Tips paid to restaurant staff should be tax-free and treated the same way as lotto winnings, says the Australian Restaurant & Cafe Association (ARCA).
After decades of resistance from local diners, optional tipping is on the rise in Australia: new data from payments tech provider Zeller, released Monday, show the average gratuity payment rose by 25% to $25.20 over 2024.
Tipping is also becoming more frequent, as cashless point-of-sale systems automatically prompt diners to make extra payments to staff.
As rewards for exceptional service become more common, making those payments tax-exempt would put more money in the pockets of hospitality workers, says ARCA CEO Wes Lambert.
Today’s food service staff are “chronically” listed as some of Australia’s lowest earners, Lambert said, arguing tax-free tips would lift those workers closer to the middle of the pack.
“Many more young Australians, and Australians in general, would work in the hospitality industry if we were better able to publish to the world that you can do quite well working in restaurants and other hospitality businesses,” Lambert told SmartCompany.
ARCA’s proposal would remove the need for workers to declare tips on their personal tax returns, as is currently required by the Australian Taxation Office (ATO).
Overall, tax rules and employment regulations around tipping have not kept pace with Australia’s changing habits, Lambert said.
The Fair Work Act 2009, which underwrites protections for Australian workers, does not specifically cover tipping.
“This is where Fair Work and the ATO and hospitality businesses need to get together,” he said.
It is important the federal government “takes a firm position that this windfall, that is paid to servers, can be considered like every other windfall and not subject to income tax”.
But removing tax on tips does not seem high on the Albanese government’s list of priorities, after prioritising reforms that compel employers — not customers — to pay their staff a fair and predictable wage.
To date, the federal government has overseen the criminalisation of wage theft, changes to the definition of casual work, and expanded casual conversion pathways, billing each as a win for vulnerable workers facing exploitation.
Speaking to the ABC last August, Workplace Relations Minister Murray Watt said tip money should be passed directly on to staff, with the onus on employers to “do the right thing”.
However, he did not reference the way tips are taxed.
Making tips tax-exempt would also affect the budget bottom line, ahead of a federal election where government spending is a primary concern.
With the hospitality industry contributing around $100 billion to the Australian economy each year, Lambert estimates between $3 billion and $5 billion in gratuities flow to workers each year — which would become tax-free under ARCA’s plan.
Tipping is also prevalent in the beauty, transport, and food delivery sectors, expanding the potential effects of any tax-free tipping policy.
Nevertheless, Lambert said the proposal would energise workers in the vital hospitality sector.
It is “paramount” the federal government ensures “as many Australian youth are excited to work in that industry, and announcing no tax on tips is a great way to kick off a campaign to get more Australians into those jobs,” he added.
Never miss a story: sign up to SmartCompany’s free daily newsletter and find our best stories on LinkedIn.
Senior Business Journalist
Focused on the small business sector, David’s work covers the political, regulatory, and economic issues facing Australian entrepreneurs. Prior to joining SmartCompany, he was a reporter for Business Insider Australia. You can follow him on LinkedIn.
