Highlights

  • The ATO released rulings and guidelines on 20 May 2026 covering rental property income, deduction apportionment and holiday homes.
  • Holiday homes not mainly used to earn income lose deductions for interest, rates, body corporate fees and depreciation.
  • Advertising, cleaning after guest stays, and booking fees and commissions remain deductible even when the holiday home test is failed.
  • Negative gearing and CGT changes start 1 July 2027, replacing the 50% discount with indexation plus a 30% minimum tax.

"Your tax return isn't the place for guesswork," ATO Assistant Commissioner Anita Challen said in April, and few areas test that line like a holiday home rented to guests. Under ATO guidance released in May, the property must be "mainly used" to earn assessable income, or interest, rates and depreciation can be denied entirely. With 2025–26 returns due by Monday 2 November for self-preparers, owners listing on Airbnb or another booking platform have little time to check where they stand.

The ATO's new rental guidance

On 20 May 2026 the ATO released three pieces of guidance. TR 2026/1 is a public ruling on rental property income and deductions for individuals who are not in business. PCG 2026/2 sets out the ATO's compliance approach to apportioning rental deductions. PCG 2026/3 covers how section 26-50 of the Income Tax Assessment Act 1997 applies to holiday homes that are also rented out.

The guidance applies to short-term rentals through online platforms as well as long-term rentals. A ruling sets out the Commissioner's view of the law, and a practical compliance guideline explains how the ATO will approach compliance. Neither is new legislation.

What counts as a holiday home

The ATO defines a holiday home as property used, or held for use, for holidays or recreation by the owner or their family and friends. Section 26-50 deals with leisure facilities, which include holiday homes.

The ATO's newsroom page puts no number on "mainly" and refers readers to the ruling and guideline for practical examples. The rule bites hardest on properties mixing family holidays with paid stays.

Deductions lost, and deductions kept

If the test is failed, the ATO says interest, council and water rates, body corporate fees, capital works deductions and the decline in value of depreciating assets are denied. For a property bought with a large loan, interest is often the biggest cost.

Costs tied directly to renting to guests survive: advertising, cleaning after a stay, and booking fees and commissions. The rental income itself is still assessable. A mainly income-producing property can have a small period of private use, such as a week in the off-season with no bookings, but expenses must be apportioned and nothing can be claimed for the private period.

What it looks like in dollars

Take a hypothetical owner, Priya, whose coastal holiday home earns $20,000 in bookings in 2025–26. Holding costs total $34,500: interest $24,000, rates $3,500, body corporate fees $2,000, capital works $4,000 and decline in value $1,000. Guest-related costs total $4,700.

If the test is failed, the $34,500 is denied and she deducts only the $4,700, leaving taxable net rental income of $15,300. If the home is mainly income-producing but her family uses it for four weeks, she apportions. On a simple time basis, 48/52 of $34,500 is about $31,846, producing a net rental loss of about $16,546. The swing is about $31,846 in deductions, and actual apportionment should follow the ATO's guidance.

Records and bigger changes ahead

Because the test turns on actual use, booking histories, availability calendars, advertising and pricing records, and notes of private stays can help. Where a holiday home is jointly owned by people not in business, income and deductions are generally split by legal interest.

Separately, the negative gearing and CGT changes are now law. Negative gearing will be limited to new builds, with properties held at 7:30pm AEST on 12 May 2026 grandfathered. The ATO's page does not explain how those changes interact with the holiday home rules, so owners of established holiday homes bought after budget night may face both sets from 2027.