iscover What the new ATO guidelines mean for holiday home owners
TaxThe ATO’s tax ruling on rental property income and deductions is raising questions around definitions, compliance, and communication.
Finalised on 20 May 2026, the ATO’s updated definition of rental properties in Taxation Ruling TR 2026/1 and Practical Compliance Guideline PCG 2026/3 differentiates between leisure and income generation regarding primary intention, with likely effects come tax time. Considering the categorical difference a few weeks of use makes, Pitcher Partners is urging home owners not to assume deductions will be accepted.
As said by the ATO, properties don’t need to be in a traditional holiday location to be considered – even urban apartments may fall under the definition of a “leisure facility” if use aligns, meaning owners must honestly assess and report how the property is used.
A property identified as a leisure facility is not eligible for any cost claims such as mortgage interest, council rates, land tax, maintenance, or asset depreciation – and importantly, apportionment is not available if the property is rented or hired to third parties for part of the year.
Only expenses relevant to the generation of rental income – advertising, platform commissions, cleaning costs for guest stays – can be claimed.
As reported earlier this year, CA ANZ identified potential complexity and compliance burdens the drafted TR2025/D1 may create, calling for a change to a proposed retrospective application.
In the finalised TR 2026/1, the ATO said it will not review expenses incurred before 1 July 2026 and highlighted a general concessional approach, much like with a range of taxation changes commencing in the new financial year.
However, it said that this will not apply to larger transgressions, such as fraud or evasion.
Pitcher Partners also suggested erring on the side of caution when it comes to holiday homes in a family trust. While the guidance is geared towards individuals, the ATO’s current definition of a leisure facility could be relevant if the property held by a trust is used for recreation by the beneficiaries or controllers.
As part of this definition, a specific anti-avoidance rule applies should a trust charge family members a low rate for the purpose of avoidance.
While no single factor is determinative, the accompanying PCG 2026/3 introduced a three-tier risk framework to help owners categorise property use and compliance, which ranks activities ranging from low risk – limited personal use of the property during peak periods and high occupancy throughout the rest of the year – to higher risk – sustained personal use during peak periods and limited attempts to rent the property or unreasonable restrictions on guests.
As reported earlier this year – and before the new definition was official – CA ANZ tax leader Susan Franks noted, in a letter to the ATO, that “there will need to be a very widely and highly publicised campaign about this change of approach to ensure that tax practitioners and taxpayers are not caught unawares”.
In its submission, the body stressed the need for education to reach the necessary broad audience, but whether the information has reached the relevant masses remains to be seen, with less than a month until the new definition officially applies.
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Amelia is a Professional Services Journalist with Momentum Media, covering Lawyers Weekly, HR Leader, Accountants Daily and Accounting Times. She has a background in technical copy and arts and culture journalism, and enjoys screenwriting in her spare time.