Do you rent out property short-term – an Airbnb, holiday home, or even a room in your house – or plan to? If so, this one’s for you.
In November, the Australian Taxation Office (ATO) released a new draft ruling, TR 2025/D1 – Income tax: rental property income and deductions for individuals who are not in business.
Along with two practical guidelines (PCG 2025/D6 and PCG 2025/D7), the ruling more clearly and strictly explains how the ATO expects you to handle income reporting, claiming deductions and assessing private use for short-term rentals.
Here’s what you need to know.
Income and reporting for short-term rentals
TR 2025/D1 makes income and reporting on rental properties simple: if you’re paid to use your place, it’s income. Short-stay guests, long-term tenants, even mates or family getting the ‘friends’ discount’ – whatever the rental period, it all counts.
If money changes hands, you need to report it as a tax obligation to the ATO. And, yes, even when you’re charging short-term rental income way below market rates.
Income you need to report (you might not expect)
- Your cousin stays for $50 a week while saving for their own place
- A short-term guest pays for a weekend stay in your spare room
- A long-term tenant contributes to rent for a room in your house
- A family friend pays a discounted rate to stay for a month
- A colleague rents your garage for storage
- A lodger pays for board while living with you
Deductibility of expenses for short-term rentals
When it comes to deductible expenses, the ruling on short-term rentals says you can only claim expenses that relate to earning rental income.
If your property is used for both renting and personal use, you can’t claim the full cost. Instead, you must apportion the expenses.
In other words, work out what percentage of the costs relates to the rental side and only claim that portion. This includes any time you or your family use the property personally. You’ll need clear records to justify how you split it fairly.
Possible deductible rental expenses
- Property running costs – Council rates, water charges, land tax
- Loan and finance costs – Interest on loans, lender fees
- Property management fees and admin – Agent fees, advertising for tenants, accounting or bookkeeping costs, postage and stationery
- Repairs and maintenance – Fixing broken appliances, plumbing, fencing, painting, cleaning costs, and general upkeep
- Tax depreciation – Decline in value of assets like carpets or appliances, and capital works deductions for buildings or renovations
- Insurance – Landlord, building or contents insurance related to the rental
- Utilities and services – Electricity, gas, cleaning services (if you pay for them)
Deduction denials for holiday homes
Certain deductions for ownership costs (such as mortgage interest, rates and maintenance) can be denied if your property is a holiday home mainly used for private leisure or recreational enjoyment.
In PCG 2025/D7, the ATO has made it easier to see where your holiday home sits when it comes to tax deductions.
The new guidelines outline how private use can limit your claims and introduce a risk-based framework so you can self-assess before lodging.
Green–Amber–Red risk spectrum
Green zone (low risk):
- Your property is clearly rented out, with evidence like booking records, rental agreements and advertising
- Most or all expenses claimed relate directly to earning rental income
- You’re unlikely to attract ATO scrutiny
Amber zone (medium risk):
- Your property is used both for personal holidays and for renting
- Some expenses are shared between private and rental use
- The ATO may ask for justification or adjust deductions
Red zone (high risk):
- Your property is mainly used for personal enjoyment
- Deductions claimed on tax return are high or inflated compared to rental income
- You’re at significant risk of an ATO review or denial of deductions
Compliance ramp-up and relief
This new draft ruling and guidelines mean we’re likely going to see more ATO audit activity focused on rentals and holiday homes.
However, because requirements around short-term rentals and holiday homes were not previously expressed, the ATO has said it won’t be chasing compliance where:
- The property was already a rental before 1 July 2026
- The rental arrangement was in place before 12 November 2025
In other words, if you were already renting out your property under existing arrangements, you won’t be penalised for past activity. But you’ll need to follow the new rules for any future rentals.
Keep your short-term rentals in check
While this ruling and guideline are only at the draft stage, we recommend you do the following for any short-term rentals arranged after the dates above:
- Report all income – Even discounted stays or short-term rentals
- Apportion expenses correctly – If the property is used for both rental and private purposes
- Keep clear records – Booking logs, rental agreements, invoices and evidence of private use
- Check genuine rental availability – Advertise properly, charge market rates, and don’t block peak holiday periods for personal use
- Use the Green–Amber–Red framework – To self-assess risk before lodging deductions
These smart actions will help keep you out of any potential ATO strife.
