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Updated: Mar 24, 2023

What is Windfall income?

Windfall is any amount (mostly large sum of money) that is won or received unexpectedly. Windfall Tax is thus any tax on such amounts.

Why is Windfall subject to Income Tax?

The idea behind taxing windfall income is greatly influenced by Wealth Creation and the concept of Income. Income Tax is based on Income but Parliament all over the world, when making tax laws fail to define clearly what is Income, and instead, left the word to judicial and administrative branches of government to thrash out the meaning of Income. Maybe the word does not lend itself for easy definition and any attempt to define income will lead to so many things being left out (to define something means to set the precise boundaries of the thing). Accountants, economist, and lawyers normally disagree on what exactly constitute income. But in spite of the unclear definition of Income, we can know it when we see it.

Most tax laws therefore, instead of defining income, use the inclusive term in the nature of phrases such as "income includes" so that anything that looks like income can be brought into the meaning.

One fundamental concept underlying taxation is the way community members contribute to the expenses of the elected Government, at least initially, obliged to share that burden. Taxes are compulsory contribution levied by government to raise funds to be spent for public purposes (public services), including the support of the government. As Justice Holmes, said ‘[t]axes are what we pay for civilized society’.

Most importantly Wealth is an important element in every tax system because taxes are payable from wealth, inevitably in money, although this was not always the case.

Governments often impose taxation by reference to the stages of wealth:

1. When you CREATE wealth, (Income Tax will be imposed, e.g. when you create wealth by earning salary, PAYE will be imposed)

2. When you HOLD your wealth created and you don't spend it, (Property tax will be imposed because you own property in the city)

3. When you TRANSFER (Sell) your wealth (Stamp Duties & Capital gains tax should be imposed)

4. When you CONSUME your wealth,VAT should be imposed because you are consuming the wealth created.

Using the principles from wealth creation, the Tax law, to a large extent relies on Net worth as a measure of Income.

If this principle holds, then potentially, anything that increases net worth is income and anything that decreases net worth is a deduction (if permitted under the tax law).

Therefore, WINDFALL INCOME such as found treasures at the back yard is taxable under the theory that, net worth has increased.

The Practice in some Countries

Countries that adopt the worldwide taxation consider that windfall gains such as found property is taxable as Occasional Income on the basis that, it increases wealth. For example, in Germany, the taxation of windfall depends on the situation. If it arises from business settings, it must be included in the business income. So, money found on the premises of a businessman is taxable as part of the business profit.

In Netherlands, unless they fall within the taxable category (Business, Investment, or employment), it will not be subject to tax.

Variants of Windfall Taxes

Windfall tax has evolved and taken on different versions and shapes. The common version of windfall tax is now called Windfall Profit Tax (Excess Profit Tax). This is a levy that certain industries are required to pay when economic conditions make them earn above-average profits. The presumption is that, these companies in the targeted industry have benefited the most from the economic windfall hence they should contribute more to society.

Such taxes are mostly temporarily, but in some countries, because it generates additional income, it is hard for governments to make it temporal. Example is the National Reconstruction Levy which was introduced in Ghana somewhere in 2004 or so,which later become National Fiscal Stabilization Levy (NFSL). The government said it was temporary but NFSL has come to stay and in the 2020 budget, it was extended to 2024.

Additional or Excess Profit tax has been criticized on the ground that, it reduce companies' initiatives to make more profits. Critics say instead of taxing hard work, the excess profits should be reinvested by companies to promote innovation.

In most Oil and Gas taxation agreement, a major excess profit tax is what is termed Additional oil Entitlement. In Ghana's Petroleum sector, oil producers are made to agree a threshold of rate for the oil they produce and when there is excess, additional tax is imposed on them. According to article 10.2 of the Model Petroleum Agreement (MPA) the State (Ghana) shall be entitled to a portion of Contractor’s share of Crude Oil then being produced from each separate Development and Production Area (hereinafter referred to as “Additional Oil Entitlements” or “AOE”) on the basis of the after-tax inflation-adjusted rate of return (“ROR”) which Contractor has achieved with respect to such Development and Production Area as of that time. The windfall profit is defined as when the IOC‟s actual internal rate of return exceeds the targeted rate of return used to evaluate the profitability of the venture during the project negotiations.

Other forms of windfall tax is National Fiscal Stabilization Levy, Gift tax and gambling or lottery winnings.

Following the Covid-19 pandemic, some industries like textiles (for face masks), Ethanol and hand sanitizers, Veronica buckets manufactures presumably,are going to make excess profit.

On the same principle which led to the introduction of National Fiscal Stabilization Levy on 9 categories of companies because they were making excess profit, the government can possibly introduce excess profit for these sectors. Currently, 5% Stabilization Levy is paid on profit before tax by the following companies.

  1. Banks (Excluding Rural & Community Banks)

  2. Non-Bank Financial Institutions

  3. Insurance companies

  4. Telecommunications companies

  5. Breweries

  6. Inspection and valuation companies.

  7. Mining support services

  8. Shipping lines

  9. maritime and airport terminals

Legislative requirement to clarify how windfall is taxed in Ghana

A careful reading of Act 896 does not appear to provide any provision on windfall income which cannot be categorized into either Business, Investment, or employment. The position therefore is that, when a windfall income falls under business, investment or employment, it will be taxed. When it falls outside this category, it cannot be taxed.

There is therefore the need for amendment to the tax laws to clarify this space as either exempt or taxable (e.g. found amount of money by an individual).


Another windfall which needs to be mentioned is payment to a person as damages. Damages are special categories of windfall gains/income. In most cases, they are taxable to the extent that they relate to assets or activity that are taxable. For example an insurance claim will be taxable as a business income.

In Ghana, the rules are very specific for Damages paid for Personal Injuries. Damages that happens in the personal sphere are not generally taxable if the injury has permanently reduced the victim’s capacity to earn income. Section 7(e) of the Income Tax Act, 2015 (Act 896) provides that, "a capital sum paid to a person as compensation or gratuity in relation to a personal injury suffered by that person or the death of another person is not taxable"

However, damages can be taxable if the payment compensates for temporary loss of income. So salary in Lieu of Notice will be taxable in an employment relationship. In some cases, when the damages are in the form of annuity then this is taxable. Some countries like Sweden do not tax windfalls because they do not believe it arose from efforts to earn the income and they are also not periodic.

The Ghana Revenue Authority must work together with the Judiciary to check possible payments of damages in civil actions in our courts.

I once engaged in a transaction where the court awarded damages for trespassing the person’s land. The damages were for the rent the person should have charged. When withholding taxes were deducted, the person threatened to go back to court that the judgement amount has not been paid in full. If the Judiciary is made to ensure taxes are paid on taxable damages, additional revenue could be raised.

Taxation of lottery and gambling

The inclusion of lottery or gambling income as taxable income is strongly influenced by a country’s choice of tax system. For those countries with worldwide tax system, gambling winnings are in principle, subject to tax whether they arise from windfall (occasional transactions) or from a professional gambler.

When tax is imposed on gambling and lottery, the Tax Base is only on the winnings and the loses are ignored. Losses incurred in gambling or lottery are not deductible because each gambling occasion is a separate event. Gambling or lottery losses arising on one occasion cannot be deducted against winnings derived on another occasion. These restrictions, presumably reflects the administrative difficulties of verifying gambling losses. Even in the case of a professional gambler or lotto "staker", losses for the year can be deducted only to the text of gambling income or winning from the stake.

The Practice in some countries

Most countries tax lottery or Gambling income as Occasional Income (windfall) and some countries consider gambling income as taxable only if the gambler can be found to be in the business of gambling. For example in Germany, gambling income of a professional card player is taxable as a business income and Gambling from TV shows are taxable as other income.

In Ghana, when Act 896 was passed in 2015, lottery activity was recognized as an investment activity. Since 2015, lottery taxation has gone through several changes leading to it being repealed.

  1. In 2015 when Act 896, a withholding tax of 5% was imposed on the winning amount under 1st Schedule Par 8(1)(b)(viii).

  2. In 2016, The Income Tax Amendment Act, 2016 (Act 907) amended it to exempt only the first GHS 2,592 and any excess wining above the GHS 2,592 was taxable at 5%

  3. In 2017: The National Lottery Authority (NLA) made a proposal to the Ministry of Finance for the scrapping of taxes as a way of attracting more mainstream operators. The tax was then repealed.

Regulations 24 of the Income Tax Regulations, 2016 (L.I 2244) defined winnings from lottery to includes gambling, betting and any game of chance.

Does the exemption of Lottery in Ghana mean that a professional gambler (CASINO, lotto forecaster, etc), engaged in gabbling business (unregistered lotto forecaster) is also exempt?

It appears not. But the law in my view needs to be clarified or enforced. What about other forms of TV shows and Promotional winnings?

The writer is a Tax Consultant.

Contact: 0266-656595


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