If you own a holiday home that you occasionally rent out, new draft guidance from the Australian Taxation Office (ATO) could change the way you report rental income and claim deductions.

The ATO is taking a closer look at properties that are primarily used for personal holidays, yet still generate substantial tax deductions. Their draft guidance clarifies how to determine whether your property is considered a “holiday home” under existing tax rules, and what that means for your claims.

What’s changing?

The key issue is the tax law’s “integrity rule,” which limits deductions when a property is mainly for private use. The draft guidance sets out how to assess whether a holiday home falls under this rule, and how to apportion expenses between private use and income-producing periods.

This includes detailed advice on:

• Declaring rental income correctly.
• Claiming deductions fairly.
• Renting to family or friends at discounted rates.
• Using reasonable methods to split expenses.

For example, if your holiday home is rented for half the year and used privately for the other half, you can typically claim 50% of general expenses, such as interest, utilities and insurance.

Introducing a risk zone system

To help taxpayers understand how the ATO views different scenarios, the guidance includes a traffic-light risk system:

Green: Low-risk situations, such as consistent commercial rentals.

Amber: Medium-risk, where there’s substantial private use alongside rental.

Red: High-risk cases where the property is mostly used personally, with minimal or non-commercial rental activity.

Properties in the red zone are more likely to attract ATO scrutiny, as they may be seen as lifestyle assets rather than genuine investment properties.

What should you do?

Although the guidance is still in draft form, the ATO intends to apply it retrospectively once finalised. Under the new guidance, the ATO will not use compliance resources to review deductions for holiday rental properties before 1 July 2026, provided the expenses were incurred, or an arrangement for those expenses was made, before the guidance was released on 12 November 2025.

Now is a good time to:

• Honestly assess how your holiday home is used.
• Review past claims for deductions.
• Keep clear records of rental periods, vacant times, and personal use.

We’re here to help you understand what these changes could mean for your situation and how to stay compliant while making the most of your legitimate deductions.

Contact our team for assistance with reviewing your claims or planning ahead.