The Legal Status of Free of Tax Payments under the Nigerian Personal Income Tax Act of 2004

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ABSTRACT

The Legal Status of Free of Tax Payments under the Nigerian Personal Income Tax Act of 2004

Professor Taofeeq Abdulrazaq*

INTRODUCTION
The problems which arise when a document, or an oral agreement, contains words in relation to some future money payment, which require that payment is to be made “free of tax” forms the basis of this paper.₁

The first problem is to construe the words which have been used and to ascertain exactly what they mean. The second problem is the extent to which the words, according to their proper construction, are affected by various statutory provisions. Having thus ascertained the legal effect of the words in question, the final problem is to discover the tax consequences which ensue both to the payer and the recipient of the money.

When words such as “free of tax” or “without any deduction” are used, two questions of construction may arise. The first is whether the words used actually do refer to tax at all; clear words are necessary to have any effect for tax purposes; “without any deduction” by themselves, will not usually be taken as referring to tax.

Assuming that the words refer to tax, then the problem arises, when the recipient is an individual, whether the words refer to personal income tax. Both these problems require consideration. The first problem of construction usually arises in relation to annuities payable under the terms of a will or codicil₂. In such cases it is well established that an annuity is not payable free of tax unless there is a clear direction to that effect. ₃ The fact that it is payable out of income which has already borne tax at source does not justify the annuity being paid without deduction₄ ; the trustees or personal representatives are under a duty to the
other beneficiaries to deduct tax.₅

Words such as a “clear annuity” ₆ or an annuity “free of all duties” ₇or “free from legacy duty and other deductions” ₈or “free from all deductions and abatements whatsoever” ₉ or a “net income”₁₀ have all been held to have no effect so far as income tax is concerned. In Re Wells, where the words used were “free of all deductions,” Simonds J. said:

There is no case among all those which have been cited to me where an annuity had been stated to be free of income tax unless there was clearly expressed on the face of the will an intention of the testator that, when he referred to freedom from deductions, he was including income tax. ₁₁

*Professor of Taxation, Lagos State University, Ojo and Partner, Saffron Professional Services

1. Whiteman & Wheatcroft, Income Tax (Sweet & Maxwell 1976) 160-166
2. See Harvey B.W. The Law and Practice of Nigerian Wills, Probate and Succession (Sweet and Maxwell 1968) 56
3. See Re Skinner (1942) 1 Ch 82 (where Morton J. explained the rules applicable to these cases); Re Sharp (1906) 1 Ch 793
4. Re. Skinner (supra): Re Cain’s Settlement (1919) 2 Ch 364
5. Re Sharp (1906) 1Ch 793
6. Re Loveless (1918) 2 Ch 1
7. Re Saillard (1917) 2 Ch 401
8. Sadler v Rickards (1858) 4 K&J 302
9. Gleadow v Leatham(1882) 22 Ch D 269. See also Well v Wall (1817) 15 Sim 513 (“clear of all taxes and deductions”: held
   subject to property tax): Lethbridge v Thurlow (18510 15 Beav 334 (“clear of legacy duty and every other deductions
   whatsoever”; same result); and Abadam v Abadam (1884) 33 Beav 475 (“ payable without any deduction whatsoever”:
   held subject to income tax)
10. Re Wright (1952) 2 All ER 698
11. (1910) Ch 411, at p 413, followed in Re Skinner (supra) where the words were “such a sum … as will bring his income up
    to £1,000 per annum”