Copies of this publication
This publication can be downloaded in Portable Document Format (PDF): download Tips and gratuities here (NAT 72667, 97KB).
To ensure your records are consistent and you are meeting your record keeping requirements, we recommend you develop and apply a written policy to deal with tips you collect and distribute. At a minimum, this policy should cover:
- how you collect and record tips you receive from customers
- how you distribute tips to your staff
- how often you distribute the tips to staff
- how you will resolve any disputes about the policy.
If your business is registered for goods and services tax (GST) and you receive tips that are voluntarily paid, you do not have to:
- pay GST on the tips you pay to your employees or contractors
- report the tips you pay to your employees or contractors as income on your activity statement or income tax return.
However, you must keep records that show the tips have been paid to your employees and contractors.
You do not claim a tax deduction for the tips you pay to your employees or contractors that you do not also report as income.
If your business is registered for GST and you receive tips that are voluntarily paid but you do not pay all of these tips to your employees or contractors, you must:
- pay GST on the tips you keep as your business takings
- report this income on your activity statement and your income tax return.
You do not have to deduct pay as you go withholding (PAYGW) from the tips you pay to your employees or include these payments on your employees' annual payment summaries.
If a contractor does not provide you with an Australian business number (ABN), you must withhold 46.5% from the tips you pay to them unless one of the exceptions to withholding applies and you must include these payments on a no-ABN withholding summary. If one of the exceptions applies, the contractor can give you a Statement by a supplier or a written statement to that effect - you should keep a copy for your records.
If your business is registered for GST and you receive tips that are non-voluntary (for example, for a pre-set amount, a surcharge or a service charge), you must:
- pay GST on these tips
- report this income on your activity statement and your income tax return.
If you pay these tips to your employees or contractors, you can usually claim a tax deduction for the amount you pay.
You must deduct pay as you go withholding (PAYGW) from the non-voluntary tips you pay to your employees and include these payments on your employees' annual payment summaries.
If a contractor does not provide you with an ABN, you must withhold 46.5% from the non-voluntary tips you pay to them unless one of the exceptions to withholding applies and you must include these payments on a no-ABN withholding summary. If one of the exceptions applies, the contractor can give you a Statement by a supplier or a written statement to that effect - you should keep a copy for your records.
Generally, employment laws do not treat tips from customers as part of your employees' salary or wages. However, any tips they receive and keep, either directly from customers or distributed by you, must be reported as income if they need to lodge an income tax return.
If your employees pay their tips to you, they only need to report as income the amount of tips they keep and that you distribute back to them.
Your employees must report their tips as income from working at Question 2, Allowances, earnings, tips, director's fees, etc, on their income tax return.
Any tips your contractors receive and keep, either directly from customers or distributed by you, must be reported as income if they need to lodge an income tax return. If your contractors pay their tips to you, they only need to report as income the amount of tips they keep and that you distribute back to them.
Your contractors must report their tips as business income by completing the Business and Professional Items schedule and submitting it with their income tax return.
If your contractor is registered for GST, they must report any tips they receive as income on their activity statement and pay one-eleventh in GST.
If your contractor does not quote an ABN to you, you must:
- withhold 46.5% from each payment of tips you make to them
- report the amount you withhold from them on a no-ABN withholding summary, unless one of the exceptions to withholding applies.
If one of the exceptions applies, your contractor can give you a Statement by a supplier or a written statement to that effect - you should keep a copy for your records.
We have a range of other publications to help you meet your tax obligations, including:
To obtain a copy of our publications, visit www.ato.gov.au/publications or phone 1300 720 092 and quote the details above.
Electronic tools
Record keeping evaluation tool - a free program to help you understand what business records you need to keep and evaluate how well you are keeping them. It can also generate a report that includes suggestions for improvement. Visit www.ato.gov.au/recordkeeping to download a copy.
For more information:
- phone 13 28 66 for business enquiries
- phone 13 10 20 for superannuation enquiries.
If you do not speak English well and want to talk to a tax officer, phone the Translating and Interpreting Service on 13 14 50 for help with your call.
If you have a hearing or speech impairment and have access to appropriate TTY or modem equipment, phone 13 36 77. If you do not have access to TTY or modem equipment, phone the Speech to Speech Relay Service on 1300 555 727.
Last Modified: Wednesday, 17 February 2010