Holiday homes after TR 2026/1: when renting out isn't enough?
On 20 May 2026, the Commissioner finalised Taxation Ruling TR 2026/1, Income tax: rental property income and deductions for individuals who are not in business (Ruling). The Ruling replaces Taxation Ruling IT 2167 (withdrawn on 12 November 2025) and complements two related Practical Compliance Guidelines: PCG 2026/2 (apportionment of rental property deductions) and PCG 2026/3 (application of section 26-50 to holiday homes).
TR 2026/1 largely restates orthodox principles on the assessability of rental income and deductibility of expenses under section 8-1 of the Income Tax Assessment Act 1997. The Ruling does, however, mark a notable shift in the Commissioner's position on holiday homes. For the first time (apart from the draft ruling), the Commissioner takes the view that section 26-50 (the leisure facility provision) denies ownership-type deductions for holiday homes that owners also rent out, unless an exception applies.
The Commissioner acknowledges this shift. Appendix 2 to the Ruling concedes that "views on section 26-50 have not previously been publicly expressed in relation to rental properties" and that taxpayers "may have entered into arrangements that may fall under section 26-50 without realising" the provision applied. The Ruling offers a transitional compliance approach for expenses incurred before 1 July 2026.
This article examines the most important aspects of the Ruling: the application of section 26-50 to holiday homes, the qualitative interpretation of "mainly" in subparagraph 26-50(3)(b)(ii), and the practical implications for advisers and clients.
The section 26-50 problem
Section 26-50 has historically been associated with corporate entertainment expenditure and boats, not the family beach house. The provision denies deductions for losses or outgoings incurred in acquiring, retaining, using, operating, maintaining, or repairing a "leisure facility”. Subsection 26-50(2) defines a leisure facility as land, a building or part of a building "used (or held for use) for holidays or recreation".
In TR 2026/1, the Commissioner treats a holiday home as a type of leisure facility because it is "used, or held for use, for your holidays or recreation, or for the holidays or recreation of your family members or friends for no rent or at a reduced rate" (paragraph 90).
The Commissioner now treats ownership-type deductions traditionally claimed on holiday rental properties (interest on borrowings, council rates, land tax, insurance, and repairs and maintenance) as expenses of holding a leisure facility. Subsection 26-50(1) denies these deductions before the taxpayer even reaches section 8-1.
This is a notable change. The Commissioner supports his position by reference to the Explanatory Memorandum to the Income Tax Assessment Bill (No. 2) 1974, which introduced the predecessor provision (former section 51AB of the Income Tax Assessment Act 1936) to section 26-50. The policy is “to establish a firm rule that prevents taxpayers from obtaining a tax subsidy for expenditure on their own recreation” (paragraph 87).
The "mainly" exception and its qualitative reading
The principal exception relevant to holiday homes appears in subparagraph 26-50(3)(b)(ii). It applies where "at all times during the income year" the taxpayer uses the holiday home (or holds it for use) "mainly to produce assessable income in the nature of rents, lease premiums, licence fees or similar charges".
The Commissioner adopts a qualitative interpretation of "mainly". Paragraph 40 of the Ruling states:
"A holiday home may be used or held for more than one purpose. Accordingly, a simple quantitative assessment, such as the proportion of time the property is used or advertised to produce assessable income, is not sufficient on its own”.
The Commissioner relies on the High Court's decision in Federal Commissioner of Taxation v F H Faulding and Co Ltd [1950] HCA 42 (quantitative reading of "wholly or principally") and the Full Federal Court in Universal Press Pty Ltd v Commissioner of Taxation [1989] FCA 698 (qualitative assessment where the task is to characterise the essential nature of the thing). At paragraph 109, the Commissioner concludes:
"the word 'mainly' in this context requires a qualitative assessment of the purpose for which the property is used and held"
Paragraph 41 sets out the factors the Commissioner considers relevant. These include the actual use of the property, the time dedicated to income production, the time used or held for potential private use, and importantly:
"the extent to which your holiday home is actually available or used as a rental at a time when use of such a property is desirable for holiday pursuits (such as, during school holidays, public holidays or peak seasonal demand periods)"
The peak season point matters. At paragraph 112, the Commissioner illustrates that a property advertised for rent for more than half the year, but not available during school holidays, public holidays or peak seasonal demand, will not qualify for the exception. The Commissioner now expects owners to "objectively explain why the use of their holiday home... for their own holidays or recreation... does not detract from it being used (or held) mainly to derive assessable rental income" (paragraph 113).
The line from Example 11 to Example 13
The worked examples in the Ruling show where the Commissioner draws the line.
In Example 11, Eve owns a seaside rental property and occasionally uses it for one or two nights per year during off-peak periods, only when bookings are unlikely. She does not reserve the property for her private use at any time. Eve's property is a holiday home (because she uses it for recreation), but she mainly uses it to produce rental income. She can claim deductions, subject to apportionment.
In Example 12, Carla owns a beach house in the Whitsundays and advertises it year-round, but blocks out Easter, Christmas, New Year, and school holidays for family use and rejects most rental applications. She rents out the property an average of 5 days per year. The property is a holiday home, and she does not mainly use it to produce rental income. She cannot claim ownership deductions.
In Example 13, Daniel and Kate rent out their beach house around 10 to 14 days per year, with their own use coinciding with peak periods. Again, they cannot claim ownership deductions, although platform fees and commission remain fully deductible.
The key point is that the Commissioner's qualitative test places considerable weight on peak-period availability. On the Commissioner’s view, reserving the prime weeks for private use will generally defeat the "mainly" exception, even where the owner genuinely makes the property available for rent the rest of the year.
Whether the Commissioner's interpretation of "mainly" is open to challenge
The qualitative reading of "mainly" merits scrutiny. The Commissioner relies heavily on Universal Press, but the statutory context in that case differed. The relevant inquiry under subparagraph 26-50(3)(b)(ii) is whether the owner uses the property "mainly to produce assessable income". The natural reading arguably directs attention to a comparison of uses, lending itself to a primarily (though not exclusively) quantitative analysis.
The statutory text does not obviously support the Commissioner's elevation of "peak demand" use to near-determinative status. Paragraph 42 of the Ruling acknowledges that "no single factor on its own is determinative”. Yet paragraphs 111 to 113 give such weight to the peak-period consideration that an owner who blocks out school holidays will, in practice, struggle to satisfy the exception regardless of the property's overall rental performance. Where an owner genuinely advertises and lets a property at market rates for most of the income year, whether the Commissioner's qualitative approach properly reflects the statutory text is, in our view, open to argument.
Recent decisions support an objective character approach. In Commissioner of Taxation v Hall [2026] FCAFC 43 at [5], Thawley J observed that "it is necessary to look to the essential character of the expenditure, rather than the subjective purpose for which an item of expenditure has been incurred”. The High Court in Automotive Invest Pty Ltd v Commissioner of Taxation [2024] HCA 36 at [109] to [111] and [116] to [117] reinforced that objective character governs over subjective intent.
That framework cuts both ways: it supports the Commissioner's rejection of "I always intended to rent it out" arguments, but it equally constrains the Commissioner from reading subjective considerations (such as why an owner blocked out a particular weekend) into the objective assessment.
The anti-avoidance overlay
Subsection 26-50(7) gives the Commissioner a further line of defence. The provision denies a deduction for a leisure facility where the taxpayer enters into a "scheme" (broadly defined in section 995-1) that, in the Commissioner's opinion, the taxpayer entered into or carried out to circumvent section 26-50.
Paragraph 45 of the Ruling indicates that whether a taxpayer entered into such a scheme for the relevant purpose "turns on the Commissioner's evaluative judgment". Advisers should approach restructures undertaken in response to the Ruling with care, particularly those designed to position a property as "mainly" rented (for instance, by removing peak-period private use). Subsection 26-50(7) is broad enough that even commercially explicable changes may attract attention if the Commissioner takes the view that section 26-50 avoidance is a material purpose.
Co-ownership and equitable interests
The Ruling also addresses co-ownership. Paragraphs 22, 26 and 51 to 53 restate the position in TR 93/32: co-owners should attribute rental income and expenses according to their legal interest in the property, "except in very limited circumstances where there is sufficient evidence to establish that the equitable interest is different from the legal title".
The qualifier "very limited circumstances" matters. Scope remains for the equitable interest to differ from the legal title (for example, where there is clear evidence of a resulting or constructive trust, or a documented common intention reflected in contributions and conduct). The Commissioner's restrictive language should not foreclose properly evidenced arguments, although in practice such arguments will face heightened scrutiny.
The transitional compliance approach
Appendix 2 provides limited relief. The Commissioner will not devote compliance resources to reviewing whether section 26-50 applies to expenses incurred in relation to holiday homes that are rental properties if those expenses are incurred before 1 July 2026. Releasing the Ruling in mid-May has somewhat reduced the benefit of the transitional relief.
Two qualifications apply. The transitional approach does not extend to cases of "avoidance, fraud or evasion", or where the taxpayer "otherwise takes inappropriate advantage" of it. The Commissioner will not apply the transitional approach to private rulings or amendment requests but will determine them consistently with the Ruling.
The narrow drafting means that taxpayers cannot rely on the transitional approach to support amendment requests for prior years where they did not claim deductions they might have claimed. The relief operates in one direction only.
Practical implications for advisers
The Ruling will require advisers to take a fresh look at clients with holiday homes that double as rental properties. Advisers should consider the following:
Review clients who have been claiming ownership-type deductions on holiday rentals against the examples in the Ruling. Properties with private blackout periods covering school holidays or peak demand are most at risk.
Even where the Commissioner denies ownership deductions, operational expenses such as advertising, platform commission and post-stay cleaning remain deductible if incurred in producing rental income (paragraphs 36, 96 and 97). Ensure clients clearly characterise and substantiate these expenses.
Where clients intend to rely on the "mainly" exception, contemporaneous evidence of availability, advertising, booking patterns, and the location-specific peak season will be important. PCG 2026/3 provides further guidance on what the Commissioner considers acceptable evidence.
Paragraph 95 notes that where subsection 26-50(1) prevents a deduction, the expenses "may form part of the third element costs of owning the asset" under Division 110. Ensure clients capture these costs accurately, as they will be relevant on eventual disposal.
Assess any change to a property's use pattern made in response to the Ruling against subsection 26-50(7) and the general anti-avoidance provisions. A definite and sustained change in pattern (paragraph 47) may engage the part-year exception in subsection 26-50(4), as Example 14 illustrates, but the changes must be genuine, and the surrounding circumstances must support them.
Paragraph 9 reminds taxpayers that renting out part or all of a main residence may compromise the main residence CGT exemption. This is not new, but advisers should flag it to clients who are considering short-term rental of their home.
Final observations
The Ruling represents the Commissioner's most detailed articulation yet of the income tax treatment of rental properties owned by individuals. Whilst most of the Ruling is uncontroversial, applying section 26-50 to holiday homes marks a meaningful change in practice. Advisers should review clients with arrangements that may be affected before 1 July 2026, when the transitional compliance approach ends.
The qualitative interpretation of "mainly", and particularly the prominence given to peak-period availability, may be open to challenge in appropriate cases. For now, however, the Commissioner's view governs administrative practice, and advisers should advise clients accordingly.
The release of TR 2026/1, alongside PCG 2026/2 and PCG 2026/3, signals that residential property deductions will remain a focus for the Commissioner. Advisers should expect continued scrutiny in this area and prepare accordingly.
If you have any questions about how TR 2026/1 or the related Practical Compliance Guidelines may affect your clients, please contact a member of the Sladen Legal Tax team:
Neil Brydges
Principal Lawyer | Accredited Specialist in Tax Law
M +61 407 821 157 | T +61 3 9611 0176
E nbrydges@sladen.com.au
Daniel Smedley
Principal | Accredited Specialist in Tax Law
M +61 411 319 327 | T +61 3 9611 0105
E dsmedley@sladen.com.au
Kseniia Gasiuk
Associate
T +61 3 9611 0160
E kgasiuk@sladen.com.au
