KembaraXtra - Legal Terms - Rule in Re Pettit

The rule in Re Pettit applies where an agreement requires a payer to make a payment “free of tax.” The payer must pay the stated amount in full to the recipient. However, for tax purposes, the payment is treated as representing a larger gross amount. The amount is grossed up by the basic rate of income tax. The recipient is therefore taxed on the grossed-up figure.

The rule originates from the case of Re Pettit, Le Fevre v Pettit (1922). The court interpreted the phrase “free of tax” according to established tax principles. The payer bears the burden of the tax rather than deducting it from the agreed payment. This ensures that the recipient receives the promised net amount. The tax calculation reflects the gross equivalent.

The rule commonly arises in contractual drafting. Parties may agree that certain payments are to be made without deduction for tax. Lawyers must understand the tax consequences of such wording. Incorrect drafting may produce unexpected liabilities. Precision is therefore essential.

An unusual feature of the rule is that it does not apply to court orders. The decision in Jefferson v Jefferson established this distinction. Although the result appears illogical, it remains part of the law. Different principles therefore apply depending upon the legal source of the payment obligation. This distinction illustrates the technical nature of tax law.

The rule in Re Pettit demonstrates the interaction between contract law and taxation. Parties cannot avoid tax consequences simply by using particular wording. The law determines the true tax treatment of payments. Professional advice is often required where agreements include tax-free payment clauses. The rule remains an important principle of revenue law.