February 2025 Client Bulletin

Content

• Holiday Homes Under the Microscope: What the ATO’s New Guidance Means for You
• Electric Car Discounts Under Review: What It Means for Your Business (and What You Should Do Now)
• AI Tax Tips: Helpful Shortcut or Costly Trap?
• Downsizer Contributions and the Main Residence Exemption

This month we look at the ATO’s sharpened compliance focus across property, business incentives and emerging technologies. New draft guidance on holiday homes signals a much tougher approach to deductions for short-term rentals, particularly where lifestyle use blurs with genuine income-earning intent. The Federal Government’s review of the Electric Car Discount also places current EV tax benefits under the spotlight, prompting businesses and employees to revisit timing and eligibility. We then turn to the rise of AI-generated tax “advice” — and the costly traps emerging as the ATO cracks down on misinformation. Finally, we unpack the nuances of downsizer contributions and the main residence exemption, highlighting key conditions and misconceptions that frequently trip up retirees.

Holiday Homes Under the Microscope: What the ATO’s New Guidance Means for You

For many Australians, a holiday home does double duty. It’s a place to escape with family and friends, and during the rest of the year it’s listed on Airbnb or Stayz to help cover the costs.

Until recently, many owners assumed they could claim most of the usual deductions for the property without much trouble, as long as appropriate apportionments were made. However, that position is now under more scrutiny than ever following the release of new draft guidance documents by the Australian Taxation Office (ATO) — TR 2025/D1, PCG 2025/D6 and PCG 2025/D7.

The ATO is looking to significantly tighten the rules around holiday homes that are used to derive some rental income. While the documents are still in draft form, they clearly signal the ATO’s compliance focus going forward.

What is the ATO Concerned About?

In simple terms, the ATO wants to distinguish between properties that are genuinely held to maximise rental income and those that are primarily lifestyle assets with some incidental rental use.

The ATO confirms that all rental income must be declared, even if it is occasional or earned through informal arrangements. However, if the property is really a holiday home and isn’t used mainly to produce rental income during the year then the owner can’t claim any deductions for expenses such as interest, rates, land tax, repairs and maintenance.

That is, the ATO might not allow any of these expenses to be claimed as a deduction, even if the property is used to generate taxable rental income for some of the year at market rates. If the property is classified as a holiday home by the ATO then owners can only claim deductions for limited direct expenses such as cleaning or advertising.

The ATO is particularly focused on properties that:

• Are blocked out for private use during peak periods (for example, school holidays or ski season)
• Are advertised inconsistently or at above-market rates
• Generate ongoing tax losses year after year

How Expenses Must be Claimed

Even if the property isn’t classified as a holiday home, it will often still be necessary to apportion expenses if the property is only used partly for income producing purposes. PCG 2025/D6 outlines how expenses should be apportioned. The key principle is that claims must be “fair and reasonable”. Common methods include:

• Time-based apportionment (for example, based on days rented or genuinely available for rent)
• Area-based apportionment (where only part of a property is rented)

Getting this wrong, or failing to keep evidence, increases audit risk. The ATO has access to booking platform data and can compare listings, calendars and reported income.

The Financial Impact Can Be Significant

Consider a holiday unit that earns $30,000 a year in off-peak rent but is kept for private use during peak holiday periods. Under the new approach, the ATO may conclude the property is really a holiday home and could reduce deductible expenses from tens of thousands of dollars to only a small fraction, resulting in a materially higher tax bill.

Co-ownership also needs care. Income and deductions are generally split according to ownership interests, regardless of who uses the property more. Renting to relatives at discounted rates can further limit deductions.

Practical Steps You Should Take Now

Although the guidance is proposed to apply from 1 July 2026 (with transitional relief for arrangements in place before 12 November 2025), now is the time to review your position:

• Test your commercial intent: Are you holding and using the property to genuinely maximise rental income? Is the property advertised broadly and consistently, including during peak periods?
• Use market pricing: Set rent in line with comparable properties in the same area.
• Keep strong records: Retain booking calendars, advertisements, enquiries, and a diary showing private versus rental use.
• Review ownership and strategy: In some cases, changing how a property is operated can improve its commercial profile and tax outcome — but beware of CGT, duty and legal fees.
• Document existing arrangements: If you qualify for transitional relief, evidence is critical.

The Bottom Line

The ATO is not banning deductions for holiday homes, but it is drawing a firmer line between genuine investment properties and lifestyle assets. With the right structure, pricing and record-keeping, many owners can still claim appropriate deductions and improve cash flow.

If you own a holiday property, a proactive review could save you from an unpleasant surprise later. Please contact us if you would like us to assess your current arrangements and help you plan ahead.

Related ATO draft guidance:
TR 2025/D1
PCG 2025/D6
PCG 2025/D7

Electric Car Discounts Under Review: What It Means for Your Business (and What You Should Do Now)

Electric vehicles (EVs) are no longer a niche choice. For many businesses and employees, the Federal Government’s Electric Car Discount (introduced in mid-2022) has materially reduced the cost of owning or leasing an EV through tax concessions.

The rules are now under statutory review. While no immediate changes are proposed, this is an important moment to understand the benefits, assess whether they suit your circumstances, and consider timing.

How the Electric Car Discount Works (in Plain English)

The discount is not a cash rebate. Instead, it operates through tax concessions that can significantly reduce the real cost of an EV:

1. 1. Fringe Benefits Tax (FBT) exemption
   Where an eligible EV is provided to an employee as a fringe benefit, private use is exempt from FBT. Without the exemption, FBT is effectively charged at up to 47%.

Important points:

• The exemption applies to battery electric vehicles and hydrogen fuel cell vehicles.
• Plug-in hybrid vehicles lost eligibility for new arrangements from 1 April 2025.
• The car must be first held and used after 1 July 2022 and be below the luxury car tax threshold at first purchase.

1. 2. Higher luxury car tax (LCT) threshold
   Fuel-efficient vehicles, including EVs, benefit from a higher LCT threshold. This can prevent the 33% luxury car tax applying to part of the purchase price.
2. 3. Reduced import costs
   Certain EVs may also be exempt from the 5% customs duty, reducing upfront acquisition costs.

Commercially, these settings have made EVs more competitive. Lower running costs (electricity versus fuel, fewer servicing requirements) and solid resale values can strengthen the business case, particularly for salary packaging and small fleets.

Why the Government Is Reviewing the Rules

A statutory review of the Electric Car Discount has commenced, with public consultation open. The review will examine the operation of the discount, whether it remains appropriately targeted, and how it interacts with other policies.

At this stage, there is no suggestion of immediate changes and any reforms are more likely to be prospective.

Practical Takeaways for Business Owners and Employees

• Review timing: If you’re considering replacing a vehicle in the next 12–24 months, now is a good time to revisit your plan.
• Check eligibility carefully: Confirm the vehicle is under the LCT threshold at first purchase and meets the criteria for the FBT exemption.
• Don’t assume related benefits apply: Charging infrastructure provided in connection with an eligible EV won’t necessarily qualify for an FBT exemption.
• Expect stability for existing arrangements: While we can’t guarantee outcomes, changes are generally less likely to apply retrospectively.

Final Thought

The Electric Car Discount remains one of the most valuable concessions available for employee vehicles. A review introduces longer-term uncertainty, but the commercial reality today is that EVs can still deliver genuine tax and cash-flow savings when structured correctly.

If you are considering an EV — either personally or through your business — now is the right time to run the numbers. Please contact our team if you would like tailored advice on whether an electric vehicle strategy makes sense for you under the current rules.

Related links:
Treasury: Statutory review of the electric car discount
Consultation hub
ATO: Electric cars exemption

AI Tax Tips: Helpful Shortcut or Costly Trap?

As a business owner or investor, time is always tight. So it’s no surprise many people now turn to AI tools like ChatGPT for quick answers on tax deductions, super contributions or structuring ideas. The responses sound confident, arrive instantly and cost nothing. What could go wrong?

Plenty.

The Australian tax and super system is complex, highly fact-specific and constantly changing. While AI can be a useful starting point, relying on it for decisions can expose you to audits, penalties and poor financial outcomes. We’re increasingly seeing the clean-up work when AI advice goes wrong.

Where AI Can Help (and Where it Can’t)

AI can be helpful for explaining basic concepts in plain English and prompting the right questions — for example, what “negative gearing” means, the difference between concessional and non-concessional contributions, or what records you might need.

The problem starts when AI moves from explaining concepts to giving “advice”. Tax and super outcomes depend on your specific facts: income levels, structure, age, residency status, assets, timing and future plans. AI does not know these details unless you provide them — and you generally shouldn’t. Even then, it cannot apply judgement or balance competing risks the way an experienced adviser can.

The Accuracy Risk: Confident, but Wrong

AI tools are known to “hallucinate” — that is, provide answers that sound authoritative but are incorrect or incomplete. In practice, this can mean:

• Claiming deductions that don’t apply to your circumstances
• Miscalculating capital gains tax or ignoring integrity rules
• Suggesting super strategies that breach contribution caps or eligibility rules
• Quoting legislation, cases and rulings or concessions that don’t exist or are out of date

A recent decision highlights how quickly this can go wrong. In Smith and Commissioner of Taxation [2026] ARTA 25, the Tribunal criticised the use of non-existent or irrelevant authorities and noted the burden this places on the Tribunal when material isn’t properly verified.

ATO Scrutiny is Increasing, not Decreasing

The ATO isn’t anti-AI — they use advanced analytics internally — but their public guidance is clear: misinformation (including AI-generated content) can be false, inaccurate, incomplete or outdated. If something is wrong, the ATO will generally amend the return, charge interest and may apply penalties — even if the mistake came from AI rather than intent.

We are seeing this most often with work-from-home claims, property deductions and SMSF compliance.

Superannuation: High Stakes, Little Margin for Error

Super is an area where AI “advice” can be particularly dangerous. SMSFs in particular operate under strict rules and AI often misses eligibility, timing, purpose tests and investment restrictions. The result can be non-compliance, forced unwinding of transactions and penalties that run into thousands of dollars.

Data Security and Privacy

There is also a practical risk many people overlook: entering personal or financial information into AI platforms. Once data is entered, you lose control over how it is stored or used. This creates privacy and fraud risks that are simply not worth taking.

The Bottom Line

AI can be a helpful assistant, but it is not your accountant. Use it to understand concepts and generate questions — then get professional advice before you act. It almost always costs less to clarify upfront than to fix an ATO problem later.

Related links:
ATO: Protect yourself from misinformation and disinformation
ATO: AI transparency statement

Downsizer Contributions and the Main Residence Exemption

When clients sell a long-held family home, they may be able to channel part of the proceeds into superannuation by using the downsizer contribution rules. While the concept is simple, eligibility can be nuanced — particularly where the main residence exemption is only partial, or where spouses have different ownership histories.

Basic Eligibility Conditions

To qualify, the seller must meet a number of conditions:

• They must have reached the eligible age of 55 years (at the time of making the contribution).
• The eligible dwelling must be located in Australia and have been owned for at least 10 years.
• The disposal of the dwelling must be exempt from CGT under the main residence exemption to some extent (full exemption not required).
• The contribution must be made within 90 days of settlement, and an election form must be provided to the fund no later than when the contribution is received.

The downsizer contribution can only be used once per individual and is limited to the lesser of the gross sale proceeds or $300,000