The ATO has released draft guidance signalling a potential crackdown on deductions for holiday homes and short-stay rentals. While it is not yet law, and may still change following consultation, the ATO has made its intentions clear. Deductions will only remain available when a property is genuinely operated to produce rental income, not kept primarily for personal holidays. Here’s what owners need to know while we wait for the final position.

What the Draft Says

Under the proposed guidance, deductions such as interest, rates, insurance and other holding costs may be denied if the property is considered “mainly” for personal use, rather than mainly used to produce assessable rental income. This represents a notable shift away from the long-standing approach where a property simply needed to be “available for rent”.

Peak Period Use Is the Key Issue

The ATO’s draft strongly focuses on peak periods, such as Christmas and New Year, Easter Public holiday long weekends, School holidays, and Seasonal or location-specific peak demand (snow season, summer coastal months, major events) If a holiday home is blocked for private use during these high-demand periods, the ATO may conclude the owner is not genuinely seeking rental income, and deductions for holding costs could be denied.

What Deductions Could Be Affected?

If implemented in its current form, deductions at risk include:

• Mortgage interest
• Council rates and water
• Land tax
• Insurance
• Depreciation
• Repairs and maintenance

Deductions that relate directly and exclusively to rental activity (cleaning, advertising, platform fees, agent commissions) are expected to remain deductible.

What Counts as “Private Use”?

The draft highlights several red flags, such as reserving Christmas or holiday periods for yourself, setting rent above market rates to deter bookings, accepting mainly friends and family, limited advertising or response to enquiries, and low bookings numbers despite being in a high-demand area. These indicators may cause the ATO to conclude the property is primarily a private holiday home and therefore not eligible for full deductions.

Record Keeping Expectations

Record keeping expectations will Increase if the draft progresses, owners will need to keep:

• Booking calendars
• Advertisements and listing history
• Enquiry logs
• Market-rate pricing evidence
• Private-use dates “Mates rates” or discounted stays documentation.

What Should Owners Do Now?

Until the ATO finalises the guidance monitor developments closely (the consultation period runs until 30 January). Review how your property is advertised and priced. Consider whether peak-period availability aligns with genuine rental use. Improve documentation now in case the guidance is implemented. There is no requirement to change anything yet, but understanding the shift will help you prepare.

The Bottom Line

The ATO’s draft guidance signals a stronger stance on holiday homes that are primarily used for private enjoyment while still claiming full rental deductions. Nothing is final, the rules may or may not proceed exactly as drafted but owners should start considering how their rental activity would stand up to the new “mainly” and “peak period” tests. When the final position is released, we’ll provide an update.

Written for you by James Barton