TR 2025/D1: The ATO redefines tax treatment of holiday rentals

The release of Draft Taxation Ruling TR 2025/D1 signals a significant shift in how the Australian Taxation Office (ATO) applies section 26-50 of the Income Tax Assessment Act 1997 (ITAA 1997) to residential properties that sit on the boundary between private use and income production.

For property investors, particularly those using short-term or holiday-letting platforms, the ruling makes clear that many properties historically treated as standard investment properties may no longer qualify for the full range of rental property tax deductions.

A tighter interpretation of section 26-50

Section 26-50 denies deductions for assets that are characterised as leisure facilities where they are used for private recreation. Historically, the exception within section 26-50, where an asset is used or held mainly to produce assessable income for the entire income year, allowed many short-term rentals to be treated as ordinary investment properties.

TR 2025/D1 significantly narrows this exception. The ATO now proceeds on the basis that a holiday home is a leisure facility unless proven otherwise. The onus rests with the property owner to demonstrate sustained commercial use.

Importantly, owner intention and gross rental income are not determinative. The assessment is objective, evidence based and focused on how the property is actually deployed throughout the year.

Rental presence versus rental dominance

The ruling draws a clear distinction between being available for rent and being commercially deployed.

Properties with lifestyle characteristics, such as intermittent private use, owner access during peak periods, blocked calendars, limited marketing or passive booking management, are likely to be characterised as leisure assets, even if they are advertised for much of the year.

Availability is not measured by the number of days a property is listed. A property may appear broadly available yet fail the test if peak demand periods are consistently reserved for private use.

By contrast, genuine rental properties demonstrate:

• consistent availability to the market
• commercially realistic pricing
• active management focused on maximising occupancy across the entire year, including peak periods.

The ATO's position is clear: incidental rental income does not convert a lifestyle asset into an investment property.

Tax deductions under section 26-50

Once section 26-50 applies and a property is classified as a leisure facility, ownership-based tax deductions are denied. This includes depreciation deductions, which are linked to holding the property rather than the act of earning income. TR 2025/D1 expressly confirms this distinction.

While rental income remains fully assessable, various deductions may be denied in full. Some variable expenses, such as platform fees, advertising and cleaning costs incurred solely because income is earned, may still be deductible under section 8-1.

Evidence will determine outcomes

The accompanying Practical Compliance Guideline PCG 2025/D6 reinforces that availability must be genuine, pricing commercial and management must be active, with claims supported by objective evidence.

Rental dominance may need to be demonstrated through documentation such as:

• booking calendars
• platform screenshots
• pricing comparisons
• enquiry and booking records
• management instructions.

To maximise depreciation deductions, properties must be commercially deployed across the financial year in a way that clearly evidences sustained market availability and active management.

What investors should do next

Although TR 2025/D1 is still in draft form, it reflects the ATO's current compliance position. Transitional treatment applies to arrangements in place before 12 November 2025, with increased scrutiny expected from 1 July 2026.

For investors with holiday homes, the ruling redraws the boundary between an investment property and a leisure or lifestyle asset. Short-term rentals are now assessed on how the property is used and made available throughout the year, not simply on the income earned. Access to property tax depreciation depends on rental dominance, not merely the presence of rental income.

For expert advice on the depreciation deductions available for your short-term rental property or holiday home, contact BMT Tax Depreciation on 1300 268 628 or Request a Quote.