Treasury and the Inland Revenue (IRD) aren’t confident extending the bright-line test from two to five years will make houses more affordable.

The Government has committed to extending the test by introducing a supplementary order paper to the Taxation (Annual Rates for 2017–18, Employment and Investment Income, and Remedial Matters) Bill.

The Bill is expected to be enacted in March.

It will mean profits from residential investment properties bought and sold within five, rather than two, years will be taxable.

Current exemptions, including that for the main home of an owner-occupier, will remain.

Treasury and the IRD can see merits in the extension, but say its benefits are “difficult to quantify”.

In the regulatory impact statement (RIS) they prepared for the Minister of Finance and Revenue Minister, they acknowledge: “To the extent that the longer bright-line discourages speculators and investors from buying residential property, prospective first-home buyers could benefit from this proposal.

“At the margin, discouraging residential property speculators may also reduce competition in the housing market, reducing upward pressure on property prices and improving housing affordability for first-home buyers.

“Existing owner-occupiers who are seeking to move up the property ladder may also be positively impacted by this policy, to a lesser degree.

“While less competition in the market may reduce the price they would otherwise receive for their existing property, it may also reduce the price of the next property they buy.”

However in weighing up the risks and unintended consequences of the policy, the IRD favours the existing two year test “mainly because it reduces over-reach”.

In other words, reduces the likelihood of those not intending to resell being implicated by the law.

The RIS says this risk could be managed by adding exemptions to the test, but this would only complicate it.

Treasury’s stance isn’t quite as definitive as the IRD’s.

It says the risks related to “over-reach” and “lock-in” can’t be quantified, so it is “difficult to assess their significance in relation to the Government’s objectives for extending the bright-line test”.

Lock-in can affect the efficient allocation of assets, discourage property owners from recognising their assets and essentially reduce the number of dwellings for sale.

The RIS also points out reduced rental property supply, caused by less investor/speculator activity, could cause rents to rise.

“A higher level of homeownership among former renters is unlikely to completely offset the pressure on rental prices,” it says.

The RIS notes that extending the bright-line test was the only option the agencies had a mandate to assess.

"Consequently, it is not possible to be confident that the Government’s objectives are being met in the best way and with the least unintended consequences.

"It would therefore be desirable to monitor and evaluate the outcomes in practice."

Steven Joyce says Government should heed the warnings

National Party Finance Spokesperson, Steven Joyce, is critical of the extension.

He says the law change needs to be properly examined through a select committee process.

“This is particularly true given the ambivalence of Treasury to the move and the opposition of the IRD to the change…

“By tacking this change on now to an already existing tax bill, they are seeking to avoid scrutiny by mum and dad investors and the Finance and Expenditure Committee.”

Joyce says: “We have a Government that is declaring war on mum and dad property investors and treating them all like they are speculators. Whether it’s this or negative gearing or the proposed capital gains tax, it’s all designed to nail legitimate property investors.”

However Revenue Minister Stuart Nash is adamant the extension will “bring fairness back into the tax system”.

“We need investment which grows the economy and creates jobs, not the sort of investment which distorts the residential housing market,” he says.

The RIS estimates that once in full swing, the extended bright line test will raise $50 million of revenue a year.