ATO finalises strict new tax rules for holiday homes.
(Source: Unsplash)
ATO Finalises Strict New Tax Rules for Holiday Homes
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What Has Changed?
Holiday home owners will lose lucrative tax deductions for expenses such as mortgage interest and council rates if they block out their properties for personal use during peak periods like Christmas, Easter and school holidays.
In its final ruling, the ATO has determined that owners must limit private use to minimal periods, such as a few off-season weekends, if they want to establish that the property's "main use" is to generate income rather than serve as a personal retreat. Only by demonstrating that main purpose can they retain access to the full suite of deductions.
Why the ATO Made This Change
The previous position was that so long as legitimate efforts were made to rent out a property, expense deductions could be claimed for the period the property was available for hire, even if the property was not actually tenanted. Owners had been exploiting this by advertising properties for rent during the off-season while reserving all peak holiday periods for personal use.
According to Robyn Jacobson, a senior advocate at the National Tax & Accountants' Association, there had been widespread misuse of the rule: some owners had gone well beyond blurring the lines. The ATO's revised stance is described as levelling the playing field for those who were already doing the right thing.
Tony Greco, a senior tax adviser at the Institute of Public Accountants, confirmed this ruling upends the Tax Office's approach dating back 40 years, fundamentally changing the landscape for the roughly 250,000 properties, or 2 per cent of Australia's housing stock, that are rented out as short-stay or holiday accommodation, many of them negatively geared.
The New "Mainly" Test: Quality Over Quantity
The critical shift in the ATO's new ruling is that it no longer simply counts days. Rather than applying a purely time-based definition to the term "mainly," the ATO has ruled that not all periods of the year should be considered equal.
As Tony Greco put it: the ATO is now saying both quantitative and qualitative factors apply.
The ruling specifically states that if a holiday home was advertised for rent for more than half of the days in the year, but was unavailable or not used as a rental for all or most of the time when it is desirable as a holiday destination, such as during school holidays, public holidays, or peak seasonal demand periods, this will indicate that the main use of the property throughout the year is not to produce assessable income.
📖 What do these words mean?
- Negatively geared: When the costs of owning an investment property (interest, rates, insurance, etc.) exceed the rental income it earns, creating a tax-deductible loss against other income.
- Assessable income: Income that is subject to tax and must be declared in your tax return.
- Main use test: The ATO's determination of the primary purpose for which a property is held, for income generation or personal use, which determines deductibility of expenses.
What Counts as a "Peak Period"?
Universal peak periods apply Australia-wide: school holidays, Christmas, Easter, and other public holiday clusters are treated as high-demand windows across the country.
However, the ATO has also confirmed that peak periods will vary depending on the property's location:
- A property in a coastal or resort area may experience peak demand during summer.
- A property near a ski field may have its peak demand in winter.
- A holiday home in a capital city CBD may see peak demand driven by major events, sporting fixtures, or festivals rather than school holidays.
This location-specific approach means owners need to think carefully about their property's particular context when assessing their exposure.
What Deductions Are Affected?
Holiday home owners who fail the main use test will be denied deductions for costs including:
- Mortgage interest
- Council rates and water rates
- Insurance premiums
- Body corporate fees
- Capital works expenditure
Only expenses directly and specifically connected to a guest stay will remain tax-deductible under the new rules. These include advertising costs, cleaning costs after a guest stay, booking fees, and commissions paid to platforms or agents.
When Does This Take Effect?
The ATO will adopt the new stance when assessing tax returns for the 2026–27 financial year. This means the current financial year (FY25–26) is still assessed under the previous approach, but from 1 July 2026, the new rules apply in full.
This gives holiday home owners one financial year to reassess their approach to bookings, personal use periods, and the overall economics of holding a short-stay rental property.
The Broader Market Impact
Some tax advisers have raised the possibility that this change could drive more properties onto the sales market. If owners can no longer claim the holding costs they've historically relied on to make the numbers work, and find they are unable to use the property as freely as before, the financial case for holding the asset may weaken significantly.
According to KPMG, approximately 250,000 properties, representing around 2 per cent of Australia's total housing stock, are rented out as short-stay or holiday accommodation, with a significant proportion of these negatively geared. The scale of the affected market is substantial.
What Should Holiday Home Owners Do Now?
If you own a holiday home that is also rented out as short-stay accommodation, there are several practical steps to take before 30 June and ahead of the 2026–27 financial year:
- Document your current usage pattern. Map out exactly when the property was available for genuine rental versus blocked for personal use over the past year.
- Review your peak period availability. Determine whether your property was genuinely open to rental during the high-demand windows relevant to its location.
- Quantify your at-risk deductions. Work with your accountant to identify which expense deductions are most at risk under the new main use test.
- Decide on your approach for FY26–27. If you intend to continue claiming deductions, your booking and personal use strategy will need to genuinely reflect an income-first purpose.
- Consider the broader economics. If restricting personal use significantly reduces the appeal of holding the property, now is the time to model the numbers with and without the deductions.
(Source: Unsplash)
Talk to JPR Business Group Before the Rules Change
The ATO's finalised ruling on holiday homes is a material change that affects a large number of Australian property investors. Whether your short-stay rental is in a coastal town, a ski resort area, or a city CBD, the test is now more exacting, and the stakes for getting it wrong are higher.
At JPR Business Group, we work with Melbourne property investors and business owners to ensure their tax position is not only compliant, but optimised. A conversation now, before the FY26–27 rules take effect, could make a meaningful difference to how you structure your holiday home's usage and what deductions you're entitled to claim.
Disclaimer: This blog is for general educational purposes only and does not constitute formal financial or tax advice. Tax laws and ATO rulings change regularly and vary by individual circumstances. The ATO's new holiday home ruling applies from the 2026–27 financial year. Always consult a qualified CPA at JPR Business Group regarding your specific property tax affairs.