NICK BRUINING: The taxman is coming for you and those deductions on your ‘rented’ holiday home

A new draft tax ruling has put holiday homeowners on notice: If you’re not genuinely trying to rent your holiday home, those generous deductions you pocket will be denied.

Released quietly late last year, the ruling — known as TR 2025/D1 — provides updated guidance on how the Australian Taxation Office looks at income, availability, and other factors in determining whether tax deductions can be claimed.

In many cases, holiday homeowners effectively “split” the availability of the home between private use and when it’s available for rent.

Under existing tax laws, deductions on a property can be claimed when it is available for rent, whether or not there is an occupant and it is generating an income.

But H&R Block director of tax communications Mark Chapman said some of the old techniques used to claim deductions on holiday homes were now under scrutiny.

“Listing a property alone does not automatically make all holding costs deductible,” Mr Chapman said.

“In practical terms, this ruling means tighter record-keeping, more careful apportionment, and ensuring the tax deduction claims reflect actual usage, rather than the intention.”

A common scenario used by many is that the holiday home is used by the owner over Christmas, Easter and other major holidays, meaning it is really only available for paying customers during “off-peak” periods.

For example, of 52 weeks in a year, six weeks may be for private use, and the property is available for “commercial” use for 46 weeks of the year.

That means the owner might apportion the annual expenses and claim 46 weeks of the 52 — or 88.5 per cent of all the expenses — as a tax deduction. That might include interest costs, rates, utilities, insurance, and other expenses typically claimed by property owners.

In effect, it becomes an attractive negative gearing scenario. The effective losses on the holiday home can be claimed against the owner’s other taxable income, thereby reducing their annual tax bill.

This exact example is included in the draft ruling using “Daniel and Kate”, their two school-aged kids, and a beachside holiday house in a summer tourist hotspot as the subjects, and effectively shuts down this strategy.

“The house is a holiday home and is not mainly used to produce rental income,” the ATO draft said.

“Daniel and Kate must include any rent derived from the house in assessable income but will be prevented from deducting any losses and outgoings to the extent they relate to the ownership of the house.”

North Perth chartered accountant Adam Panizza said in a practical sense, passing the scrutiny of the ATO would involve some relatively simple steps.

“I would be making sure that the property is not blocked out for private use during peak periods,” Mr Panizza said.

“That would include major public holidays but also school holidays. Also make sure that the property is not advertised at above-market rates, having regard to the location and the time of year.”

Similarly, a holiday home that generates ongoing tax losses year after year or one that has restricted advertising and promotion might also attract the ATO’s attention.

And don’t forget, the ATO has access to data from sites like AirBnB and Stayz.

Nick Bruining is an independent financial adviser and a member of the Certified Independent Financial Advisers Association