Federal Treasury has scolded the Coalition for overstating the impact of Labor's negative gearing changes.

Key points: The Labor Party wants to restrict negative gearing deductions

The Labor Party wants to restrict negative gearing deductions The plan involves limiting the tax break to new investment properties

The plan involves limiting the tax break to new investment properties The Coalition has claimed Labor's plan would "smash" housing values

The revelation blunts the Government's attacks against the proposed overhaul of housing tax concessions.

The Australian Labor Party (ALP) wants to curb negative gearing deductions by limiting the tax break to new investment properties.

Since 2016, the Coalition has continued to claim the plan would "smash" housing values with a "sledgehammer".

But it can now be revealed Treasury explicitly told the Government it should not even claim home values "will" fall under the proposal.

Kelly O'Dwyer's office was informed Labor's planned policy would not definitely reduce prices. ( ABC News: Adam Kennedy )

Emails obtained by the ABC reveal that last January, Acting Treasurer Kelly O'Dwyer's office asked officials to fact-check the statement that Labor's policy to increase capital gains tax by 50 per cent and abolish negative gearing would reduce house prices.

After consulting specialist teams, the department sent back the following correction:

"The … statement is not consistent with our advice. "We did not say that the proposed policies 'will' reduce house prices. "We said that they 'could' put downward pressure on house prices in the short-term depending on what else was going on in the market at the time. "But in the long-term they were unlikely to have much impact."

The exchange is a rare public display of tension between the bureaucracy and a government of the day.

The documents were obtained by the ABC under freedom of information laws after a months-long investigation.

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The correspondence between Treasury and the Minister's office took place on January 8, 2018.

That is the same day the ABC first revealed Treasury's view on the Opposition's housing tax plans — that the changes would only have a "small" impact on prices.

'Caught red-handed'

Labor's Shadow Treasurer Chris Bowen said "the Government's been caught red-handed" misrepresenting official advice.

Negative gearing policy proposal timeline February 2016: Labor announces plan to curb negative gearing and the capital gains tax discount

February 2016: Labor announces plan to curb negative gearing and the capital gains tax discount Early 2016: Treasury tells Scott Morrison the overhaul might place "some downward pressure" on prices

Early 2016: Treasury tells Scott Morrison the overhaul might place "some downward pressure" on prices Since 2016: The Coalition has attacked Labor's plan, saying that it could smash home values

Since 2016: The Coalition has attacked Labor's plan, saying that it could smash home values January 8, 2018: Treasury advice made public by the ABC

January 8, 2018: Treasury advice made public by the ABC January 8, 2018: Office of Acting Treasurer Kelly O'Dwyer asks Treasury to fact-check a claim stating prices "will" fall

January 8, 2018: Office of Acting Treasurer Kelly O'Dwyer asks Treasury to fact-check a claim stating prices "will" fall January 8, 2018: Treasury officials reject the claim, saying it is "not consistent with our advice"

"This is quite a significant revelation," Mr Bowen said.

"[The Government should] stop abusing the Treasury processes, abusing the independence of the Treasury, misrepresenting what the Treasury has said."

Former senior public servant Andrew Podger said the advice would have been "very carefully" prepared and he praised Treasury for its "pushback".

"Treasury's main concern would be that it should not be misrepresented, and it should not itself be drawn into the partisan battle," he said.

In response to questions, Treasurer Josh Frydenberg pointed to forecasts produced by the property sector, which is fiercely resisting Labor's plan.

"Independent economic modelling commissioned by the Master Builders Association found that new builds will slow, jobs will be lost, and billions drained from the economy," he said.

"A survey of more than 1,000 people by the Property Council of Australia found … half of all investors admitted they would be forced to charge more rent and around six in 10 current investors would be discouraged from investing in property."

Treasury appears to have maintained its view about the likely impact of the ALP's negative gearing and capital gains policy on prices in the three years since it was announced.

In early 2016, the department confidentially told then-treasurer Scott Morrison the overhaul would likely have a small impact on prices.

"Previous changes to negative gearing … and the introduction of the [Capital Gains Tax] discount … had little discernible impact on the market," officials wrote three years ago.

"[But] the housing market itself has been highly cyclical and it is possible that uncertainty arising from the policy change itself could compound upon a cyclical downturn that may be underway at the time."

Since then, the national median cost of residential property peaked and has begun falling — although that median price is still higher than three years ago.

Sorry, this video has expired Aussie Home Loans founder John Symond says negative gearing should be treated "very carefully".

Negative gearing on the election agenda

Taxation is set to be a major battleground between the major parties at this year's federal election, with the Coalition attacking the ALP's tax policies on housing and shares.

Negative gearing allows investors to deduct rental losses from their income tax bill.

If elected, the ALP would restrict negative gearing to new properties and increase taxes on any profit from the sale of a rental property.

The housing tax changes would add an estimated $3 billion to the budget each year, even though existing investments would be protected from the crackdown.

Independent think tank the Grattan Institute and the Australian Housing and Urban Research Institute have both called for restrictions on existing housing tax breaks.

The Reserve Bank of Australia has previously said curbing negative gearing could be a good thing for financial stability.