Did you know… Tax on tips and gratuities

Have you ever gone to pay for your coffee or lunch and saw the tip jar at the local café counter, and wondered how (or if) the business accounts for tax on that money? Depending on a number of factors, this can add up to quite a sum over a year, assuming the café owner empties the jar each day. Not surprisingly, the taxman has thought of this scenario, and has devised guidance for dealing with “tips and gratuities”.

A business registered to collect GST does not need to pay GST on the value of tips paid to staff, nor report this amount as income on activity statements or the business’s annual income tax return. However any tips, or portion thereof, not distributed to staff but kept as part of business takings must account for GST and be reported as income.

The business owner does not have to deduct pay-as-you-go withholding from tips distributed to staff, nor include them on employee annual payment summaries. For contractors used, if they do not supply the business with their Australian business number, the business is expected to withhold 47% from tips provided.

For employees, it is generally the case that employment laws do not treat tips from customers as part of salary or wages. The Tax Office however takes a different view. It deems any tips that employees receive, either directly from customers or distributed by the employer, as needing to be reported by the individual as income if the employee is to lodge an income tax return.

The Tax Office also advises business owners that it expects them to keep a record of tips paid to staff.