With the end of year break in sight, the ATO has helpfully produced a Draft Practical Compliance Guideline (PCG 2025/D7) that looks at the issue of holiday homes and what they consider deductible and what they consider non-deductible according to the behaviour patterns of their owners.

Before looking at PCG 2025/D7, it is useful to consider the top tax matters that impact property owners.

Below is a summary of these matters:

• • 1. Principal place of residence exemption

    The principal place of residence (PPR) exemption provides that, where you buy property, move in to that property as soon as practically possible, live there for six months or longer and do not own elsewhere, you do not have to pay tax on its sale in the future. Note that you can still earn rental income from a PPR in certain circumstances and maintain the exemption. Using your PPR as a home office may result in a capital gains tax liability.

    • • 2. Negative gearing

        Negative gearing is a rental property loss that, without being able to claim the interest from borrowings, would produce a profit. Rental property losses act as a deduction against your other assessable income that produces tax refunds or lowers your tax liabilities. Unlike business losses, there are no income tests to prevent you claiming negative gearing. However, rental property losses are added back to your taxable income for various thresholds in Australia’s tax and welfare systems.

        • • 3. The ATO can hold up your return

            Our taxation system is known as self-assessment. You lodge your return and the ATO processes it and assesses you in a relatively short time period, without auditing the information. However, one of the exceptions to self-assessment is rental property, particularly in the first year you declare it on your return. The ATO uses benchmarks to assess the risk that negative gearing is higher than it should be and has the ability to audit your rental property loss. If this happens, your return will take many months to be assessed by the ATO.

            • • 4. Goods & services tax

                Residential property is exempt from GST, however not commercial property. The difference between residential and commercial property depends on local council zoning. If you own a commercial property, you do not have to register for GST unless the rental income exceeds $75,000 per year. Note that not collecting GST also means forgoing GST credits, so you may be better off being registered in any event.

                • • 5. The role of State taxes

                    States have the ability to levy property taxes, such as land tax and stamp duty. Rates and exemptions vary from State to State and are important considerations when deciding to buying property. Land tax is a deductible cost against rental income, whereas stamp duty is generally a capital cost with the notable exception of the A.C.T.

                    • • 6. Rental properties are not small businesses

                        In general terms, rental properties are classified as investments and not businesses, which means they do not qualify for base rate taxation and they are not eligible for small business concessions. Depreciation of furniture and fittings in a rental property is different to depreciation of the same furniture and fittings in a small business. Renting a property through a service provider such as Airbnb does not change the status of your enterprise to a business in most circumstances.

                        • • 7. Companies versus trusts

                            Buying your second property in your own name may result in unexpected State taxes. Using a company offers the prospect of the rent being taxed at the corporate rate of 25%, but because of the ineligibility for base rate taxation, the tax rate will be 30% (with the exception of companies that earn most of its income from trading activities). For this reason, trusts have become the preferred way to purchase investment properties for families who have family members whose average tax rates are less than 25%. Note that rental property losses in a company or trust are carried forward to future years, unless they can be offset against other assessable income in the same way that individuals are allowed to do.

                            • • 8. Capital gains tax

                                Capital gains tax applies to the sale of investment properties, unless an exemption applies. If an investment property has been held for more than a year before being sold, a CGT discount of 50% will be applied to reduce the taxable profit in half. Companies are not entitled to the CGT discount, which is another reason why trusts are the preferred investment vehicle for owing second and more property. Self-managed super funds receive a CGT discount of 33.3%, however owning a property through a SMSF is complicated.

                                • • 9. Building allowance

                                    If an investment property was built or had major capital works to an existing structure after 1985, it will be entitled to a deduction known as a building allowance. Building allowances only apply to the structure and not to plant and fittings. You can commission a building allowance report from a registered quantity surveyor. The allowable rate is 2.5% per year on a prime basis. Note that building allowances are deducted from the capital cost of property when CGT is calculated.

                                    • • 10. Leaving Australia

                                        Leaving Australia before selling your investment property can have major taxation consequences, particularly the loss of the CGT discount. All properties sold in Australia must have a clearance certificate from the vendor stating whether or not they are tax residents. If you are not a tax resident, foreign resident capital gains withholding will be deducted from the sale at a rate of 15%. The fact that your real estate agent completes your declaration and states you are a resident is not determinative of your real liability until you lodge your tax return and are assessed by the ATO.

                                         

                                        Holiday homes

                                        Returning to PCG 2025/D7 with the above tax matters in mind, the ATO is concerned that holiday homes are being used for personal enjoyment rather than owned as investments. To determine whether holiday homes should receive generous tax concessions, particularly negative gearing, the ATO has devised a behaviour spectrum with a green zone (low risk), amber zone (medium risk) and red zone (high risk).

                                        Green zone behaviours include: high levels of income-producing occupancy, particularly around peak holiday seasons where the property is most desirable as a holiday destination; limited personal or other non-commercial use of the property; and attempts to maximise income from the use of the property to derive rents, lease premiums, licence fees or similar charges.

                                        Amber zone behaviours include: increased personal use of the property by the taxpayer and friends (for no cost or below market rates); using the property (or holding it as available) for personal non-income-producing use in peak income-producing periods; and limited attempts to exploit the property to gain rents, lease premiums, licence fees or similar charges.

                                        Red zone behaviours include: prioritising personal use of the property, by blocking out times for personal use each year, particularly during periods of high rental demand; major features of the property, or parts of the property rented out, are inaccessible even when the property is being used by guests; and advertising the property at a price above the market rate.

                                        Note the term ‘peak holiday season’ in the behaviour spectrum. Other than the national public holiday periods like Easter and Christmas, what this means will vary from city to city. The Gold Coast has its schoolies celebrations each year. Would it not be unreasonable to not want to rent your investment property to this demographic?

                                        PCG 2025/D7 does not apply to entities that are not individuals (companies, trusts and SMSFs) nor to individuals who use rental properties in carrying on a business.

                                        The public may provide a submission to the ATO about this draft guidance by 30 January.

                                         

                                        Due date: 30 January 2026

                                        Contact officer: Penny Hextall

                                        Email: IAIPAG@ato.gov.au

                                        Phone: 03 6221 0624

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