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Holiday homes: New framwork, new risks

Many Australians own, or aspire to own, holiday homes. These properties often serve multiple purposes, providing rental income, lifestyle benefits and, in some cases, a future retirement destination. Recent guidance from the Australian Taxation Office (ATO) has introduced a new framework for assessing the deductibility of holiday home expenses. This module explores the ATO’s new approach and the potential implications for clients who own holiday homes.

 

The new ATO approach to holiday homes

In May 2026, the ATO released its new ruling and guidance on the tax treatment of holiday homes.
The ATO’s updated approach is outlined in:

  • Taxation Ruling TR 2026/1 ‘Income tax: rental property income and deductions for individuals who are not in business’ (TR 2026/1).
  • Practical Compliance Guideline PCG 2026/3 ‘Application of section 26-50 of the Income Tax Assessment Act 1997 to holiday homes that you also rent out – ATO compliance approach’ (PCG 2026/3).

The guidance is particularly relevant given the increasing popularity of short-term accommodation platforms, which have enabled many taxpayers to generate rental income from properties that are also used for personal holidays and recreation.
While it has long been accepted that expenses associated with rental properties may be deductible, TR 2026/1 highlights that special rules may apply where a property is also a holiday home.

A leisure facility

Central to the ATO’s analysis is the concept of a holiday home as a type of leisure facility.
Holiday home refers to a property, which is a type of leisure facility, that is used (or held 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) (ATO 2026c).
For these purposes, a property may include land, a building, part of a building, or another structure used or held for holiday or recreational purposes.
The ruling further explains that:

  • a holiday refers to a vacation or period spent away from work for recreation
  • recreation includes amusement, sport and similar leisure activities.

Holiday homes as leisure facilities

At first glance, this definition appears relatively straightforward. However, the classification of a property as a holiday home, and therefore a leisure facility, is significant because section 26-50(1) of ITAA 1997 may deny certain deductions relating to the property unless an exception applies.
A holiday home is generally acquired or retained because it provides recreational or lifestyle benefits tothe owner and their family. While the property may be rented to third parties for periods of the year, it is also typically used by the owner, family members or friends for holidays or recreation. It is this recreational purpose that leads the ATO to characterise the property as a leisure facility.
Importantly, a property does not cease to be a holiday home merely because it generates rental income. Many holiday homes are advertised on short-term accommodation platforms and may be rented to paying guests for substantial periods during the year.

Factual assessment

Determining whether a property is a holiday home requires an objective assessment of the facts and circumstances. This involves examining the pattern of use over time, including periods when the property is occupied by the owner, family members or friends, as well as periods when it is vacant or available for rent.

Example: Allan and Janessa’s holiday home

Allan and Janessa live permanently in Brisbane and own a house in Agnes Waters, Queensland. For much of the year, they advertise the house through an online accommodation platform and rent it to paying guests.

However, the property is reserved for Allan, Janessa, and their children during school holidays and other family holidays throughout the year.

Despite generating rental income, the Agnes Waters property remains a holiday home because it is retained, at least in part, for the recreational use of Allan, Janessa, and their family.

The existence of rental income does not, by itself, change the character of the property as a holiday home.

Why the classification matters

The classification of a property as a holiday home does not automatically result in the denial of deductions. However, it is an important first step in determining the tax treatment of expenses associated with the property.
As discussed in the next section, special deduction rules apply to certain expenses associated with holiday homes. Whether those expenses remain deductible depends on several factors, including whether the property is used mainly to produce assessable income.

Useful resources

Special deduction rules

Once a property is classified as a holiday home, the next step is determining how subsection 26-50 applies to expenses associated with the property.
Unlike ordinary rental properties, holiday homes may be subject to special rules that restrict deductions for certain expenses.
If your rental property is also your holiday home, certain deductions relating to holding it will be denied because it is a leisure facility (under subsection 26-50(1)) unless an exception applies (ATO 2026c).
For many taxpayers, rental property deductions are based on the principle that expenses incurred in earning assessable income are deductible. However, subsection 26-50 modifies this position for certain leisure facilities.
Broadly, the provision seeks to prevent taxpayers from claiming deductions for the costs of holding assets that are primarily retained for private enjoyment or recreation. As a result, the tax treatment of a holiday home differs from that of a conventional investment property that is acquired solely to generate rental income.
Importantly, subsection 26-50 does not deny all deductions associated with a holiday home. Instead, the provision focuses on particular categories of expenses and whether an exception applies.

Ownership and use expenses

A deduction may be available for ownership and use expenses where the holiday home is used, or held  for use, mainly to produce assessable income.
Common examples of ownership and use expenses include the following:

However, not all expenses associated with a holiday home are treated as ownership and use expenses.
For example, booking platform fees, advertising costs and cleaning fees incurred when renting the property are not ownership and use expenses. As a result, these expenses are generally not subject to the same restrictions and may remain deductible to the extent they are incurred in earning rental income.

Example: Michael’s coastal apartment

Michael owns a holiday apartment on the Gold Coast that is advertised through an online accommodation platform.
During the income year, Michael incurs the following expenses:

  • Interest on his investment loan: $18,000.
  • Council rates: $2,200.
  • Insurance: $1,000.
  • Cleaning costs: $2,500.
  • Booking platform commissions: $1,800.

The interest, rates and insurance are ownership and use expenses that may be affected by subsection 26-50. By contrast, the cleaning costs and booking platform commissions are not ownership and use expenses and are generally deductible to the extent they relate to the rental activity.

The importance of the income-producing exception

The mere existence of rental income does not automatically mean that ownership and use expenses are deductible.
Instead, subsection 26-50 requires consideration of whether the holiday home is used, or held for use, mainly to produce assessable income.
This is often the most challenging aspect of applying the provision. A holiday home may generate substantial rental income while still being retained primarily for the private enjoyment of the owner and
their family.
Conversely, a property that is genuinely operated as an income-producing asset may qualify for the exception and allow deductions for ownership and use expenses.
Determining where that line is drawn requires a detailed examination of the facts and circumstances surrounding the property’s use. TR 2026/1 and PCG 2026/3 provide guidance on the factors the ATO considers relevant in making this assessment. The operation of this exception is explored in the next section.

Applying the ‘mainly’ test

Determining whether a holiday home is used, or held for use, ‘mainly’ to produce assessable income is often the most challenging aspect of applying subsection 26-50.
TR 2026/1 makes clear that there is no single factor that determines whether a holiday home is used mainly to produce assessable income. Instead, the assessment requires consideration of all of the relevant facts and circumstances surrounding the property’s use.

A qualitative assessment

A common misconception is that the test can be satisfied simply by ensuring the property is rented for more than half of the year. However, TR 2026/1 rejects a purely quantitative approach.
While rental days may be relevant, a broader range of factors must be considered. This requires an objective assessment of how the property is used, or held for use, throughout the year.

Factors considered by the ATO

A number of factors are relevant when determining whether a holiday home is used mainly to produce assessable income. These include:

  • The way the holiday home is actually used.
  • How much time the holiday home was dedicated to income-producing use.
  • How much time the taxpayer used the holiday home for their own private use, or for potential private use for themselves, family or friends.
  • How often the holiday home is available or used as a rental at times when the use of the property is desirable for holiday pursuits (such as during school holidays, public holidays, or peak seasonal demand periods).

No single factor is determinative and the relative importance of each factor will depend on the circumstances of the particular property.

Peak demand periods

One of the recurring themes throughout both TR 2026/1 and PCG 2026/3 is the significance of peak demand periods.
For many holiday homes, a substantial proportion of annual rental income may be earned during school holidays, public holidays and other peak tourism periods. Consequently, reserving a property for private use during these periods may indicate that the property is being retained primarily for personal enjoyment rather than income production.

The ATO also considers whether a property is genuinely available for rent on commercial terms, particularly during periods of peak demand.

Example: Josh’s use during peak periods

The ATO’s guidance includes several examples illustrating how the “mainly to produce assessable income” test operates in practice. The following example is adapted from the ATO’s example involving Josh (ATO 2026b).

The beach house

Josh owns a beach house on the south coast of New South Wales. He advertises it for short-term rental accommodation throughout much of the year. Accordingly, the property derives rental income and is available for rent during a range of periods.
However, Josh and his family use the beach house during the Christmas school holidays, Easter and other popular holiday periods. These are the times when demand for holiday accommodation is generally at its highest and when the property has the greatest potential to generate rental income.
By reserving the property for private use during the periods when it is most commercially valuable, Josh is limiting the property’s ability to generate assessable income. This is a significant factor in determining whether the property is used mainly to produce assessable income.

Considerations

  • As Josh uses the beach house for his and his family’s holidays and recreation, it is a holiday home.
  • Regarding the overall pattern of use, the beach house is not mainly being used (or held for use) to produce assessable income. Instead, the property is retained primarily for Josh’s personal enjoyment and recreation.

Outcome

Josh must include any rental income derived from the beach house in his assessable income.
However, subsection 26-50 operates to deny deductions for any ownership and use expenses associated with Josh’s beach house.
Note: The existence of rental income alone is insufficient to satisfy the income-producing exception. The “mainly to produce assessable income” test requires a holistic assessment of the property’s use, including private occupation, commercial availability and the treatment of peak demand periods.

Applying the ATO’s compliance framework

Having established the factors relevant to the “mainly to produce assessable income” test, the next question is how the ATO will assess the risk associated with a particular arrangement.
PCG 2026/3 provides a practical framework that assists taxpayers in understanding the types of holiday home arrangements that are likely to attract greater compliance attention.

ATO’s traffic light risk framework

PCG 2026/3 categorises holiday home arrangements into three risk zones: green, amber and red.
Importantly, the risk zones do not determine whether deductions are available. The question remains whether the holiday home is used, or held for use, mainly to produce assessable income. The risk zones indicate the level of compliance risk associated with an arrangement and the likelihood that the ATO may seek further information or devote compliance resources to reviewing a taxpayer’s claims.

  • Green zone: Represents lower-risk arrangements. This typically includes behaviours such as limited personal use, genuine commercial rental activity, availability during peak demand periods and active efforts to maximise rental income.
  • Amber zone: Medium-risk arrangements, including greater private use or restrictions on availability, particularly during peak periods.
  • Red zone: Represents high-risk arrangements, including significant private use by the owner or their family, restrictions on bookings during peak periods and patterns of occupation suggesting that recreation is being prioritised over income production.

Example: Natalie’s ski lodge

Natalie owns a holiday apartment in a popular snow location. The apartment is advertised for short-term accommodation throughout the year and is available to paying guests during both peak and off-peak periods.
During the income year, Natalie:

  • responds promptly to all rental enquiries
  • does not place unreasonable restrictions on renting the property
  • charges rental rates comparable to similar properties in the area
  • uses the property for a one-week holiday during the peak season.

Outcome

Natalie actively manages the property to maximise rental income and her private use is incidental. Although the apartment remains a holiday home, it is mainly used (or held for use) to produce assessable income.
Accordingly, the exception in subsection 26-50 applies and Natalie may claim deductions for ownership and use expenses associated with the apartment, subject to any required apportionment for private use.
This example demonstrates that a property can be both a holiday home and an income-producing asset. The critical issue is not whether the owner ever uses the property privately, but whether, viewed
objectively, the property is mainly used, or held for use, to produce assessable income.

Interaction with negative gearing reforms

TR 2026/1 and PCG 2026/3 determine whether deductions for ownership and use expenses are available in relation to a holiday home. Separate rules may affect how any resulting rental losses are treated.
Following the enactment of the negative gearing reforms, changes to the negative gearing rules will apply to certain residential investment properties from 1 July 2027.
Importantly, these reforms do not alter the operation of subsection 26-50 or the “mainly to produce assessable income” test. Instead, they operate separately and only become relevant after determining whether ownership and use expenses are deductible.

Conclusion

The ATO’s new guidance places renewed emphasis on whether a holiday home is used, or held for use, mainly to produce assessable income. As a result, the existence of rental income alone is no longer sufficient to assume that ownership and use expenses will be deductible.
A holiday home may generate rental income and still fail the income-producing exception, where the overall pattern of use demonstrates that private recreation is the dominant purpose.
Understanding both the principles in TR 2026/1 and the compliance framework in PCG 2026/3 will become increasingly important when discussing holiday homes with clients who hold or aspire to hold these assets.

References

Australian Taxation Office (ATO) 2026a, Practical Compliance Guideline PCG 2026/3 “Application of section 26-50 of the Income Tax Assessment Act 1997 to holiday homes that you also rent out – ATO compliance approach”, 20 May, Australian Government, viewed 23 June 2026 from <https://www.ato.gov.au/law/view/document?DocID=COG/PCG20263/NAT/ATO/00001&PiT=99991231235958#H11>.
Australian Taxation Office (ATO) 2026b, “Holiday homes”, 21 May, Australian Government, viewed 19 June 2026 from <https://www.ato.gov.au/individuals-and-families/investments-and-assets/property-and-land/holiday-homes>.
Australian Taxation Office (ATO) 2026c, Taxation Ruling TR 2026/1 “Income tax: rental property income and deductions for individuals who are not in business”, 20 May, Australian Government, viewed 23 June 2026 from
<https://www.ato.gov.au/law/view/document?DocID=TXR/TR20261/NAT/ATO/00001&PiT=99991231235958#H48>.

Legislation

Income Tax Assessment Act 1997 (Cth)

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