Rental properties remain a popular investment, but the ATO has made it clear that tax compliance in this area is under closer review. The release of Draft Taxation Ruling TR 2025/D1 in November 2025 marks a shift in how rental income and deductions are assessed, particularly for short-term and mixed-use properties.
Understanding these changes is essential to protecting returns and avoiding compliance risks.
The updated guidance reflects changing investment behaviour, the rapid growth of short-term accommodation platforms such as Airbnb, and increased ATO concern around mixed-use and holiday homes. For many property owners, these changes will directly affect how income is declared, how deductions are claimed, and how closely arrangements may be scrutinised.
What Is TR 2025/D1 and Why Has the ATO Introduced It?
TR 2025/D1 provides updated guidance on how rental income and deductions should be treated for individuals who earn rental income but are not operating a rental property business. It applies to both:
- Long-term residential rentals, and
- Short-term arrangements such as holiday homes and short-stay accommodation.
Importantly, TR 2025/D1 replaces the long-standing Taxation Ruling IT 2167, which had been in place since 1985 and is now withdrawn. The ATO’s new position is notably more restrictive than the previous guidance.
The ATO’s objectives are clear:
- Clarify what constitutes assessable rental income
- Tighten the rules around allowable deductions
- Address compliance risks where properties are used for both private enjoyment and income generation
The key message for property owners is that intention, behaviour, and evidence now matter more than ever. The ATO is focusing on how a property is actually used not how it is labelled.
All Rental Income Must Be Declared
One of the clearest messages in TR 2025/D1 is that all rental income must be declared, regardless of the form or structure of the arrangement.
Assessable income includes:
- Rent from long-term tenants
- Short-term or holiday rental income
- Income earned through agents or online platforms
- Lease premiums and licence fees
- Rent charged at below-market rates, including to family or friends
Charging discounted rent does not remove the requirement to declare income. While some household contributions (such as shared expenses with family members) may not be assessable, payments for the right to occupy a property will generally be treated as rental income.
Stricter Rules for Holiday Homes and Short-Term Rentals
Holiday homes and short-term rental properties are a major focus of the new guidance.
Under TR 2025/D1, a property may be classified as a “leisure facility” under section 26-50 of the ITAA 1997. Where this applies, deductions for property holding costs such as interest, council rates, and insurance may be denied unless an exception applies.
The ATO will assess whether a property is genuinely used mainly to produce rental income, based on factors including:
- The number of days rented versus private use
- Whether the property is available during peak demand periods
- Whether rent is set at market rates
- Whether bookings are genuinely accepted
Properties blocked out for personal use during school holidays or peak seasons, or priced unrealistically to discourage bookings, are at higher risk of being treated as lifestyle assets rather than income-producing investments.
Mixed-Use Properties and Apportionment of Deductions
For properties with both private and rental use, accurate apportionment of expenses is essential.
TR 2025/D1 reinforces that deductions must be claimed only to the extent they relate to earning assessable income. Private or domestic costs remain non-deductible, even if the property is rented at other times of the year.
To support compliance, the ATO has released Draft PCG 2025/D6, which outlines acceptable apportionment methods, including:
- Time-based apportionment (days rented versus private use)
- Area-based apportionment (where only part of the property is rented)
- Combined methods for more complex arrangements
Blanket estimates are unlikely to be accepted. Claims must be supported by clear records and evidence.
ATO Compliance Approach for Holiday Homes
Draft PCG 2025/D7 introduces a risk-based compliance framework for holiday homes under section 26-50.
The ATO classifies properties into three risk zones:
- Green (low risk): Mostly rented, minimal private use
- Amber (medium risk): Increased personal use, some income foregone
- Red (high risk): Primarily private use with limited or token rental activity
No single factor determines risk. The ATO will consider the overall pattern of use, including commercial exploitation, pricing, availability during peak periods, and the extent of private enjoyment.
Transitional Compliance Relief
The ATO has acknowledged that its views on section 26-50 were not previously public. As a result, it has provided transitional compliance relief.
The ATO will not devote compliance resources to expenses incurred before 1 July 2026, where:
- The arrangement was entered into before 12 November 2025, and
- The expenses relate to holiday homes now affected by section 26-50
This provides property owners with time to review and adjust their arrangements.
Practical Implications for Property Owners
These changes significantly raise the importance of:
- Detailed record-keeping of rental and private use
- Evidence of market-based pricing
- Genuine availability for rent during peak periods
- Using ATO-approved apportionment methods
Property owners who treat their properties more like holiday homes than investments should expect greater scrutiny and a higher risk of denied deductions and penalties.
Conclusion: Why Property Owners Should Act Now
The release of TR 2025/D1 and the accompanying compliance guidelines marks a clear shift in the ATO’s approach to rental properties, particularly holiday homes and short-term rentals.
Historic assumptions about deductions may no longer apply, especially where private enjoyment overlaps with income generation. Now is the time for property owners to review their rental arrangements, assess whether income and deductions align with the new guidance, and seek professional advice where uncertainty exists.
Acting early can help protect cash flow, reduce audit risk, and ensure your investment remains both tax-effective and compliant as the ATO finalises its position.
Source: ATO
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