Holiday homes and short-stay rentals: why the ATO is taking a closer look

The ATO has sharpened its focus on holiday homes and short-stay rental properties, particularly where owners are claiming deductions while also using the property themselves.

With the rise of Airbnb and other short-term accommodation platforms, more property owners are earning income from properties that are not traditional long-term rentals. In response, the ATO has released new guidance aimed at clarifying when income must be declared and when deductions can be claimed.

The message is clear. If a property is being used partly to earn income and partly for private enjoyment, the tax treatment may not be as generous as many owners expect.

Why this matters

Many property owners assume that if a holiday home is listed for rent, the usual property deductions will follow. That is no longer something the ATO appears willing to accept without closer examination.

The ATO is focusing on whether the property is genuinely being used to produce income, or whether it is really being held mainly for private lifestyle purposes. Where private use is significant, some of the larger deductions, such as loan interest, council rates and insurance, may be reduced or denied.

This is particularly relevant for owners who keep the property available for themselves, family or friends during peak holiday periods while renting it out only at other times.

Rental income still needs to be reported

Where a property earns income, that income generally needs to be declared. This includes amounts received through booking platforms, agents or direct arrangements with guests.

It also extends to situations where family or friends pay to stay at the property. Even if the amount charged is below market rates, the ATO may still treat the payment as rental income depending on the arrangement.

In short, informal arrangements are not automatically outside the tax net.

Deductions depend on how the property is actually used

The key issue is whether the expenses being claimed genuinely relate to earning assessable income.

If a property is used entirely as an investment property, the position is more straightforward. However, where there is a mix of rental use and private use, deductions must be reduced to reflect that split.

This can happen where:

• the property is only rented for part of the year

• the owner uses it personally during certain periods

• family and friends stay there without paying market rates

• only part of the property is rented out

The ATO expects expenses to be apportioned on a fair and reasonable basis in these cases.

Holiday homes are a particular focus

The ATO is especially concerned about holiday homes that are marketed for short-stay accommodation but are really being kept primarily for private use.

A property is more likely to attract scrutiny where it is unavailable for rent during school holidays, summer periods, long weekends or other peak times because the owner wants to keep it for personal use.

That sort of pattern may suggest that income production is secondary and that the property is really being held as a lifestyle asset. If that view is taken, some holding costs may not be deductible.

An example of where issues can arise

Consider a coastal property that is advertised for rent for much of the year, but the owners block out Christmas, New Year and school holiday periods for themselves and their relatives. While the property may still earn some income, the ATO may question whether it is truly being held mainly to produce rental income.

If the most valuable times of the year are reserved for private use, that may weigh against the owner when claiming deductions.

The ATO’s compliance focus

The ATO has indicated that it will look at the overall facts and circumstances of each case.

Properties are likely to present lower risk where they are consistently marketed, genuinely available for rent at commercial rates and only used privately on a limited basis.

Risk increases where there is substantial private use, frequent blocking out of prime periods, non-commercial pricing, or only limited rental activity. In those cases, the ATO is more likely to challenge the deductions claimed.

Good records are essential

Owners of holiday homes and short-stay rental properties should ensure they have proper records to support their tax position.

This includes evidence of:

• when the property was available for rent

• when it was actually rented

• when it was used privately

• how the rent was set

• whether bookings were accepted or declined

• how expenses were apportioned

The stronger the records, the easier it is to support the position taken in the tax return.

A sensible time to review existing arrangements

These developments are a timely reminder for property owners to review how their holiday home or short-stay rental is being used.

A property that has historically been treated as an income-producing asset may no longer qualify for the same level of deductions if private use is prominent. In some cases, changes may be needed to the way the property is managed, rented or documented.

Final thoughts

The ATO’s latest guidance reflects a broader compliance push in the short-stay rental market. Holiday homes that have a private element are now firmly under the spotlight.

Simply listing a property online is not enough. What matters is whether the property is genuinely being used in a commercial way to produce income, and whether the deductions claimed match that level of income-producing use.

If you own a holiday home or short-stay rental property and would like advice on how these rules may apply to you, please contact us.