Speculators who buy and sell residential property for profit within two years will be taxed on the capital gains in a move to rein in Auckland's housing market.

Prime Minister John Key also announced Sunday measures targeting overseas buyers who have been able to escape paying any tax on their profits.

Key said the measures would be contained in this week's Budget and the focus would be on ensuring people buying and selling property for profit paid their fair share of tax to the Inland Revenue Department (IRD).

The changes would tax capital gains on properties bought and sold within two years other than the family home or an inherited estate - but the government denies it is a capital gains tax.

Labour leader Andrew Little also rejected suggestions it was a capital gains tax and said it would have minimal effect because property speculators would simply wait two years before selling their investment property.

The measures include:

* Requiring non-residents and New Zealanders buying and selling any property other than their main homes to provide a New Zealand IRD number.

* Requiring non-residents to have a New Zealand bank account to get a New Zealand IRD number.

* Including a new "brightline test" to tax gains from residential property sold within two years of purchase, unless it is the seller's main home, inherited or transferred in a relationship property settlement.

* IRD would get $29 million extra funding to enforce the changes, which are subject to consultation and take effect on October 1. 

AUCKLAND ACTION NEEDED

The measures are in response to mounting concern over first home buyers being locked out of the residential property market in Auckland where prices have soared.

The Reserve Bank last week announced tighter loan to value measures targeting property investors in Auckland.

Speaking to a National Party regional conference north of Wellington on Sunday, Key said people calling for a new capital gains tax often overlooked the fact that under existing rules anyone buying property with the intention of selling for a gain was liable for tax on that gain.

"These measures will not affect New Zealanders' main home although existing tax rules will still apply in addition to these new steps," Key said.

"They are aimed squarely at ensuring that property buyers, including overseas speculators, who buy residential property with the intention of settling for a gain pay their fair share of tax as required by the law.

"It is not unreasonable to expect that if you buy an investment property and sell it for a gain within two years then you should be taxed on that gain."

This was different to an investor buying with a long term view of renting their property to tenants.

"And it is completely different to New Zealand owner occupiers who have worked hard to buy their family home."

While the current law was clear about taxing property gains, decisions often relied on the intent of the buyers or an assessment of their intentions by IRD.

"One of the reasons this has become an issue, particularly with overseas investors, is that we don't always have good information about them."

"And some overseas investors can be difficult to track down, even if Inland Revenue knows they owe tax."

The changes were about ensuring those investors were treated the same as New Zealand property buyers.

"That's what these changes are about. As New Zealanders we expect each other to pay our fair share of tax. That same requirement must also apply to overseas residents. The Government welcomes overseas investment but in return those investors must follow our rules when it comes to tax."

NOT ENOUGH: LABOUR

But Little said the proposed measures were a weak response to the "astronomical" profits made by property speculators are making and an admission – finally – that there is a housing crisis.

"The prime minister is creating a massive loop hole with his new 'bright line' test which will exempt speculators who hold onto their properties for longer than two years.

"A tax which only applies to sales within this arbitrary period will not deter the land-bankers and will only capture the small number of short-term buy-and-flick speculators.

"It will take two-and-a-half years for this tax to fully come into effect. That is a long time to wait when Auckland house prices rose over $100,000 last year.

"For years the Prime Minister has denied there is a crisis, refused to admit foreign investors are pushing up house prices and said there is no need to dampen down housing demand. Today John Key has been forced to eat his words.

"This is not only an admission there is a housing crisis, it is an admission that the intention test in the current law is not working.

The Property Investors Federation said it was comfortable with the prime minister's announcement of a capital gains tax on property sold within two years.

Spokesman  Andrew King said the tax was aimed at property traders, or speculators, not rental property owners.

"As we have been saying for years, people trading property have always had to pay tax on their profits and this move will help to clarify this. This should finally put to rest all the unfounded comments from people who say that property has a tax advantage."

Some people may be unfairly affected however.

"For example the changes could have a negative impact on some rental property owners. While a property sold as a relationship property settlement will not be affected, eventualities such as the owner contracting a terminal illness and needing to sell will not be covered. Although the tax will only apply to some of their capital gain, this would appear to be unfair given that the tax wouldn't apply if the same individual had bought and sold shares or a business."

Meanwhile, it was unclear if the move would have any effect on house prices, King said.