Cash is king for underground landlords

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Landlords taking rent in cash and not declaring it as income is becoming a growing problem.

Monday, November 28th 2022, 3:33PM 2 Comments

by Sally Lindsay

In most cases tenants coughing up cash for their rental don’t have a tenancy agreement or pay a bond, leaving no official record of the tenancy, leading to problems if there is a dispute.

New Zealand Property Investors Federation president Peter Lewis has come up against the issue when he been called in by the Citizens Advice Bureau to help with thorny tenancies inquiries and he believes it is only going to become a bigger issue with tax payments under the new tax laws looming. 

He often finds landlords, particularly those receiving some kind of benefit, are renting out part of their property or another property for cash. “It leaves tenants in an invidious position. If there is an issue between a tenant and landlord and it is suggested the Tenancy Tribunal might be the appropriate place to settle the dispute, the tenant often refuses saying the landlord ‘wouldn’t like it’ and they don’t want to lose their home.”

Lewis says the only way underground tenancies come to light is if there is a bond paid, but there is no legal requirement for a landlord to request a bond, although most do. “However, not every landlord is conducting their tenancy in the right way.”

He says even if bonds were made mandatory it won’t solve the problem because there will always be “rogue landlords”.

He believes more landlords will take rent in cash to avoid paying the new tax introduced when the Government axed the ability of landlords to use mortgage interest payments as a deduction against rental income. Legitimate landlords start paying for it in next year’s tax returns. “It is going to mean landlords paying thousands of dollars extra in tax every year over the next four years as the new rules are phased in.

“Some landlords will be resistant and will find ways around it, including not declaring rent payments to the IRD, which over time will dilute the amount of tax the Government says it will collect under the new rule plus the extension of the Brightline test to 10 years.”

Lewis says many landlords see the only way around the tax dilemma is a change to a National-led Government as it has promised to axe the tax deducion rules. “It might also stop a burgeoning of landlords taking rent in cash and avoiding a rash of underground tenancies.”

Accurate records

MBIE says it is important for landlords and tenants to keep accurate records about the tenancy. Landlords must keep rent and bond records for seven years after the tax year to which they relate.

Keeping records can help you clear up any issues, either during or at the end of the tenancy. Records can include: the tenancy agreement and any variations or renewals of it, property inspection reports, rent, receipts and records, water bills, invoices or records for any work carried out at the property, such as maintenance or cleaning, copies of letters or emails sent to or received from the other person.

MBIE says landlord should record details of any communication with the other person. For example, make a diary note when rent is paid or received, or repairs or maintenance are discussed.

Tenants should keep their own records for the rent they’ve paid even if it is in cash. Bank statements are one way to do this but it’s also good to keep a rent summary spreadsheet.

“If the tenant pays rent with cash, the rent book is usually their receipt. A tenant should keep the rent book or other records for a reasonable time after the tenancy ends,” says MBIE.

Rent receipts

A landlord must give a written receipt for rent when there is no other record available to the tenant. For example, if the tenant pays in cash receipts must be given:

• immediately, if rent is paid in cash;
• within 72 hours, if rent isn’t paid in cash.

A receipt is not legally required when the rent is paid from a tenant’s bank account by automatic payment into the landlord's account, if the account is only used for the tenancy (and any of the landlord's other tenancies).

MBIE says it is a good idea to give a receipt for all payments, even if it’s not required by law.

Rent receipts should include the following information:

• the address of the rented property, or some other way to identify it (such as a reference number);
• the amount of money received and what it’s for;
• the period the rent covers;
• the day the rent was paid;
• the name of the person who paid the rent;
• the signature of the landlord or the person who received the rent.

Statement of rent

The landlord must give a written statement of rent if the tenant asks for it in writing. The statement must cover the period the tenant asks for.

Tags: landlords

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