The summer holidays are approaching. For some, they are already here! To celebrate the season the ATO has issued Draft Taxation Ruling 2025/D1 that sets out its position on income and deductions for rental properties and holiday homes. This replaces a ruling from July 1985, and also comes with two Draft Practical Completion Guidelines that sets out the ATO’s compliance approach. PCG 2025/D6 sets out the differing apportionment methods that can be used in relation to deductions, while PCG 2025/D7 applies risk ratings to the behaviours surrounding the use of holiday homes to determine if the ATO is likely to review deductions for that property.
The distinction between a rental property and a holiday home is a key element of being able to deduct costs for holding, using, operating, maintaining or repairing the property, such as interest expense and repairs and maintenance. For the purposes of the ruling, a holiday home refers to “a property that is used (or held ready for use) for your holidays or recreation (or the holidays or recreation of your family members and friends for no rent or at a reduced rate).” If the property fits this definition, then any deductions would be limited to those directly related to the renting out of the property such as agent and cleaning fees.
There is an out clause as such, with the deduction restrictions not applying where the holiday home is used, or held ready for use, mainly to produce assessable income such as rent. To determine whether is it mainly used for such a purpose, various factors need to be taken into consideration, such as the:
- way the holiday home was actually used?
- time the holiday home was dedicated to earning rental income
- time the holiday home was used or held for private purposes
- extent that the holiday home was actually available for rent during peak holiday periods, such as school holidays, public holidays or peak seasonal demand periods.
The risk ratings provided in PCG 2025/D7 align with the above factors. The higher the risk rating, the more likely the ATO will apply compliance resources to the property. A low-risk rating is unlikely to be reviewed.
A holiday home with high occupancy, very little private use (particularly during peak seasons), where it can be shown that the renting out of the property is given priority over private purposes, will fall into the low-risk zone. One of the low-risk examples given had 1 week total of private use per year during the “peak period” (not a typo-apparently there was only one peak period).
A holiday home with high occupancy, a larger amount of private use (particularly during peak periods), where there are limited attempts to maximise the rental income, will fall into the medium risk zone.
The high-risk zone applies to holiday homes with low occupancy, where private use is prioritised, with significant blockout periods, where major features of the property are not available to renters or unreasonable restrictions are placed on renters, and there are limited attempts to derive rental income, including advertising the property at above market rates.
For rental properties, or holiday homes with the main use of deriving rent, any deductions relating to holding, using, operating, maintaining or repairing the property, may not be able to be claimed in full. Where 100% of the property was not rented out, available for rent, or available for use by the tenants, only a percentage of the deduction can be claimed. This extends to any private use of the property, or if there is a blackout period where it cannot be rented.
Such an apportionment can be made based on the percentage of time the property is rented or available for rent. An apportionment can also be made based on the percentage of the property area that is rented or available for rent. It is possible that it is appropriate to use both methods to determine the percentage of the expense that is deductible. Apportionments can also apply where the type of use changes during the year.
40 years have passed between the ATO providing guidance on rental property and holiday home income and deductions, and in that time the amount of data the ATO is able to collect in relation to property usage has increased significantly during that time.
Holiday home owners may find themselves in the firing line if they over-use their properties during peak demand periods. Unfortunately, there’s not too much guidance on what over-use is!
Please contact Ross Prosper if you would like to discuss the ATO’s views and risk zones.