ATO ruling TR 2025/D1 puts holiday-home interest, rates and land tax deductions at risk from 1 July

This article is general information only and does not constitute financial or tax advice. Consult a qualified tax professional for advice specific to your situation.

This article is general information only and does not constitute financial, tax, or investment advice.

There are 12 days between today and EOFY. The biggest piece of rental-property tax news for the 2026 lodgement season is not a budget measure, an APRA buffer change or a state stamp duty tweak. It is a draft ATO ruling that quietly withdrew a 41-year-old position last November and reverses the starting presumption on whether a holiday home counts as a rental at all.

TR 2025/D1 is the draft. The transitional compliance approach in its Appendix 2 carries the old position through to 30 June 2026. From 1 July, the new approach applies. Here is what the ruling does, how it fits the broader tax time 2026 picture, and what a leveraged Australian landlord should be doing in the next two weeks.

What TR 2025/D1 actually says

The ATO released TR 2025/D1 on 12 November 2025, titled "Income tax: rental property income and deductions for individuals who are not in business". It is the operational restatement of how the ATO will assess rental property income, deductions, apportionment and the treatment of holiday homes for individual landlords. On the same day, the ATO withdrew IT 2167, the ruling that had run since 1985.

The general structure of TR 2025/D1 looks familiar. Rental income is assessable when derived. Deductions for expenses are available to the extent the property is producing assessable rental income, with apportionment for any period of private use or any portion not commercially let. Repairs are immediately deductible. Capital improvements are deductible over 40 years at 2.5% under Division 43.

The structural change is in the section on holiday homes. The draft ruling proceeds on the basis that a holiday home is a 'leisure facility' for the purposes of subsection 26-50(1) of the ITAA 1997 unless the owner proves otherwise. Under section 26-50, expenses incurred in providing or maintaining a leisure facility are not deductible at all, full stop, even against rental income earned in the periods the property was let.

The ATO's own framing is direct. A rental property will constitute a leisure facility where the private use of the property is prioritised over income generation, and occasional rental activity is not enough to change that conclusion if the overall use reflects a predominant personal or recreational purpose.

This is the inversion. Under IT 2167, the practical test ran the other way. An owner had to establish that the property was reserved for private use rather than commercially let. Under TR 2025/D1, the owner has to establish that the property is genuinely a rental rather than a leisure asset.

The deduction categories at risk

For a holiday home that fails the new test, the deductions denied include the largest line items on a typical schedule.

• Interest: at the June 2026 cash rate of 4.35% and major bank investor variable rates sitting in the mid-6% range, interest is the single largest claim on most leveraged rental schedules. On a $700,000 investor loan at 6.5%, that is around $45,500 of interest a year.
• Council rates: typically $2,500 to $5,000 a year for a coastal or regional holiday property.
• Land tax: state-dependent, but a Victorian holiday home valued at $1.5 million can attract $10,000 or more annually under the current absentee surcharge regime.
• Insurance: $2,500 to $6,000 for the building and landlord cover combined.
• Body corporate fees: where applicable, typically $4,000 to $12,000 per year for an apartment.

Lose the interest claim alone on the example above and a 37% marginal rate taxpayer is out of pocket roughly $16,800 in tax effect per year that previously offset other assessable income.

What remains deductible against actual rental income in the periods the property was let is the direct cost of letting: agent fees, cleaning, consumables, repairs incurred and depreciation. These are usually a fraction of the holding cost. A negative-gearing strategy on a holiday home that relies on the interest claim collapses if section 26-50 bites.

The evidence the ATO wants

The ruling shifts the burden onto the owner. The ATO's practical compliance language asks for evidence of sustained commercial use. The shape of that evidence, drawn from the draft's wording and consistent ATO guidance on rental property:

• A written agency agreement with a property manager that lists the property for rent at advertised market rates broadly consistent with comparable nearby properties.
• Booking records that demonstrate the property was genuinely available for the periods the owner was not occupying it.
• Evidence that periods of private use, including stays by family members at concessional rates, were properly identified and excluded from the deduction claim.
• Marketing on platforms like Airbnb, Stayz or Booking.com that runs continuously rather than only outside owner-use windows.
• Rates set at market levels rather than artificially high to discourage bookings.

The Pitcher Partners summary of the draft puts the point bluntly: under the new ruling, the more time the property sits available but unrented while the owner could be using it, the harder it is to escape the leisure-facility classification.

How TR 2025/D1 sits next to the broader tax time 2026 push

The ATO's tax time focus areas for 2025-26 keep rental property at the top of the list, alongside work-from-home claims, side-hustle income and multiple income sources with capital gains. The Random Enquiry Program continues to find about nine in ten rental returns contain at least one error, including returns lodged through a registered tax agent. The ATO has been disclosing that figure for several years now and it has not budged.

The specific categories the ATO has flagged as recurring problems for 2026:

• Interest after loan redraws. If a rental loan has been redrawn for private purposes, the interest on the redrawn portion is not deductible. The ATO's residential investment property loan data matching program pulls loan-level data from the big four banks plus Macquarie, ING, Bendigo, Bank of Queensland, Bankwest, ME Bank and Suncorp, covering 1.7 million individuals a year through the 2025-26 income year. The program already sees loan balances, redraws and refinances.
• Repairs versus capital improvements. The repair-versus-improvement test is the single most contested call on a rental schedule. A like-for-like replacement of a broken item is a repair. An upgrade or replacement that materially improves the asset is a capital improvement, deductible at 2.5% over 40 years under Division 43.
• Depreciation on plant and equipment. For second-hand residential property acquired after 9 May 2017, Division 40 plant and equipment that was already installed at the time of purchase is no longer depreciable for individual investors. Only assets the current owner installs after purchase qualify. Division 43 capital works at 2.5% on post-18-July-1985 construction is unaffected and remains the larger half of most schedules.
• Short-term letting income. Airbnb, Stayz, Booking.com and other platform income flows to the ATO under the Sharing Economy Reporting Regime that turned on for all asset-letting platforms from 1 July 2024. The ATO sees the income, the address, the booking count and the gross take. Deductions must be apportioned for any periods of personal use.

The data infrastructure layered on top of the new ruling is the bit that changes the audit risk profile. With loan data, bond data and short-term platform data all matched at scale, the ATO's pre-filling is the audit trigger. Returns that depart from the matched data set themselves on a review list.

What the macro picture means for the EOFY position

The cyclical position is not friendly for a leveraged holiday-home owner. The RBA held the cash rate at 4.35% on 17 June 2026, after three 25 basis point hikes earlier in the year. Big four investor variable rates sit in the mid-6% range. Holiday letting demand, on Cotality and SQM's tracking, has been softer through 2026 as discretionary travel budgets tighten. Capital values on coastal and regional second-home markets have lagged the capital cities through this leg of the cycle.

A holiday home that ran a positive cash flow on a 2.5% cash rate in 2021 can be deeply negative at a 4.35% cash rate in 2026. The deduction stack was the structural offset. If TR 2025/D1 takes the interest claim away, the after-tax economics of the asset change quickly.

That is the calculation worth running in the next two weeks. On a holiday property that has run at, say, 30 weeks of bookings a year and 8 weeks of owner use, the question is whether the bookings, advertised rates and management arrangement add up to 'sustained commercial use' that survives the new leisure-facility presumption. If yes, the evidence file is the priority. If no, the strategic question is whether to professionalise the letting arrangement before 1 July, sell the asset, or accept a higher after-tax holding cost from the 2026-27 financial year onward.

What a long-term tenanted rental needs to do differently

A garden-variety long-term rental in a Sydney, Melbourne or Brisbane suburb is largely outside the leisure-facility risk. The continuous tenancy on a 12-month lease at market rent is the answer to that question. The exposure for a long-term landlord under TR 2025/D1 is narrower and centres on three issues:

• Periods of vacancy between tenants. If a long-term rental sits vacant for more than a routine reletting window, deductions for that vacant period need to be supported by evidence the property was genuinely available for rent at market rates. Listings, agent records and lowered rents over extended vacancy periods are the relevant evidence.
• Family or 'mates rates' lettings. Renting to family at below market rates restricts deductions to the rent actually charged. The ATO's position under TR 2025/D1 is consistent with the existing law but the audit attention on these arrangements has tightened.
• Mixed use. Properties that are tenanted for part of the year and personally used for another part need clear documentation of the rental period, with deductions apportioned accordingly.

For most long-term residential investors, the bigger 2026 risk is still the interest-after-redraw issue, repairs-versus-improvements and depreciation schedule discipline. TR 2025/D1 does not change those rules. It tightens the operational language and lines up with the data matching that already runs in the background.

The 30 June checklist

Working backwards from 30 June 2026, an investor's tax time 2026 prep list looks like this:

1. Loan reconciliation. Pull every redraw, refinance and offset movement on the rental loan for the year. Apportion any private-purpose portion out of the interest deduction. The ATO already sees the loan-level data.
2. Repairs versus improvements review. For every item over $300 charged to the rental, decide whether the item restores the asset to its prior condition (repair, immediate deduction) or improves or replaces the asset (capital, Division 43 at 2.5% over 40 years or Division 40 for plant and equipment installed by the current owner).
3. Depreciation schedule. For any property purchased or substantially renovated in the past 18 months without an existing schedule, engage a registered quantity surveyor before 30 June. The catch-up Division 43 claim on a recent build is typically tens of thousands of dollars in the first year.
4. Short-term platform reconciliation. Pull the gross income reports from Airbnb, Stayz and Booking.com. Match them to the income declared. Apportion expenses for any owner-use weeks.
5. Holiday-home evidence file. For any property with a holiday letting pattern, build the file the ATO now expects under TR 2025/D1: agency agreement, advertised rates, booking log, owner-use log, marketing screenshots, photos.

The lodgement risk on a 2025-26 holiday-home return runs hot. The data is matched. The ruling is new. The Random Enquiry Program is still finding nine in ten returns wrong. Get the documentation right or expect the call.

How Propkt helps

Propkt's property management platform is built for Australian landlords running the numbers under exactly these conditions. The mortgage calculator lets you stress-test the after-tax holding cost at 4.35%, 4.85% and 5.10% cash-rate scenarios. The expense tracker categorises every transaction against the ATO's rental deduction schedule so the repairs versus improvements call is documented as you go, not reconstructed at June 30. The rent management module captures every booking and payment in one place, ready to match against the ATO's pre-fill.

If TR 2025/D1 has you reviewing a holiday-home or mixed-use position, that is the decision the next 12 days are made for. The 2025-26 lodgement window opens on 1 July and runs through the back half of the year. Run the numbers now. Build the evidence file now. Let your accountant lodge from a defensible position rather than a hopeful one.