Treasury does not believe removing tax concessions for property investors would shift the dial for housing affordability, despite being asked to investigate the impact of the tax changes by the government.
The department's secretary, Steven Kennedy, said he has "strongly encouraged" the government to fix its sights on increasing the supply of housing.
Asked by Greens Senator Nick McKim during Senate estimates if winding back negative gearing and the capital gains tax discount would help first homebuyers get into the property market, Dr Kennedy said their impact was not irrelevant and should be thought about carefully.
"But I've strongly encouraged the government to remain firmly focused on increasing the supply of housing: public, affordable housing, and housing more broadly," he said on Wednesday.
"I wouldn't go as far as saying it's a distraction ... but to resolve the issues that we face at the moment, we simply have to increase the supply of housing. That should be our primary focus and my understanding is it's the government's primary focus."
Dr Kennedy said the 50 per cent discount on capital gains had a greater impact on shifting the balance of home ownership between investors and first homebuyers than negative gearing.
"It's likely to have an influence. Exactly what that influence would be and the magnitude and materiality of it would be something we have to look at more," he said.
He said the impact of cutting the capital gains concession would be complex because reducing the amount of investors would decrease the amount of dwellings available to rent.
Senator McKim queried whether an increase in supply would not simply be scooped up by investors and renters who want to get into the housing market would lose out.
"I'm not particularly concerned about that," Dr Kennedy replied.
"We can see differences in housing outcomes across jurisdictions that predominantly reflect supply.
"It's a small jurisdiction, admittedly, but this jurisdiction here, the ACT, where there's been a substantial increase, particularly in the supply of apartments, is having somewhat different outcomes to other states where that supply has not responded nearly as fulsomely."
It was worth the Commonwealth looking at the concessions in regards to how they affect the efficiency and equity of the broader tax system, he said.
But given the levers of supply rest largely in the hands of state and local governments, the issue can't be solved at the federal level alone.
"This dial only shifts when we get more supply," Dr Kennedy said.
"We have very constructive conversations with the states, and I'm not diminishing the difficulties they have in doing it, but it will lie with them. It's a tough job, but it's around planning and zoning, and it's around the things that they constitutionally have the power over."
