Late last year, the Australian Taxation Office (ATO) released new draft guidance explaining how tax applies to rental properties and holiday homes.
This replaces rules that were last updated in 1985 and reflects the ATO’s much greater ability to see how properties are actually used.
A key update is the distinction between a rental property and a holiday home. The ATO defines a ‘holiday home’ as a property used by the owner/s and their friends/family for holidays or recreation, either for free or at a reduced rate. In this situation, the deductions you can claim are very limited.
In most cases, you can only claim costs that directly relate to renting the property out, such as agent commissions or cleaning fees, while expenses like loan interest, repairs and general upkeep are not deductible.
These limits do not apply if the property is primarily used to earn rental income. The ATO looks at how the property is actually used over the year, including how often it is rented, how much private use occurs, and whether it is genuinely available for rent during peak times such as school holidays and public holiday periods. Merely listing the property online is not enough if it is frequently blocked out or priced so high that bookings are unlikely.
To support this approach, the ATO has introduced a risk-rating system that shows how likely it is to review deductions claimed for a holiday home.
Low risk: Properties that typically have high rental occupancy, very little private use (particularly during peak periods), and clear evidence that renting the property is prioritised over personal use. One ATO example involved only one week of private use during a peak period across the entire year.
Medium risk: Properties that generally have good occupancy but also have a larger amount of private use, especially during peak periods, and limited efforts to maximise rental income.
High risk: Properties that usually have low occupancy and significant private use, with long blackout periods, restrictions on what renters can use, or pricing that is well above market rates. In these cases, private use is clearly prioritised over earning rent.
Even where a property is mainly used to earn rental income, it does not automatically mean all expenses can be claimed in full. If the property is used privately at any time, is unavailable for rent for part of the year, or is only partially available to tenants, deductions generally need to be reduced. This reduction may be based on the time the property was rented or available for rent, the portion of the property available to tenants, or sometimes a combination of both. If the use of the property changes during the year, the deductible amount may change as well.
This update comes 40 years after the last detailed ATO guidance in this area, and during that time the amount of data available to the ATO has increased dramatically. As a result, holiday home owners who make heavy personal use of their properties, particularly during peak demand periods, may find themselves under closer scrutiny. The challenge is that the ATO has not clearly defined how much private use is too much, making careful record-keeping and conservative claims more important than ever.
If you have any concerns in this area, please contact your advisor.