— WHAT CHANGED —

The ATO Has a New Stance on Holiday Homes

For decades, holiday home owners who also rented out their property could claim a wide range of deductions — mortgage interest, council rates, depreciation and more. That has now fundamentally changed.

On 20 May 2026, the ATO finalised Taxation Ruling TR 2026/1, replacing the long-standing IT 2167 (withdrawn November 2025). For the first time, the ATO has publicly stated that Section 26-50 of the Income Tax Assessment Act 1997 — the ‘leisure facility’ provision — applies to holiday homes that owners also rent out.

In plain terms: if the ATO determines your holiday home is primarily a personal getaway rather than a genuine income-producing asset, your ownership-related deductions can be denied entirely.

— THE KEY TEST —

Is Your Property a ‘Leisure Facility’?

Under the new rules, a holiday home is classified as a ‘leisure facility’ if it is used (or held for use) mainly for your holidays or recreation — or those of your family and friends — rather than to produce rental income. This is not limited to coastal cottages or ski lodges; the ATO has confirmed that even a city apartment can be classified as a leisure facility if it is mainly used for personal purposes.

The critical word is ‘mainly’. The ATO looks at whether income production is genuinely prioritised over personal use, particularly during peak demand periods for your property’s location.

— WHAT YOU CAN AND CAN’T CLAIM —

Deductions: The Old Rules vs the New Reality

Whether you can claim ownership costs now depends entirely on whether your property satisfies the ‘mainly used to earn income’ exception under Section 26-50. Here’s how it breaks down:

— THE ATO’S RISK FRAMEWORK —

Green, Amber or Red? Know Your Zone

PCG 2026/3 introduces a three-zone risk framework to help property owners understand where they stand. Your zone determines the level of scrutiny the ATO will apply to your claims.

No single factor is decisive — the ATO considers the overall picture. However, personal use during peak periods is treated as the most significant indicator of a leisure facility arrangement.

— CALCULATING YOUR DEDUCTION —

How to Apportion Expenses (PCG 2026/2)

If your property qualifies under the ‘mainly income’ exception, you must still apportion expenses to exclude any period of personal use. PCG 2026/2 sets out two accepted methods:

A combination of both methods may be used where only part of a property is rented for part of the year. Note: for a room in your primary home, days when the room is unoccupied count as private use — not days available for rent.

— RECORD KEEPING —

The Evidence You Need to Protect Your Claims

With the ATO’s expanded data-matching capabilities and renewed focus on rental property deductions, strong records are your best defence. To demonstrate your property is genuinely available for rent on commercial terms, you should keep:

• Records of all days the property was rented and to whom
• Evidence the property was advertised with broad exposure (screenshots of listings, dates advertised)
• Proof the rental rate was comparable to similar properties in the area
• Records of all booking enquiries received — and responses
• Evidence of local peak seasons and how your usage aligns (or doesn’t) with those periods
• Details of any personal use periods, even short ones
• All expense receipts, invoices and bank statements
• If claiming the mainly exception: documents showing priority of rental income over personal use

— TRUSTS & HOLIDAY HOMES —

What If the Property Is Held in a Trust?

While TR 2026/1 is directed at individuals, the ATO has indicated the leisure facility classification can also apply where a property is held in a trust and used mainly for holidays or recreation by the beneficiaries or controllers. If your holiday home is held in a family trust and family members use it regularly, you should review the arrangement carefully.

A specific anti-avoidance rule also applies: if a trust charges family members a below-market rate to use the property in an attempt to avoid the leisure facility provisions, the ATO can still deny deductions.

— YOUR ACTION PLAN —

What to Do Before 30 June 2026

The transitional period ends on 1 July 2026. Before then, review your position and act:

• Assess which ATO risk zone (green/amber/red) your property falls into using PCG 2026/3
• Review your personal use vs rental use pattern for 2025–26 and document it honestly
• Check your advertising — is the property listed at market rates with broad exposure?
• Gather records of all booking enquiries received and accepted (or declined)
• Identify which expenses are ownership-type and which are operational (advertising, cleaning, commissions)
• If your property may be classified as a leisure facility, start tracking denied expenses for CGT purposes
• Book an appointment with us to review your 2025–26 return before lodging

Disclaimer: This article is general in nature and does not constitute financial or tax advice. The application of TR 2026/1, PCG 2026/2 and PCG 2026/3 depends on individual circumstances. Please contact North Coast Accounting for personalised advice before lodging your tax return or making any decisions based on this information.