Depreciation on a holiday rental the owner also uses

A holiday rental is let to guests for short stays, and its owner often stays there too, or lends it to family and friends. Its building and its plant are deducted under the same two parts of the Income Tax Assessment Act 1997 as any other rental property, Division 43 for capital works and Division 40 for plant and equipment, but only for the use that produces assessable income. This guide sets out how the Act makes that split, and a further rule that can shut out the plant of a holiday home its owner uses regularly.

For residential construction begun after 15 September 1987, the capital works deduction is 2.5% of the construction cost a year, worked out by the day. Section 43-210 (section 43-215 for works begun before 27 February 1992) multiplies the cost by the rate and by the "days used", the days in the income year on which the owner held the property and used it to produce assessable income, and divides by 365; it then reduces the result to the extent the property was used only partly for that purpose. The days the owner stays there are not days used, and nor are days on which the property was neither let nor available for rent. Days on which family or friends stay free are generally left out too, and where they pay less than the market rent, the ATO's view is that the deductions for that use are generally limited to the rent they pay.

A day on which the property is offered but not booked can count. The Act treats a property as used for a purpose while it is maintained ready for that use, is not used for anything else, and that use has not been abandoned (section 43-160). The ATO's view is that the availability must be genuine: generally, advertised where people looking for a holiday rental will find it, at a rent in line with the market, and on conditions that do not put guests off. On that view, a listing at a rent well above the going rate, or one few of the people who might book it will ever see, does not generally make the empty days count. Where that use stops for a time because of repairs, the building of an extension, alteration or improvement, or seasonal or climatic factors, the property is taken to be still in that use (section 43-165).

The days that are not counted are not added on at the end. The construction cost still to be deducted falls by the same daily amount for every day since the building was first used after it was finished, whoever used it and for whatever purpose (sections 43-230, 43-235 and 43-240), so the share of a private day is lost, not deferred.

Two other rules are worth knowing. For works begun after 26 February 1992, the 4% rate Division 43 gives an apartment used to provide short-term accommodation for travellers needs the owner also to own or lease at least nine other apartments, units or flats in the building used the same way (section 43-145), so an owner with fewer than ten there is generally on the ordinary rate; a room in a building run as a hotel, motel or guest house with at least ten bedrooms for short-term travellers is tested under that section's hotel row instead. And outside a hotel or apartment building as Division 43 defines them, a part of a property that is for use mainly as accommodation for the owner, or for an associate other than under an arm's length arrangement, is taken not to be used to produce assessable income at all (section 43-170).

Take an 85 m² apartment in a high-rise building, completed in 2015 in Queensland and bought by an individual who lets it to holidaymakers. Its construction cost, not counting the plant listed separately, was about $150,124 in our cost database, the figure the page for an apartment in Queensland gives for 2015. Let or genuinely available on every one of the 365 days of the 2026–27 income year, it would deduct 2.5% of that, about $3,753, or $10 a day.

Say that in 2026–27 it is let on 200 days, the owner and their family stay on 21, and on the other 144 it is advertised at the market rate but not booked. The days used are the 344 on which it was let or genuinely available, so the deduction is about $3,537. Had the 144 empty days not been genuinely available, only the 200 days let would count, and the deduction would be about $2,056. Either way the cost still to be deducted falls by the whole year's $3,753: the $216, or $1,697, for the days not counted is not claimed later.

These figures are for illustration, to show how a year's days divide its deduction; they are no estimate for any property. What a particular holiday rental gives turns on what it cost to build, when its construction began, and its own days, as the owner's records show them. The same arithmetic applies to a unit in Tasmania, a townhouse in South Australia, a house in Western Australia or an apartment in the Northern Territory, whose pages give what each cost to build, year by year.

For plant, such as carpet, blinds, appliances, air conditioning and the hot water system, section 40-25(2) reduces the deduction by the part of an item's decline in value that is attributable to its use for a purpose other than a taxable purpose, such as the owner's own holidays. The decline is worked out under the item's method as usual and then reduced, and the item's adjustable value still falls by the whole of it (section 40-85).

Section 40-27 can go further. It reduces the deduction by the part of an item's decline in value attributable to its use to produce assessable income by providing residential accommodation in residential premises, other than in the course of carrying on a business, if at any time in that income year or an earlier one the item was used, or installed ready for use, for a purpose that was not a taxable purpose and in a way that was not occasional (section 40-27(2)(d)(ii)). Where a holiday home's plant is used privately in a way that is not occasional, as when its owner stays there regularly, its decline in value is therefore generally not deductible for the letting either, for that income year and every later one, even for an item bought new. The Act does not define "occasional", so whether an owner's stays reach that point turns on the facts. Like the rest of the section, the rule applies to plant acquired at or after 7.30 pm on 9 May 2017, and to plant acquired before then only if nothing could be deducted for it for the income year to 30 June 2017 (Treasury Laws Amendment (Housing Tax Integrity) Act 2017, Schedule 2, item 13).

Section 40-27 is also the section that shuts out second-hand plant, and it reaches the same owners: individuals, self-managed super funds and most trusts. It does not apply to a company, a superannuation fund other than a self-managed one, a managed investment trust, a public unit trust, or a unit trust or partnership whose members are all such entities (section 40-27(3)). The 2017 rules for second-hand property set out its other limbs.

Low-cost items have rules of their own. The $300 immediate deduction needs the item to be used predominantly to produce assessable income that is not income from carrying on a business (section 40-80(2)). An item allocated to a low-value pool is dealt with by an estimate instead: when it is pooled, the owner makes a reasonable estimate of the share of its use over its effective life that will be for a taxable purpose, and the pool takes only that share of its cost, or of its written-down value for an item that joins the pool later (sections 40-435 and 40-440); where section 40-27 would otherwise reduce its deductions, the residential letting is left out of that estimate (section 40-435(2)).

Our reports work out each year's deductions as if the property is let or genuinely available for rent for the whole of each income year, and say so. For a holiday rental the owner or their accountant applies the year's share in the return, and the plant rule above where it reaches. The records that matter are the ones that show the days: each booking and the rent it brought, where and at what rent the property was advertised, and the days the owner, family or friends stayed.

This is general information about the law, not advice on a particular property or a promise of any deduction. How a holiday rental's year divides, and whether its owner's use is occasional, turn on its own facts, which are a matter for the owner and their tax agent.