Holiday home owners prepare for tax changes

Many farming families purchase a holiday home as an off-farm investment that they can sometimes retreat to. 

When the farm schedule permits, your family can visit to unwind and enjoy quality time together, away from the constant demands of life on the land. For the majority of the time, when you’re busy on the farm, it’s a steady stream of passive income.

In recent years, the thriving short-stay rental market has made holiday homes an increasingly attractive investment. The tax savings associated with negative gearing also play a role. By allowing interest and other costs to offset rental income, it is much more feasible for farmers to purchase properties in competitive coastal markets.

Unfortunately for current and prospective holiday-home-owners, the Australian Taxation Office (ATO) has updated its stance on the taxation of these properties.

Historically, owners of investment properties could claim deductions for periods when their property was genuinely available for rent at market rate. If the property was used by the owner, their family, or rented below market rates, deductions were reduced for those periods to match the income earned. Most considered this approach to be fair and straightforward.

However, in recent years, the ATO has ramped up audits and reviews, paying close attention to owners who report losses from short-term rentals.

The ATO is particularly concerned with arrangements where owners take actions that limit the property’s commercial earning potential, such as:

• Blocking out peak holiday periods for personal use.
• Discouraging bookings by restricting access to parts of the property.
• Setting rental prices well above market rates.
• Renting to family and friends below market value. 

These actions reduce earning potential and raise questions about whether the property is genuinely available for rent as a commercial investment.

Now, the ATO has classified some holiday homes as a ‘leisure facility,’ which brings a new set of tax implications for owners.

Tax treatment will now depend on the property’s main use. If generating rental income is prioritised over personal use, the previous tax rules will continue to apply. However, if the property is mainly for personal use and therefore not mainly used to generate rental income, the property will be classified as a ‘leisure facility,’ meaning any rent received is still taxable, but ownership expenses like interest, insurance, rates, and other holding costs will no longer be deductible.

The ATO’s new position represents a significant change in the tax treatment of holiday home investments and will apply from 12 November 2025 to all new arrangements and from 1 July 2026 for arrangements entered into prior to 12 November 2025.

Determining the main use of the property under the ATO’s new ruling can be complicated. Holiday home owners are strongly encouraged to seek professional advice to help ensure they structure their arrangements such that their deductions remain valid and that the advantages of holding a holiday home are preserved.

To understand how these ATO changes may affect your holiday home, contact your local RSM agribusiness specialist today.

This article was first published on ACM Farm Weekly.