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How do you account for tips in Restaurant Income

  • 12 posts
  • # 99113

My client has just raised the issue of tips in restaurant income. They are suggesting that the tips should be deducted from the EFT takings.

They have the EFT tip receipts from July 2013.

How do I account for the tips? retrospectively and in future transactions?

To save the client money, I have suggested that they (rather than me) enter the daily tips into excel.

Any ideas gratefully accepted.
PaulineWalton
  • Fellow in Practice
  • 283 posts
  • # 99121

Hi Ingrid,

Some information for you and a link for further information from the ATO at the bottom.

What happens with tipping depends on how the customer is tipped and how the entity passes that tip on (If they do!)

Voluntary Tipping

For a voluntary tip that is passed onto employees from the owner of the business there is no GST payable as this is not deemed a taxable supply to the business owner.

If a voluntary tip is NOT passed onto the employees then it becomes part of the taxable supply and GST must be paid.

Non Voluntary Tipping

If a tip is not voluntary – for example a pre-set tip amount is set as part of the service charge; then this is considered part of the taxable supply and GST is paid.

Record Keeping

It is important that records are kept to show that the tips have been passed onto the employees and not taken by the owner as part of the business income

For further information:

 

What happens with tipping depends on how the customer is tipped and how the entity passes that tip on (If they do!)

Voluntary Tipping

For a voluntary tip that is passed onto employees from the owner of the business there is no GST payable as this is not deemed a taxable supply to the business owner.

If a voluntary tip is NOT passed onto the employees then it becomes part of the taxable supply and GST must be paid.

Non Voluntary Tipping

If a tip is not voluntary – for example a pre-set tip amount is set as part of the service charge; then this is considered part of the taxable supply and GST is paid.

Record Keeping

It is important that records are kept to show that the tips have been passed onto the employees and not taken by the owner as part of the business income

For further information:

 

http://law.ato.gov.au/atolaw/view.htm?docid=AID/AID20021062/00001


 
  • 12 posts
  • # 99122

Thanks Pauline, for your reply.

I have read the ATO page thanks.

The tips are definately passed on to the staff.

I record the total EFT takings off the bank statement. What the client is saying that part of those daily takings are the tips which are not income and not subject to GST, and therefore should be deducted from the takings. They estimate tips to be at least $500+/week.

So what would be the best method in recording this? Also they want to claim back the tips from 01/07/13.

Thanks for your help

Ingrid
PaulineWalton
  • Fellow in Practice
  • 283 posts
  • # 99123

Hi Ingrid

 

From what you have said they are banking the full amounts so how are they passing the tips on?  Is this being paid from the bank to the employees?  if so you would be able to pick that up in the account.  

 

The bookkeeping process is simple.  You should have the information on the till slips or the Z read showing the amount of the tip received.  When you then enter the EFT for the day you would break down the EFT payment with the income going to the income account and the Tips going into a tip liability account.  So you would set up a liability account showing these tips.  Once the tips have been paid to the staff, you would record against the liability account thus reducing it back to $0.00.

For the business to be able to exempt the tips from their income they need to keep records proving that they have paid the staff the tips.  Without these records the tips are deemed to be income and they must record as such.  An estimate of tips is not acceptable they must know how much they have received in tips and how much as been paid out to staff.  If they want to claim back from 1.7.13 this will only be possible if they have the records showing the money has been given to staff.

Hope this helps
  • 51 posts
  • # 99126

Hi Pauline,

I agree 100% with your comments. As to Ingrid, I believe the income records must be taken from the ‘Z’ read from the cash register and not from the bank statements only. The dissected sales categories from the cash register should be recorded to a clearing account may be called the ‘Cash Drawer’ account in the software, and the bank statement deposits are then allocated to offset the amounts to the cash drawer account. (This is no different to the real life situation, you collected the money and put it in the cash drawer, then when the money is banked from the cash drawer, the total banked should agree to what you had in the drawer). Any differences would be either a cash shortage or an overage, with the tips charged to the liabilities as Pauline has pointed out. Bear in mind also that cash from the register are sometimes taken out to buy incidental purchases which also need to be accounted for. Allocating sales from the bank statements on bank deposits for restaurants simply would not work. I believe this is also the ATO’S preferred method. It will involve a little extra work compared with how you did it previously but I believe this is the only way to do it.



Richard Lowe. FICB (Fellow); MYOB Certified Consultant; Registered BAS Agent.
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