GST and restaurant tips

Does a tip paid voluntarily by a customer form part of the consideration, as defined in section 9-15 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), for the supply by the entity, a restaurant operator, to the customer?

No, a tip paid voluntarily by a customer does not form part of the consideration, as defined in section 9-15 of the GST Act, for the supply by the entity, a restaurant operator, to the customer.

The entity is a restaurant operator. A customer who dines at the entity's restaurant provides a tip in addition to the payment for their meal. The tip is purely voluntary, is intended for the restaurant employees that provided the service and is paid by way of cash or credit card. The entity passes on the tip to the employees.

The entity is registered for goods and services tax (GST) and its supply to the customer is a taxable supply under section 9-5 of the GST Act.

Under section 9-15 of the GST Act, consideration includes any payment, act or forbearance, in connection with, in response to or for the inducement of a supply of anything.

For a tip to be consideration for the entity's supply from its restaurant, it must be in connection with, in response to or for the inducement of the supply made by the entity from its restaurant. Generally, a genuine tip that is paid on a purely voluntary basis by a customer and that is intended to go to the employee/s that provided the service, is not a payment to the restaurant but is a payment to the employee. As such, a genuine tip is not consideration for a supply by a restaurant to its customers.

The tip is paid by the customer on a purely voluntary basis and is intended for the restaurant employees that provided the service. Further, the entity passes on the tip to the employees. Therefore, the tip does not form part of the consideration, for the supply by the entity to the customer. [Note 1: An entity must keep records to reflect that the tips have been passed onto employees and not retained as part of the entity's business takings. If tips are not passed onto the employees those tips amount to consideration for the entity's supply and are subject to GST where the other requirements in section 9-5 of the GST Act are met. Note 2: If a tip is not paid voluntarily, for example, it is a pre-set amount or an amount that is otherwise defined as a service charge or similar, it forms part of the consideration for an entity's supply and is subject to GST where the other requirements in section 9-5 of the GST Act are met.]