Do you own a holiday home that you sometimes rent out? The ATO has just released draft guidance that could change how you claim your holiday home rental income and expenses. The updates specifically target situations where properties are used mainly for personal holidays but owners still claim substantial tax deductions.

The tax law contains an “integrity rule” that stops you from deducting expenses for a property that’s essentially for your personal use. The new draft guidance clarifies how to work out if your property’s considered a holiday home under this rule, and how much you can legitimately claim.

The draft guidance also explains how you should declare rental income and claim deductions for rental properties, including holiday homes, addresses when a property is a “holiday home” for tax purposes and considers common scenarios like renting to family or friends at reduced rates.It outlines what the ATO considers fair and reasonable methods to split expenses between income-producing use and private use; for example, if your holiday home’s rented out half the year and you use it for the other half, you can claim roughly 50% of general costs like interest, utilities and insurance as deductions.

Finally, the guidance introduces a traffic-light system of risk zones. “Amber” covers medium-risk scenarios where you rent the property but also use it personally for a significant part of the year. “Red” covers high-risk arrangements where the property’s mostly used by you or your family, with infrequent or non-commercial rentals. If you’re in the red, the ATO will suspect the property’s mainly a lifestyle asset rather than a genuine income-producing investment, and will be more likely to investigate or challenge your claims.

While these rules are drafts right now, the ATO plans to apply them retrospectively once they’re finalised, with a transitional compliance approach for arrangements in place before 12 November 2025.

Take an honest look at your holiday home usage and review your past claims. Improve your record-keeping by maintaining a log of rental periods, vacant periods and personal use dates. We can help assess how the rules might affect your specific circumstances and ensure you’re maximising your legitimate deductions while staying compliant with the ATO’s expectations.