ATO’s New Draft Ruling Targets Short-Term Rental Deductions — Here’s What Property Owners Need to Know

If you own a holiday home or short-stay investment property, you might want to pour yourself a coffee before reading on, because the ATO just dropped a draft ruling that could seriously reshape how deductions work for short-term rentals.

With around 250,000 Australian dwellings, about 2% of our housing stock, now operating as holiday or short-stay accommodation, meaning platforms like Airbnb have become a significant part of the Australian property landscape.

Many of these properties are negatively geared, providing potentially significant tax breaks to owners and investors.

But the ATO has been watching… closely.

For years they’ve been signalling concerns about over-claimed deductions, mixed-use properties, and holiday homes that look more like private getaways than genuine income-producing assets.

Now we’ve got their updated thinking in black and white.

The ATO’s newly released Draft Ruling TR 2025/D1 aims to clarify how individuals, not running a business, must treat income and deductions from rental properties, including holiday homes and short-stay rentals.

And there are some significant implications for investors.

Below, I’ll break down what’s changed, what’s at risk, and how savvy investors can get ahead of the new rules according to KPMG tax partner Hayley Lock.

Why this ruling matters

The ATO’s updated view replaces guidance that’s been around for decades (IT 2167).

It reflects how dramatically the short-term rental market has evolved—and how much more scrutiny owners can expect moving forward.

According to KPMG tax partner Hayley Lock

“The ATO has been looking at short-stay rentals such as Airbnbs as a focus area for individual tax compliance for several years.

They’ve used this activity to gather intelligence on what people are claiming and their own views on whether those deductions for ownership costs should be allowed.

This guidance represents their updated view.

Key risks they’ve identified are not only around the time that the property is used for different activities, but a range of other factors, such as how the property is rented during peak holiday periods.”

Lock continues...

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“Anyone who is lucky enough to own a holiday rental should work with their advisory to be across this new guidance.
There are important clarifications from the ATO on their approach to deductions,” she said.

In other words, simply having the property listed online isn’t enough anymore.

The ATO is drilling deeper, looking at availability, pricing, rejected bookings, seasonal blocks, and actual rental activity to determine whether deductions are truly justified.

Key changes you need to know

KPMG highlight the following changes:

Assessable Income:

All amounts received for the use of a property must be reported as assessable income.

This includes formal lets through an agent or online platform, and any other amounts paid, even when significantly below market rate, including payments for use from friends and family members.

1. Deductibility of home ownership costs: The ruling introduces stricter limits on deductions for properties used personally by the property owner.
   If a property is classified as a “holiday home,” deductions for ownership costs (such as interest, rates, and maintenance) will generally be denied unless the property is mainly used to produce rental income throughout the year.
2. Deductions remain available for running costs of holiday homes incurred in deriving rental income: Owners can continue to claim expenses to the extent they are non-property costs and are directly incurred in producing assessable income.
   This means that some deductions for costs related to holiday homes which are partially used for personal purposes will still be available, such as advertising and agent/platform fees, and cleaning the property to the extent that this expense is directly related to deriving rental income.
   Costs which are capital, private, or domestic in nature remain non-deductible.

Impact to owners

1. Holiday Home Owners: The biggest change is for owners who mix personal and rental use.
   
   Simply advertising a property for rent is not enough - availability during peak holiday periods and actual rental activity, including owners rejecting requests to book the property, will be scrutinised.
   Owners who block out periods of peak demand, such as school holidays, may lose access to deductions for all ownership costs.
2. Proportioning expense deductions: Owners with some personal use will need to ensure that they document not only the actual running costs incurred but also the basis for any apportioned expense claims expected to justify any deductions they wish to take.
3. Family Arrangements: Renting to relatives at below-market rates still counts as assessable income, but deductions must be apportioned to reflect the non-commercial nature of the arrangement.
4. Compliance Burden: The ATO will apply a transitional compliance approach for arrangements entered into prior to 12 November 2025, but, from 1 July 2026 onwards it is likely that enforcement will tighten with a likely focus on record-keeping and evidence of genuine intent to rent the property.

Action checklist for property owners

Lock suggests that if you own a holiday home or short-term rental, here’s what you should be doing now:

1. Review Property Use: Assess whether your property is genuinely available for rent during peak periods. If private use dominates, expect deductions to be denied.
2. Plan Ahead: Maintain detailed logs of rental income, advertising efforts, booking calendars, and private use dates on a contemporaneous basis.
   If your record keeping is not sufficient, get this up to date ahead of the end of the transitional relief on 30 June 2026.
3. Apportion Deductions: Use fair and reasonable methods to split running cost expenses between private and income-producing use, and consider whether you need to change your approach to managing your ongoing tax affairs in relation to anticipated income figures.
4. Seek Advice: The ATO will be releasing detailed “Practical Compliance Guides” to support owners, however, properties with mixed personal and rental use can create complex tax and compliance obligations – seek professional advice as required.

Final thoughts

Short-term rentals have been a tax-effective strategy for many investors, but the ATO’s new stance signals a clear shift: If you want the deductions, you must show genuine commercial intent.

For strategic investors, this isn’t necessarily bad news.

It simply means:

• better documentation

• clearer decision-making

• more disciplined management

And for some, it may prompt a bigger question: Is your holiday home really an investment, or is it time to rethink its role in your portfolio?

As always, being proactive, not reactive, is what separates successful investors from struggling ones.