Renting out your shack or holiday home and also using it privately? your tax deductions may be at risk

This is the time of the year when many Australian’s head off to their holiday home or shack to spend time with their friends and family. Given the steep rise in property prices, it is common for owners to rent out their holiday homes to help subsidise the significant holding costs of retaining them.  

What might surprise you is the Australian Taxation Office (ATO) has issued a new draft ruling that would significantly reshape how holiday homeowners can claim tax deductions. The changes, outlined in Draft Taxation Ruling TR 2025/D1, aim to curb over-claimed expenses on properties that blur the line between private use and genuine income generation. 

What’s Changing? 

Under the ATO guidance, deductions for ownership costs such as loan interest, council rates, land tax, and insurance will be denied if the property is used by you for holidays or recreation. Deductions for these expenses will be denied even if the property is mainly used to produce rental income throughout other times of the year. This reflects enforcement of an existing provision in the Tax Act and aligns with the ATO’s increasingly stringent stance on compliance. The ATO is focusing on peak periods such as Christmas, Easter, and school holidays as a key indicator of genuine commercial intent. Properties not offered for rent during these times may be deemed primarily for personal use, triggering the denial of major deductions. 

Why the Crackdown? 

The ATO has flagged widespread over-claiming on holiday homes that function more as private retreats than income-producing assets. With around 250,000 properties operating as short-stay accommodation in Australia, the tax office is drawing a clear line between genuine commercial rentals and personal leisure properties.  

When Will It Apply? 

The draft ruling is open for comment, but enforcement is expected to tighten from 1 July 2026, following a transitional compliance period.  

Bottom Line:  

Importantly, keep in mind this is only guidance at this point, but if it makes it into the final version, owners will need to reconsider how they will treat future deductions.  

For the time being, talk to us for advice if you own a holiday home that you use part privately and part for investment purposes to understand the impact of this proposed change on your situation.