PCG 2025/D7: How the ATO’s Updated Guidance Changes the Game for Holiday Homes
On 12 November 2025, the Australian Taxation Office (ATO) released Draft Practical Compliance Guideline PCG 2025/D7 marking a significant shift in how the ATO applies section 26-50 of the Income Tax Assessment Act 1997 to holiday homes. This provision, originally introduced as an integrity measure, denies deductions for expenses that are essentially private in nature — particularly where properties are used for recreation rather than genuine income production.
Historically, holiday home owners could claim deductions for interest, council rates, insurance, and other holding costs, provided the property was “available for rent.” The ATO’s new stance introduces a more rigorous test of actual commercial use and limiting deductions where private use is determined to be the principal purpose of owning the property.
If you own another property that you use for holidays, it is important to review the changes to see if deductions still apply.
What PCG 2025/D7 Covers
PCG 2025/D7 sets out the ATO’s compliance approach for holiday homes that are also rented out. It introduces a risk assessment framework to help taxpayers self-assess whether their arrangements are likely to attract scrutiny under section 26-50:
Green Zone (Low Risk):
Property is genuinely income-producing.
High occupancy during peak seasons.
Minimal private use.
Evidence of commercial rental activity (e.g., realistic pricing, broad advertising).
Amber Zone (Medium Risk):
Some private use during peak periods.
Occasional blocking out of dates for personal use.
Rental activity exists but is secondary to personal enjoyment.
Red Zone (High Risk):
Property primarily used for private holidays.
Peak periods blocked for personal use.
Limited or token attempts to rent (e.g., unrealistic pricing, restrictive conditions).
Advertising alone is not enough — actual rental activity matters.
This framework reflects the ATO’s view that mere availability for rent does not guarantee deductibility. The focus is now on behaviour and intent, not just listing the property on Airbnb or similar platforms.
What’s Changed?
From Availability to Actual Use:
Previous guidance often accepted that listing a property for rent was enough to justify deductions. Under PCG 2025/D7, the ATO looks at actual occupancy and income generation, especially during peak seasons.
Introduction of Risk Zones:
The Green–Amber–Red spectrum is a practical tool for taxpayers but also signals the ATO’s enforcement priorities. Red zone arrangements will likely face denial of deductions for major costs like interest and council rates.
Transitional Relief:
The ATO has stated that they will not apply compliance resources to arrangements entered before 12 November 2025 for properties that were rental properties before 1 July 2026. This gives owners time to adjust.
Implications for Holiday Home Owners
Deductions for holding costs (interest, rates, insurance) may be denied if the property is treated as a leisure facility.
Owners must demonstrate genuine commercial intent:
Avoid blocking out peak periods for personal use.
Maintain realistic pricing and broad advertising.
Keep detailed records of rental activity.
Mixed-use properties require fair and reasonable apportionment of expenses under PCG 2025/D6.
Conclusion
PCG 2025/D7 signals a tougher ATO stance on holiday homes. If you own a property that you use for personal holidays, we would advise reviewing your situation to see if it falls into the new guidelines. Taxpayers must now prove that their property is genuinely income-producing — or risk falling into the red zone.
The information provided above is general in nature and does not take into account your specific circumstances, objectives, or financial situation. It should not be relied upon as tax, legal, or financial advice. Before acting on any information, you should consider seeking advice from a qualified professional who understands your individual circumstances.
