Gareth I think it would help if you could be really clear about why this is proposed. Is it for fairness, or is it to fix the housing market?
I don't think "fairness" will sell it. Why? Because only an economist could become outraged at the unfairness of people freely living in their own homes ;-) Yes, I agree with your logic that imputed rents should be taxed, but neither I nor most other kiwis will want to buy into this policy on the basis of "fairness". We may buy into it as a solution to the housing market.
Well it actually addresses both and better than that it also addresses (c) the shortage of capital flowing into our business sector (d) the problem around lacklustre productivity in NZ that is constraining our ability to lift GDP per capita (e) this obscene race to the bottom advocated by our Treasury to just keep cutting tax rates on corporates until we’re the same as tax havens - this is a craven position that arises because of our morbid dependency on foreigners' savings because we’re too bloody stupid to direct our own savings into productive endeavour rather than property speculation.
OK having got that off my chest, here’s your answer. Inequality in New Zealand has increased enormously since Ruth Richardson’s Mother of all Budgets where she pulled the rug out from under the lower paid. The Trickle Down never eventuated and under John key’s regime rampant house price inflation has made it even worse. Now if you don’t care about fairness then such events don’t interest you, otherwise you should be disgusted. What the closing of the income tax loophole I propose achieves is it takes away the reason for rampant house price inflation and it gives tax cuts to lower incomes. So it does both of the things you asked about. More details here.