ATO Draft Guidance Signals Major Shift for Short-Term Rental Accommodation Owners

The Australian Taxation Office (ATO) has released new draft guidance that significantly narrows when tax deductions can be claimed for holiday homes and investment properties used for short-term rental accommodation (STRA).

The ATO has issued three draft publications:

- Draft Taxation Ruling TR 2025/D1 - rental property income and deductions for individuals not in business

- Draft Practical Compliance Guideline PCG 2025/D6 - how to apportion deductions for mixed-use properties

- Draft Practical Compliance Guideline PCG 2025/D7 - how the ATO will apply the "leisure facility" rules to holiday homes

According to Miss Craig-Jones, Executive Director of the Short Term Accommodation Association Australia (STAAA), the draft guidance represents a substantial change in how STRA properties are treated for tax purposes.

"This draft guidance represents a significant shift from long-standing ATO interpretations and has serious implications for short-term rental accommodation owners across Australia," Miss Craig-Jones said.

Holding cost deductions at risk

Under section 26-50 of the Income Tax Assessment Act 1997, the ATO considers many holiday homes to be "leisure facilities". Where this applies, property holding costs such as interest, council rates and insurance may be denied, unless the property is used or held mainly to produce assessable rental income.

This approach is more restrictive than previous ATO guidance (IT 2167 from 1985, now withdrawn).

"Many STRA owners who have previously claimed deductions in good faith may now find those deductions at risk, despite earning rental income during the year," Miss Craig-Jones said.

What counts as assessable income

The ATO confirms that all rental income must be declared, even where:

- rent is discounted for family or friends

- bookings are informal or platform based

- rent is below market rates

Payments that are merely contributions to shared household expenses may not be assessable, but payments for a lease or licence to occupy generally are.

Holiday homes and 'main use'

Whether a property is considered a holiday home depends on the facts and circumstances, including:

- how often it is rented versus used privately

- whether peak periods (such as school holidays or seasonal demand) are blocked for personal use

- whether market-based pricing is applied

For example, a property that is unavailable for rent during peak holiday periods may be treated as a leisure facility, placing key deductions at risk.

"The ATO's focus on 'main use' means that even limited personal use during peak periods could have disproportionate tax consequences for STRA owners," Miss Craig-Jones said.

Transitional relief

The ATO has acknowledged that this interpretation has not previously been clearly stated. As a result, it will not apply compliance action before 1 July 2026 for arrangements entered into before 12 November 2025, giving property owners time to adjust.

Compliance risk zones (PCG 2025/D7)

The draft guidance introduces a risk-based framework:

- Green (low risk): Mostly rented at market rates, minimal private use

- Amber (medium risk): Increased personal use and reduced income during peak periods

- Red (high risk): Primarily personal use with limited or token rental activity

Apportioning deductions (PCG 2025/D6)

Where properties have mixed private and income-producing use, the ATO accepts:

- time based apportionment

- area based apportionment

- combined methods for more complex arrangements

Call for submissions

These rulings and guidelines are currently in draft form. STRA property owners, operators and industry participants are strongly encouraged to make a submission to the ATO before the consultation closes on 30 January 2026.

Under the draft guidance, many STRA owners may face denial of deductions where properties are used personally or unavailable for rent during peak periods, even if rental income is earned during the year.

"This is a critical opportunity to ensure the practical realities of short-term rental accommodation are properly understood and considered before the guidance is finalised," Miss Craig-Jones said.

This represents a significant shift from previous ATO guidance and creates new uncertainty for STRA owners across Australia.

You can Have Your Say here:
https://www.ato.gov.au/about-ato/ato-advice-and-guidance/advice-under-development-program/advice-under-development-income-tax-issues

Contact us:

Short Term Accommodation Association Australia (STAAA)
Email: contact@staaa.org.au
Website: https://staaa.org.au

About the Short Term Accommodation Association Australia (STAAA):

The Short Term Accommodation Association Australia (STAAA) is the national peak body representing Australia's short-term rental accommodation (STRA) industry.

Dedicated to supporting STRA owners and operators and advancing best practice, STAAA provides a united national voice to protect members' interests, strengthen industry standards and contribute positively to Australia's visitor economy and broader tourism industry.

https://staaa.org.au

This release was published on openPR.