If you own a holiday home, the ATO may deny your rental deductions under section 26-50 if personal use outweighs genuine income-producing use. The ATO now applies a clear risk-based framework to decide when this rule applies.
Why this matters for holiday home owners
The ATO has released Draft Practical Compliance Guideline PCG 2025/D7, setting out how it will apply the leisure facility rules in section 26-50 of the ITAA 1997 to holiday homes.
In plain English:
If your holiday home looks more like a lifestyle asset than a genuine rental investment, the ATO may deny deductions for losses and expenses – even if you earn some rental income.
We’re already seeing this come up in reviews for clients with coastal and regional properties across NSW, particularly where personal use hasn’t been tightly managed.
What are the leisure facility rules?
Section 26-50 denies deductions for losses or outgoings that relate to a leisure facility, unless a specific exception applies.
Historically, there was uncertainty about when a holiday home crossed the line into being a leisure facility. PCG 2025/D7 is the ATO’s attempt to clarify how it will assess risk and allocate compliance resources.
Importantly, this guideline:
- Applies only to individuals
- Does not apply where the property is used in the course of carrying on a business
- Does not apply to companies or trusts (though other rules may still apply)
The ATO’s risk framework: green, amber and red zones
The guideline introduces a colour-coded risk framework that looks at how the property is actually used, and not just how it’s described in your tax return.
Green zone (low risk)
Typical behaviours
- High levels of income-producing occupancy
- Particularly strong rental use during peak holiday seasons
- Property is genuinely desirable as a holiday rental destination
- Limited personal or non-commercial use
ATO compliance approach
The Commissioner would not generally apply compliance resources to consider section 26-50.
What this looks like in practice
One of our clients with a South Coast holiday home achieved green-zone comfort by:
- Restricting personal stays to off-peak periods
- Using market-rate listings year-round
- Keeping clear booking and availability records
Amber zone (medium risk)
Typical behaviours
- Increased personal use by the taxpayer, family or friends (often free or below market rates)
- Forgoing rental income when the property is available for personal use
- Using the property (or holding it available) for personal, non-income-producing use during peak rental periods
- Limited attempts to generate income through rent, lease premiums or licence fees
ATO compliance approach
The Commissioner may apply compliance resources to consider whether section 26-50 applies.
Our advice
Amber-zone properties are where proactive structuring and documentation matter most. This is often where we step in to:
- Review booking patterns
- Assess “fair and reasonable” apportionment methods
- Identify defensible positions before the ATO asks questions
Red zone (high risk)
Typical behaviours
- Personal use is prioritised by blocking out prime rental periods each year
- Only limited or token attempts to rent the property
- Major features (or parts) of the property are unavailable to paying guests
- Unreasonable restrictions are placed on renters, leading to low occupancy
- No genuine attempt to increase occupancy or rental income
- Advertising the property at above-market rates
- Limited or no effort to derive rent, lease premiums, licence fees or similar charges
ATO compliance approach
These arrangements will attract ATO attention and may lead to further analysis, audits or adjustments under section 26-50.
How the ATO assesses “fair and reasonable” deductions
While PCG 2025/D7 focuses on risk, it interacts closely with PCG 2025/D6, which outlines acceptable apportionment methods, including:
- Time-based methods
- Area-based methods
- A combination of both
If you adopt an alternative approach, the burden is on you to demonstrate that it is fair and reasonable in your specific circumstances.
This is where poor records, casual bookings, or “we could have rented it” arguments often fall apart.
Key takeaways for holiday home owners
- Earning some rent does not automatically protect your deductions
- Personal use during peak periods is a major red flag
- The ATO is looking at behaviour, not intentions
- Documentation and booking evidence are critical
- Individual owners face the highest scrutiny under this guideline
How C&N Accountants can help
At C&N Accountants, we regularly advise clients across Parramatta, Western Sydney and regional NSW on holiday home tax risks.
We help by:
- Reviewing your usage against ATO risk zones
- Stress-testing your deduction position before lodgement
- Advising on defensible apportionment methods
- Supporting clients during ATO reviews or audits
If you’re unsure where your holiday home sits under the new ATO framework, talk to us before the ATO does.
This article is general information only and does not constitute tax advice. Always seek professional advice tailored to your circumstances.