Are tips and gratuities taxable?

Tipping is often something us Aussies associate with being a thing they do in the movies or in other countries. 

It’s not something that we see as mandatory in Australian tourism and hospitality culture where our minimum wage is fairly high compared to the rest of the world. 

While it feels less common and expected here than in other countries, its quickly becoming embedded in our culture as a reward where great service is delivered. 

These days, many pieces of software used by businesses now include an inbuilt feature to add in a voluntary gratuity when placing an order that you have to consciously say either yes or no to. There’s also the good old fashioned tip jar at the till for cash, which without fail always contains a large note that makes you think  “wow, how generous were those people!” (who says cash is dead?).  

What are your tax obligations?

So, what are your tax obligations if you are on the receiving end of a gratuity or tip? Well, if it’s in the form of solid advice such as “be good to your mother” then that’s completely tax free. If it’s got a monetary value, it’s taxable. 

As a business, if you collect voluntary tips via your billing function or software (or the aforementioned good old fashioned tip jar), you are obliged to pass these onto your employees. The internal mechanics of how this is distributed is completely up to the business, but if it is intended to reward good service, it should end up in the hands of the employees and not retained by the business.  

Mandatory service charges or surcharges pre-determined and charged by the business are treated differently and are considered business income. As there is no discretion by the consumer and these charges are not intended to be a reward for individual efforts, they are imposed to cover business costs. 

Employees

As an employee, if you are awarded tips from collections made by your employer, or directly received from customers, these should be included as part of your assessable income in your tax return. 

It's worth noting that even non-cash tips such as gifts or vouchers, may still be subject to taxation. The ATO considers the market value of these non-cash tips as assessable income. 

The ATO expects individuals to report all income earned, including tips, to ensure accurate tax calculations. Failing to report tips could result in penalties or other legal consequences. 

When tips are included in your assessable income, they are subject to income tax. The tax rate applicable to the tips will depend on the overall income tax bracket you fall into.  

Remember, it’s crucial to keep good records. Whether you are the business collecting tips on behalf of your employees or if you are an employee receiving them directly, as it could save you should you ever be subject to an ATO audit – that’s my tip! 

FOR MORE INFORMATION

For more information, or to speak with one of our advisers, please contact local RSM office.