GST core
Tips
Tips are voluntary payments given by customers for good service, and they are generally not subject to GST, whereas compulsory service charges are part of the price and do attract GST.
A tip is a payment a customer chooses to make over and above the price of a purchase, as a thank you for good service. Because it is voluntary and the customer receives nothing additional in return, a genuine tip is generally not consideration for a supply. That means no GST is payable on it, and the business does not report it as part of its taxable sales.
The distinction between a tip and a service charge is important. If the business adds a compulsory service charge to the bill, such as a set percentage added for large groups or on public holidays, the charge forms part of the price of the supply. GST applies to it just as it applies to the rest of the bill. The key question is whether the customer has a real choice to pay or not.
Practical situations make this less clear. A card machine that prompts customers for a tip is still collecting a voluntary payment, as long as the customer can decline. A restaurant that suggests a 10 per cent gratuity on the bill but makes clear it is optional is still dealing with a voluntary payment. But a pre-printed bill with a service charge already included, with no way to remove it, is part of the price. The way it is presented to the customer is what matters.
Tips also have income tax consequences. Tips received by employees are generally assessable income for them, even though they are not subject to GST. Where tips are pooled and shared, the arrangements can affect payroll, super and reporting, so it is worth speaking to a professional if your business pools tips. These are separate from GST and follow their own rules.
Common misunderstandings include charging GST on genuine tips or failing to charge GST on compulsory service charges. Both can create problems at BAS time. A business may also wrongly include genuine tips in G1 total sales, which can overstate the sales figure. Accurate coding in your point of sale and accounting systems helps avoid this.
If you operate a hospitality or service business, review how your system records tips and service charges. Keep records that show which payments were voluntary and which were compulsory. This page is general information only, so confirm your situation with the ATO or a registered tax professional.
Worked example
A restaurant bill is $110 including GST for the meal. The customer adds a voluntary $10 tip on the card terminal and pays $120. GST included in the meal is $110 / 11 = $10. The $10 tip has no GST. If instead the restaurant adds a compulsory $11 service charge, the bill is $121, and the GST is $121 / 11 = $11.
Practical tips
- Treat only genuinely voluntary payments as tips. A charge that the customer cannot decline is part of the price and includes GST.
- Make sure your point of sale system records tips separately from sales so they are not reported as taxable sales by mistake.
- Tell staff how tips are handled and recorded, since transparent practice helps with payroll, reporting and trust.