Others, like Newtown resident Lynn Stanton, have been instructed to apply to become bed and breakfasts – a process which may include expensive upgrades like fitting commercial kitchens – as councils grapple with how to regulate a growing online economy that connects home owners with holidaymakers.

Ms Stanton, who is working with the City of Sydney to get her application approved, said the council even requested to see a copy of her breakfast menu.

"They said, 'oh there's not much cooking involved there," said Ms Stanton, who typically laid out fruit, muesli and bread for guests to help themselves.

" 'But [they said] if we approve you as a bed and breakfast you can in the future serve hot breakfast and you'll be needing a hygienic commercial kitchen.'

"I just think the whole thing is crazy."

Shauna, who requested Fairfax Media not disclose her last name, was notified by Randwick Council in April that it had evidence she was running an "unauthorised" bed and breakfast from her home.

A council letter gave her 10 days to explain why it should not take action against her, warning she could be liable for a maximum penalty of $1.1 million plus an additional $110,000 a day.

"It was quite a shocking letter to get," said Shauna, who was renting out a room through Airbnb for about a month at a time.

"I immediately saw $1.1 million and thought 'what am I going to do?' "

Trevor Atherton, of Atherton Legal, which specialises in tourism law, said several Sydney councils were telling residents they would need to lodge development applications and were threatening $1 million-plus fines for what the councils saw as an illegal breach of their planning controls.

"They have the right to impose those penalties," he said. "But ... when it comes to a person like Shauna, the impact is to be intimidating."

Mr Atherton successfully argued that Shauna was legally entitled to rent out one of her rooms to short-term guests, listing grounds including that the property was a "dwelling", a home business and not a bed and breakfast – an "inappropriate" categorisation, given she didn't provide meals.

"I feel like they're making [the rules] up as they go along because they have no clear guidelines yet," said Shauna.

"It's a perfect circumstance for vindictive neighbours with no real grounds for complaint to contact the council."

In Shauna's case, as well as Ms Stanton's, it was a neighbour's complaint that prompted her property to be one of the few singled out for council attention from about 7600 Sydney listings on Airbnb.

A Randwick Council spokesman said it concluded after further inquiries the short-term stays were a "lawful ancillary use" of Shauna's home.

The spokesman said it was "feasible" for a resident to let out part of their home for short-term rentals if the principal use was still as a dwelling.

Other councils like the Blue Mountains and Gosford have sought to make it clear that some properties can be used for short-term stays without special permission.

Sam McDonagh, Airbnb's country manager for Australia and New Zealand, said the regulatory framework in NSW was "confusing".

"Queensland and Victoria both already have clear rules that allow people to rent out their homes for any period of time," Mr McDonagh said.

Planning Minister Pru Goward said councils had the powers to set these rules.

"So people should contact their local council or a councillor if they want their local policies changed," Ms Goward said.

The City of Sydney spokeswoman said its planning controls "have not caught up with the rapid development of the collaborative consumption market led by companies like Airbnb".

But that has not stopped the council from promoting the "awesome" website in a guide for international students.

"If you are looking for cheap accommodation then definitely check out Airbnb," it says.