ATO’s New Ruling on Rental Property Deductions
What rental property owners need to know before the June 2026 enforcement deadline.
The Australian Taxation Office (ATO)’s new draft ruling, TR 2025/D1, clarifies how individuals who are not carrying on a rental business must treat income and deductions from residential investment properties.
This update represents the most substantial shift in rental property tax treatment in decades, and it's crucial that property owners understand what's changing and how to stay compliant. The new rules are designed to ensure that deductions are only claimed when properties are genuinely being used to earn rental income, not primarily for private enjoyment.
Below, we've outlined the key changes.
Key Takeaways
All rental income must be declared, including below-market rent to family and friends.
Holiday homes and short-stay properties face tighter deduction rules—simply listing online isn’t sufficient.
Mixed-use properties must apportion expenses based on actual rental use vs private use.
Transitional relief applies until 30 June 2026, allowing time to adjust record-keeping.
Genuine availability for rent must be demonstrated to claim ownership costs like interest and rates.
Understanding the New Draft Ruling
The ATO has withdrawn its longstanding rental property ruling IT 2167 and replaced it with a new Draft Taxation Ruling TR 2025/D1, which provides updated guidance for individuals who are not in business but earn income from rental properties.
This change took effect from 12 November 2025.
The new draft ruling affects all types of rental arrangements, including:
Long term rentals
Short stay accommodation (e.g., Airbnb)
Holiday homes
Partly rented homes (renting out one or more rooms)
All Rental Income Must Be Declared
Under the new draft ruling, every amount you receive for renting out your property must be reported as assessable income, even if:
It's rented to friends or family at a discount
It's booked informally
It's below market value
This includes income from online platforms and any "mates rates" arrangements.
Stricter Deduction Rules for Holiday Homes and Short-Stay Properties
The ATO is tightening its approach to deductions for holiday homes and mixed use properties. Deductions for ownership costs (such as interest, rates, and insurance) may be denied if:
The property is used mainly for private purposes
The property is not genuinely available for rent
Availability is restricted during peak periods (e.g., school holidays)
Owners decline reasonable booking requests
Simply listing the property online is not sufficient to prove it is genuinely available.
Mixed-Use Properties Must Apportion Expenses
If the property is used for both private and income-producing purposes, you can only claim deductions that relate to the rental portion.
This means expenses must be apportioned on a fair and reasonable basis, taking into account:
Actual private use
Days genuinely available for rent
Days actually rented
Common examples requiring apportionment:
Mortgage interest
Council rates
Insurance
Utilities
Some Expenses Remain Fully Deductible
Even with the stricter rules, certain costs are still deductible to the extent they relate directly to rental activity, including:
Advertising and listing fees
Cleaning and linen after guests
Agent or platform commissions
Repairs related to rental use (not private use)
Important note: If the rent is charged below market value (for example, to family or friends), deductions for these expenses may be limited to the proportion of market rent, rather than the full amount.
New Practical Compliance Guidelines (Draft)
Alongside the draft ruling, the ATO has released draft Practical Compliance Guides (PCGs) that explain:
How the ATO will check deductions
How to apportion expenses
What evidence owners need to keep (e.g., booking records, private use logs, advertising history)
These guidelines will help property owners understand when the ATO is more or less likely to review their claims.
Transitional Relief Applies Until June 2026
The ATO will allow a transition period until 30 June 2026 before stricter enforcement begins, giving owners time to adjust their record-keeping and rental practices.
What You Should Do Now
To remain compliant under the new draft rules, we recommend:
Reviewing your current rental arrangements
Ensuring the property is genuinely available for rent if deducting ownership costs
Keeping detailed and accurate records of private use vs rental use
Confirming all rental income is declared
Reviewing how you apportion expenses for mixed-use properties
If you would like us to review your property's deductibility position or help you prepare for the new ATO requirements, please reach out to your MGD Tax team.
References
Australian Taxation Office: Income Tax: Rental property income deductions for individuals who are not in business
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