We all love the best things of life, whether they happen to be the fruits of our labour or they come in the form of giveaways or winnings.
I mean, who is not reading ‘How to’ books nowadays?
When the cash is in the bag, we sometimes forget to remember that just like Big Brother, the taxman is always watching.
Our fave won a lot of money and other prizes a few days ago. Two tax authorities have congratulated him and have told him #ItPaysToPayYourTaxes.
This begs the question. Are cash prizes or giveaways won from shows by an individual taxable in Nigeria?
TAXABLE OR EXEMPT
To answer this, we have to consider who should pay taxes in Nigeria and what income is taxable.
The Personal Income Tax Act (PITA), regulates the taxation of every individual that is resident in Nigeria. This excludes (i) non-Nigerian residents; (ii) FCT Abuja residents; and (iii) officers in the Nigerian Army, Navy, Air Force, Police Force and Foreign Service.
Personal Income Tax (PIT) in Nigeria is imposed on the basis of Residence and Residents that are not in categories i, ii and iii above must pay PIT on their income from all sources – salaries, wages, fees, allowance, profit, trade, business, profession, vocation, winnings, dividends, etc.
No PIT will be however payable on some categories of income. These are Exempt income which include: (i) cash payments made in compensation for loss of employment; (ii) interest on a foreign currency domiciliary account; (iii) foreign dividend income brought into Nigeria through government channels, etc. Cash winnings or prizes are not exempt from PIT.
So, our fave is resident in Nigeria and he must pay PIT on his BBNaija winning since it is not exempt from PIT.
Will he then pay PIT on the whole winning?
The Bag contains our fave’s hypothetical income from all sources for the year which are:
Income A – Moneys from performing at an event; and
Income B – the cash equivalent of the prizes he recently won on the Show.
He would not pay PIT on his total income (A+B) because PITA allows him to remove from that income in the Bag.
This permission to remove by PITA automatically reduces the amount of PIT that our fave would pay in the end because the income that is removed will not be taxed.
Put simply, if you have 5 oranges and you are supposed to pay the taxman half of each orange as tax, you would be paying 2 and a half oranges as tax. But if the law allows you to remove two oranges and to pay half of the three remaining oranges as tax, you pay 1 and a half oranges instead of 2 and half oranges.
This allowance is PITA’s way of giving people less dangerous heart attacks.
So what exactly does PITA allow our fave to remove from his Bag?
1 Our fave can remove all the amounts he spent for the purpose of generating his income (A+B) that is in the Bag aka his expenses. These expenses must however be Wholly, Reasonably, Exclusively and Necessarily incurred for the purpose of generating the income. This is the WREN test and his expenses must pass all four tests before they can be removed from the Bag.
So if our fave paid a team to publicise, campaign and get voters/votes for him so that he could emerge Winner which got him Income B, the amount he paid to that team would be removable from the money in the Bag.
Also, if he incurred transportation expenses to get him to his event that got him Income A, the transportation expenses would also be removable from the Bag, etc.
2. Still in the spirit of Giveaways, PITA also allows our fave to take out a Consolidated Relief Allowance (CRA) from the Bag.
CRA = (₦200,000 or (1% x Total Income) whichever is higher + (20% of Total Income).
If our fave’s total income A +B equals 100 Million Naira, his CRA according to the formula would be 21 million Naira.
So Laycon would pay PIT on the income remaining in the Bag after the necessary CRA and expenses that pass the WREN test are removed from it. This is called the Taxable Income.
It is important to note that Laycon would not personally pay PIT on his Income B (his BB Naija winnings) only if he signed a contract with the BB Naija Organisers that states that the winnings he got are net of taxes.
Such a contract would most likely state the Total/Gross winnings amount, the PIT payable on this Gross and the net amount of winnings he would get. Laycon’s Net winnings is his Gross Winnings minus the PIT Payable.
So if Laycon’s 85 Million Naira worth of prizes is actually net of tax, the BB Naija organisers would be the ones to remit his PIT to the relevant state tax authority on his behalf.
THE REST THAT IS HISTORY
The rates of PIT range from 7% – 24% depending on the amount of taxable income. Just as PIT is imposed on the basis of an individual’s residence, it is payable to the Tax authority an individual’s state of residence.
So where two tax authorities – in this case LIRS and OGIRS, are vying for Laycon’s Bag, the tax authority of Laycon’s state of residence will prevail.
Determination of residence is not as straight forward as you may think. This is why the PITA dedicates a whole schedule to the ‘Determination of Residence’.
Our fave has till 31 March to render his PIT returns.
Eniola Akinoso is an Associate with Andersen Tax, Nigeria and the Initiator of TaxVille.