Tipping the waiter

Restaurant Tips and GST

Written by: Institute of Certified Bookkeepers

Restaurant Tips

Tipping for services – do you pay GST on the Tips received? What happens when a customer pays a tip? Does it get reported on the BAS? What is the impact for employees/contractors?

What happens with tipping depends on how the customer tips and how the entity passes that tip on (If they do!).

Voluntary Tipping

For a voluntary tip that is passed on to employees or contractors from the owner of the business there is no GST payable as this is not deemed a taxable supply to the business owner. Nor are you required to report the tips as Income on the Activity Statement or Income Tax Return.

However, if a voluntary tip is not passed on to the employees then it becomes part of the taxable supply and GST must be paid. If a contractor does not provide an ABN then the ‘no ABN withholding tax’ must be withheld from the tip.

Equally you do not have to deduct pay as you go withholding (PAYGW) from the tips of the employees.

Non-Voluntary Tipping

If a tip is not voluntary – for example a pre-set tip amount is set as part of the service charge, then this is considered part of the taxable supply, GST is paid and the income is reportable on the activity statement.

If you pay these tips to employees or contractors, you can claim a deduction and deduct PAYGW and report on their payment summaries.

Equally, if a contractor does not provide an ABN then the ‘no ABN withholding tax’ must be withheld from the tip.

Employees

Tips are income.

Regardless of how you receive cash tips (directly from customer or employer), employees receiving tips must report the tips as income.

Some tips are collected for all workers (like in a tip jar) and shared between employees. These tips are also part of your income.

Record Keeping

It is important that records are kept showing that the tips have been passed on to the employees and not included by the owner as part of the business income.

Bookkeeping Process

When processing tips from a Z-Read or POS Summary sheet, it is important to separate the tips in the accounting process.

For voluntary tips passed on to employees, the tips received with the customer payment may be processed to a liability account, and then paid from the liability account when payment is made to employees.

For non-voluntary tipping/service charge/surcharge, these are processed as income to the business inclusive of GST.

Examples

Scenario 1

Restaurant customer gives a tip in addition to the payment for the meal.

The tip is purely voluntary, and is intended for the restaurant employees that provided the service. The tip may be paid in cash or credit card.

The restaurant passes on the tip to the employee/s.

The tip/gratuity is not consideration for supply by the restaurant provided that the tip is passed on to the employee/s as intended.

Note: The entity must keep records showing that the tips have been passed on to employees and not retained as part of business takings.

Scenario 2

Restaurant customer pays the bill which includes a pre-determined rate or amount that may otherwise be defined as a service charge, public holiday surcharge or similar. The non-voluntary tip is consideration for the supply by the restaurateur.

Note: The restaurateur would include these amounts on their BAS.

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