Your Holiday Home Deductions Are at Risk: The ATO’s New Stance Explained

Off the back of grappling with the 2026-27 Federal Budget announcements, property investors and advisors now have another key change to consider in May 2026.

Over the last week, the ATO finalised Taxation Ruling TR 2026/1 Income tax: rental property income and deductions for individuals who are not in business, together with two supporting Practical Compliance Guidelines (PCG 2026/2 and PCG 2026/3).  The position now taken is a changed approach relating to deductions concerning holiday homes that are rented out.

This article explains what has changed, why it matters, and what investors need to do now.

What is the ATO’s current position?

TR 2026/1 replaces the long-standing Taxation Ruling IT 2167, which was withdrawn on 12 November 2025. For the first time, the Commissioner has publicly stated that section 26-50 of the Income Tax Assessment Act 1997 (Cth) (the “leisure facility” provision) applies to holiday homes that owners also rent out.

At a high-level, a taxpayer can claim deductions for losses or outgoings relating to a rental property to the extent that they are incurred in gaining or producing assessable income from the property, but not to the extent they are:

• capital in nature;
• of a private or domestic nature; or
• prevented from being deducted under a provision of the Tax Acts (such as section 26-50).

Under section 26-50, where a property is deemed a “leisure facility”, the taxpayer is denied tax deductions for expenses related to its ownership and use, unless an exception applies. This is the provision at the heart of the ATO’s new position.

The Commissioner acknowledges this shift in view, noting that “views on section 26-50 have not previously been publicly expressed in relation to rental properties” and that taxpayers “may have entered into arrangements that may fall under section 26-50 without realising” the provision applied. The stated purpose of section 26-50 is “to establish a firm rule that prevents taxpayers from obtaining a tax subsidy for expenditure on their own recreation”.

What is a “holiday home” for tax purposes?

Under TR 2026/1, a holiday home is a type of “leisure facility”, defined in subsection 26-50(2) as “land, a building, or part of a building or other structure, that is used (or held for use) for holidays or recreation”. A property will be a holiday home if it is used, or held for use, for your holidays or recreation, or for the holidays or recreation of your family members or friends for no rent or at a reduced rate. Whether a property qualifies is a question of fact, determined from the pattern of use over time, including periods when it is unoccupied. A property can still be a holiday home even if rented out.

Importantly, if a property is never used for the owner’s holidays or recreation (or that of family or friends for no rent or at a reduced rate), it is not a holiday home at all, and section 26-50 simply does not apply. The Ruling gives the example of an owner who markets an apartment solely to holidaymakers, never reserves it for private use, and takes all reasonable steps to maximise rental occupancy. In that scenario, the property is not a leisure facility and deductions are not denied.

Where a holiday home is co-owned, rental income and expenses must be attributed to each co-owner according to their legal interest in the property (for example, equally for joint tenants or by percentage for tenants in common), except in very limited circumstances where the equitable interest differs from the legal title.

The key point: ownership deductions denied unless an exception applies

The ATO’s view is as follows: if your rental property is a holiday home, section 26-50 denies deductions for “ownership and use expenses” unless you can show the property is used (or held for use) mainly to produce assessable rental income.

What are “ownership and use expenses”?

These include expenses incurred to acquire or retain ownership, acquire or retain rights to use, or to use, operate, maintain or repair the property. Common examples include:

• Interest on borrowings to finance the property
• Council rates
• Land tax
• Repairs and maintenance
• Body corporate fees
• Insurance
• Capital works and decline in value deductions

What can you still claim?

Even where section 26-50 denies ownership deductions, expenses that do not relate to the ownership or use of the holiday home remain deductible to the extent they are incurred in gaining or producing assessable income. These include:

• Advertising costs to rent the property
• Cleaning costs after a guest stay
• Booking fees and sharing economy platform commissions

The “mainly” exception and how it works

The principal exception for holiday home owners is in subparagraph 26-50(3)(b)(ii). It provides that section 26-50 will not deny deductions if, at all times during the income year, you use the holiday home (or hold it for use) mainly to produce assessable income in the nature of rents, lease premiums, licence fees or similar charges.

The word “mainly” takes its ordinary meaning of “chiefly; principally; for the most part”.

A qualitative test, not just a numbers game

This is where the Commissioner’s approach departs most significantly from what many investors might expect. The Ruling states that “a simple quantitative assessment, such as the proportion of time the property is used or advertised to produce assessable income, is not sufficient on its own”.

In the past, taxpayers apportioned expenses on a time basis. If a property was available and marketed for rent 50 out of 52 weeks, ownership expenses could be claimed for that proportion. This practical approach was broadly consistent with the withdrawn IT 2167, which endorsed time-based apportionment for holiday homes, although IT 2167 did not specifically address the application of section 26-50.

Instead, the Commissioner has now adopted a “qualitative evaluation” of all relevant facts and circumstances to determine the character of the property’s use.

The factors include the way the property is actually used, the time dedicated to income-producing use, the time used or held for potential private use, and critically, the extent to which the property is available or used as a rental during school holidays, public holidays or peak seasonal demand periods. No single factor is determinative, and this is an objective test that does not depend on your subjective intention.

Peak-period availability is critical

The practical effect is that peak-period availability carries considerable weight in the ATO’s eyes.

If a holiday home is advertised for rent for more than half the year, but is not available during school holidays, public holidays or peak seasonal demand periods, the Commissioner will view it as not mainly held to produce rental income. Peak seasonal demand varies by property type and location, coastal properties peak in summer, ski properties in winter, and city apartments may peak around major events such as sporting fixtures or festivals. Owners should have regard to the location-specific seasonal demand characteristics of their property.

Reserving the prime weeks for private use will generally defeat the “mainly” exception, even where the owner makes the property available for rent the rest of the year.

In our view the ATO’s position and focus on peak-period availability is open to challenge. The statutory text of subparagraph 26-50(3)(b)(ii) uses the phrase “at all times during the income year”, which arguably directs attention to a quantitative assessment of use over the full year rather than a purely qualitative evaluation weighted toward peak periods. The Ruling acknowledges this tension: it cites the High Court decision in Federal Commissioner of Taxation v F H Faulding and Co Ltd [1950] HCA 42, where “mainly” (in the context of “wholly or principally”) was held to require a quantitative comparison. The Commissioner distinguishes this on the basis that subparagraph 26-50(3)(b)(ii) requires consideration of both “use” and being “held for use”, which he says necessitates a qualitative evaluation of the character of the property’s use. Whether this distinction withstands judicial scrutiny remains untested. However, as with many of these cases, the cost-benefit of contesting an ATO position through review or audit can make taking certain positions counter-productive, and taxpayers should weigh the strength of their factual position before relying on a purely quantitative argument.

How the ATO will assess your risk: the traffic light system

PCG 2026/3 sets out the ATO’s compliance approach using a green, amber and red zone framework.

Green zone (low risk): High income-producing occupancy (particularly during peak periods), limited personal use, prioritisation of rental income, commercial rental terms, and active attempts to maximise occupancy. The Commissioner will not apply compliance resources to green zone arrangements.

Amber zone (medium risk): Increased personal use, forgoing income so the property is available for personal use, personal use during peak demand periods, or limited attempts to rent out the property. The Commissioner may apply compliance resources.

Red zone (high risk): Blocking out peak periods for personal use, limited attempts to rent, major features inaccessible to guests, unreasonable restrictions on renters, or advertising above market rate. Red zone arrangements will attract the ATO’s attention and may proceed to audit.

How apportionment works if you qualify

If your property satisfies the “mainly” exception, you must still apportion expenses to exclude any period of private use. PCG 2026/2 sets out two accepted methods. The time-based method uses the formula: (days used to produce income + days held to produce income) ÷ 365 days × total expenses. The area-based method apportions expenses based on the floor area available to the tenant (including half of any shared common areas) relative to the total floor area of the property. A combination of both methods may also be appropriate where only part of a property is rented for part of the year.

To count as “available for rent on commercial terms” (and therefore count as days “held to produce income” in the formula), a property must be advertised in ways that give it broad exposure to potential tenants, at a rental rate comparable to similar properties in the area, and rental requests must be actively monitored. Factors that indicate a property is not genuinely available include: advertising only by word of mouth or at your workplace; blocking out peak periods for private use; setting rent above the market rate for comparable properties; placing unreasonable conditions on tenants (such as requiring references for short holiday stays or imposing “no children” rules); making parts of the property inaccessible to guests; or failing to respond to rental enquiries in a timely manner.

Practical examples from the Ruling

Not a holiday home (section 26-50 does not apply): Cho owns a Gold Coast apartment marketed solely to holidaymakers through a sharing platform. She provides guest services, takes all reasonable steps to maximise occupancy, and never reserves the apartment for private use. Because Cho does not use the property for her own holidays or recreation, it is not a holiday home and section 26-50 does not apply. Her deductions are determined under the ordinary rules in section 8-1.

Deductions allowed: Eve owns a seaside property and occasionally uses it for one or two nights per year during off-peak periods when bookings are unlikely. She never reserves it for private use. She can claim deductions, subject to apportionment.

Deductions denied:

Carla owns a beach house advertised year-round but always blocked out at Easter, Christmas, New Year and school holidays for family use. She rejects most rental applications and rents out about 5 days per year. She cannot claim ownership deductions.

Daniel and Kate block out school holidays for personal use coinciding with peak rental periods, renting only 10 to 14 days per year. They cannot claim ownership deductions, though platform fees remain fully deductible.

Anti-avoidance warning

Property owners should be aware that subsection 26-50(7) operates as an anti-avoidance provision. Where the Commissioner considers that a taxpayer has entered into a scheme to circumvent the operation of section 26-50, for example, by restructuring usage patterns or arrangements primarily to satisfy the “mainly” exception, the deduction will be denied regardless. The term “scheme” is defined broadly in section 995-1 to include any arrangement, plan, course of conduct or proposal. Critically, while the identification of a scheme is an objective matter, the question of whether it was entered into or carried out for the purpose of coming within the exception turns on the Commissioner’s judgment. This gives the ATO practical discretion in applying the provision.

Clear change in use during the income year

The Ruling also recognises that you may change the main use of your holiday home part-way through an income year. Under subsection 26-50(4), if there is a definite and sustained change in the pattern of how your holiday home is used (or held for use), such as transitioning from personal use to permanent rental, deductions will not be denied for the part of the year after that change. However, this exception requires more than a one-off use or regular seasonal variation. For example, if an owner who previously reserved peak periods for personal use permanently removes all restrictions and actively markets the property for rent, deductions may be available from the date of that clear change.

The transitional compliance approach

The ATO will not devote compliance resources to reviewing whether section 26-50 applies to expenses incurred before 1 July 2026. This is an administrative concession only. This relief does not apply where there is evidence of avoidance, fraud or evasion. The transitional approach operates in one direction only: it cannot be used to support amendment requests for prior years where deductions were not claimed.

Other implications

Where section 26-50 prevents a deduction, those expenses may form part of the third element costs of owning the asset under Division 110, relevant on eventual disposal. Investors should maintain appropriate records.

Investors should also note that renting out some or all of a main residence may compromise the main residence CGT exemption on sale.

Key actions for property investors

In light of these changes, holiday home owners who also rent out their property should consider the following:

• Review your current arrangements against the green, amber and red zone framework in PCG 2026/3. Properties with peak-period blackout periods are most at risk.
• Check your pricing and advertising – The property must be advertised at market rates with broad exposure. Unreasonable restrictions or selective refusal of bookings may impact deductions for ownership expenses.
• Keep contemporaneous records of availability, advertising, booking patterns, rental enquiries received and accepted (or refused), and location-specific peak seasons. These records are critical to demonstrating that your property was genuinely available for rent on commercial terms during unoccupied periods.
• Minimise peak-period personal use – Even modest personal use during peak periods can shift your arrangement into the amber or red zone.
• Continue to claim non-ownership expenses such as advertising, platform commissions, and post-stay cleaning.
• Track denied expenses for CGT purposes – They may form part of your cost base on sale.

Property investors who use their rental property for personal holidays, particularly during peak demand periods, should urgently review their position and ensure their arrangements are structured and documented in a way that withstands scrutiny.

Disclaimer: This article is general information only and does not constitute legal, tax or financial advice. The application of the law depends on your individual circumstances. You should seek tailored professional advice from a qualified tax adviser or lawyer before making any decisions about your property arrangements.