is genuinely a leisure facility, the deductions were never allowable. We’re just making that clear now.
The Peak Period Trap
Here’s the unexpected clarity: the ATO isn’t just counting days anymore. They’re looking at when you use the property.
Let’s say you own a Gold Coast apartment. You block out Christmas, Easter, and school holidays for family use. That’s maybe 8-10 weeks total. The rest of the year? Available for rent at market rates.
Old thinking: “I’m only using it 20% of the time, so I’ll claim 80% of my expenses.”
New reality: Because you’re prioritising personal use during peak earning periods (when nightly rates are highest), the ATO may decide your primary purpose isn’t income production. Your property might be classified as a leisure facility, and those holding cost deductions could be denied entirely.
Not apportioned. Denied.
Who is At Risk?
The ATO has created risk zones. You’re likely in the red zone (high audit risk) if you:
- Block out peak periods every year for personal use
- Keep the property for yourself, family, or friends during high-demand seasons
- Only rent it out during quieter periods when rates are lower
- Don’t actively market it during peak times
- Make limited attempts to maximise rental income
Think about the Byron Bay owner who reserves Christmas and January for family but rents it out in May and September. Or the Sunshine Coast property that sits empty during school holidays “just in case” the kids want to use it. Under the new guidance, these patterns signal that income production isn’t the main game. And that’s when deductions start disappearing.
An Example of How This Will Be Applied
Daniel and Kate own a beach house. Two school-aged kids. They block out Christmas, Easter, and Queensland school holidays for family use. Because of this, the property only rents commercially for about three weeks a year.
The ATO’s position? This is a holiday home. They keep the rental income (it’s still assessable), but they lose deductions for holding costs. On a $1.5M property with $60,000 annual interest costs, that’s a $60,000 deduction that simply vanishes.
They can still claim the $3,000 in Airbnb platform fees and $2,500 in cleaning costs. But the interest, rates, and insurance? Not deductible. Â
For high-net-worth investors, this changes the economics completely.
We break down this case study in more detail here.Â
What You Can Still Claim
Even if your property is classified as a leisure facility, you can always claim:
- Short-term rental platform fees (Airbnb, Stayz, Booking.com)
- Agent commissions
- Cleaning costs between guests
- Advertising expenses
- Repairs directly related to rental periods
And if your property passes the “mainly for income” test, you can claim (apportioned):
- Mortgage interest
- Council rates
- Insurance
- Land tax
- Repairs and maintenance
- Depreciation on assets
- Capital works deductions
The key word? Mainly. And the ATO now defines “mainly” by looking at your behaviour during peak periods, not just total days rented.
Alternative Structures Worth Considering
For high net worth families facing the new reality, the structure matters as much as the usage pattern. The right approach depends on your genuine intent and what you’re trying to achieve.
Pure Investment Property in a Trust or Company
If your property is genuinely commercial, consider holding it in a discretionary trust or company structure. This separates the investment from your personal estate, provides asset protection benefits, and makes commercial intent crystal clear. The trade-off? You can’t use it personally without paying market rent, which must be genuine and declared.
For families with multiple properties and significant wealth, this structure makes sense for true investment assets. It’s clean, defensible, and removes any ambiguity about purpose.
Documented Mixed-Use Arrangements
If you want both investment returns and occasional personal use, the new rules demand meticulous documentation. This means:
- Written rental policy showing genuine commercial intent
- Comprehensive rental calendars proving availability during peak periods
- Professional property management agreements
- Marketing evidence (listing history, pricing strategy, booking platform analytics)
- Occupancy reports showing genuine attempts to maximise income
Personal use should be scheduled outside peak periods, paid at market rates, or clearly documented as incidental to the commercial purpose. This is to ensure you are able to provide evidence of a genuine commercial operation.
Separate Holiday Home (No Deductions)
Sometimes the honest answer is: this is primarily a lifestyle asset. You want it available for family, and any rental income is secondary.
In this case, the cleanest approach is owning it personally and not claiming deductions. You keep the property available when you want it, rent it out opportunistically, and declare the rental income. No deductions, no audit risk, no complexity.
For wealthy families, this might make the most sense. The tax deductions on a holiday property were never substantial relative to total wealth, and the new ATO scrutiny makes the compliance burden heavier than the benefit.
Important consideration: If you’re treating a property as a lifestyle asset with no deductions, make sure your debt structuring reflects this. Borrowings should be appropriately documented and structured to avoid creating tax issues elsewhere in your wealth structure. Non-deductible debt needs different treatment than investment debt, particularly if you’re managing a broader property portfolio or business interests.
The Structure Decision Tree
Ask yourself three questions:
- Is maximising rental income my primary goal?
If yes, structure it commercially (trust/company), manage professionally, market aggressively, and minimise personal use. Full deductions, but genuine commercial operation required.
- Do I want both income and personal use?
If yes, be prepared for heavy documentation requirements, restrict personal use to off-peak periods, pay market rates for any personal use during peak times, and maintain meticulous records. Partial deductions possible, but audit risk is higher.
- Is this primarily a lifestyle asset?
If yes, own it personally, use it when you want, declare any rental income, and don’t claim holding cost deductions. Clean, simple, no audit risk.
The Transitional Grace Period
The ATO has acknowledged this guidance is new. They won’t review expenses incurred before July 1, 2026, as long as the arrangement (mortgage, maintenance agreements, etc.) existed before November 12, 2025.
Translation: You have breathing room to reassess your strategy, however, from July 1, 2026, onwards, expect scrutiny.
What This Means For You
If you own holiday properties and claim deductions, three questions matter:
- Is your property truly income-focused?
Can you demonstrate you’re maximising rental income, especially during peak periods? Or are you prioritising personal access?
- Can you prove commercial intent?
Do you have evidence of active marketing, competitive pricing, and genuine availability during high-demand times?
- Have you documented everything?
Occupancy records, rental calendars, personal use logs, marketing efforts. These aren’t optional anymore.
For many high net worth families, the answer might be simple: the property isn’t mainly for income, and that’s fine. But you need to structure your affairs accordingly and stop claiming deductions you’re not entitled to.
For others, small changes could make a material difference. Reducing personal use during peak periods, implementing transparent booking systems, or adjusting your rental strategy might keep you in the green zone.
The Bigger Strategic Question
This ruling forces a clarity moment: Why do you own this property?
If it’s genuinely an investment, structure it like one. Market it aggressively. Maximise income. Limit personal use to off-peak times.
If it’s lifestyle first, investment second, that’s completely legitimate. Just don’t pretend otherwise on your tax return.
The worst position? The middle ground where you’re trying to have it both ways, claiming investment deductions while operating like it’s a family holiday home.
Moving Forward
The ATO’s message is clear: demonstrate genuine commercial intent, or don’t claim commercial deductions.
For investors managing significant property portfolios, this changes the risk calculation. A $50,000 disallowed deduction at a 47% marginal rate costs you $23,500. Over five years? That’s a six-figure impact.
You’ve worked too hard to build wealth to give it back through poorly structured investments.
If you own holiday properties and claim rental deductions, now is the time to review your position. Look at your usage patterns honestly. Assess your risk zone. Evaluate whether your current structure still makes sense. Make sure your structure matches your actual intent.
At Walsh Accountants, we can help you assess where you stand, what documentation you need, and whether your current approach still makes sense under the new rules. Let’s make sure your property strategy protects what you’ve built, not just on paper, but in reality.
