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Is your business ready for Single Touch Payroll Phase 2?

December 20, 2022

Single Touch Payroll Phase 2 (STP2) reporting became mandatory on 1 January 2022.  While a number of Digital Service Providers (DSP) such as Xero and QuickBooks Online obtained STP2 deferrals, these will be expiring shortly, meaning employers will soon need to start reporting STP2 data via their payroll software.

How STP Works

STP2 is designed to streamline reporting obligations for employers who need to submit information about their employees to multiple government agencies, such as Services Australia and the Child Support Agency.  To achieve this objective, large amounts of detailed information needs to be extracted from payroll systems and sent to the ATO with each pay run.

Almost all businesses are already reporting payroll data including gross wages, PAYG withholding and superannuation information via STP.  STP2 will capture and report more detailed information, such as:

  • Income types and country codes (i.e. salary and wages, closely held payees, inbound assignees, working holiday makers, Australian residents working overseas and labour hire);
  • The components which make up the reported amounts (such as gross pay, paid leave, allowances or overtime);
  • Employee’s employment status (full time, part time, casual, labour hire or non-employee);
  • Tax treatment of employee, including tax scale, STSL status, Medicare levy options and any tax variations;
  • Reason for an employee’s termination, such as voluntary cessation, redundancy, dismissal, contract cessation, transfer, ill health or death; and
  • The amounts withheld from payments made.

Gross earnings components that will need to be separately itemised under STP2 include:

  • Allowances (by category);
  • Paid leave (by category);
  • Overtime;
  • Bonuses and commissions;
  • Directors’ fees;
  • Lump sum payments and employee termination payments; and
  • Salary sacrifice and deduction amounts (by category).

The information transmitted via STP2 reporting will eliminate the obligation to provide Employee Separation Certificates upon termination, or to submit TFN declarations to the ATO.

Getting ready for STP2

Employers need to be ready to implement STP2.  DSPs will be upgrading their software to meet STP2 reporting requirements, however a number of setup items still need to be addressed by the employer.  The disaggregation of reported data will require the setup and mapping of STP2 labels and codes for various categories:

  • Employment type (e.g. Employee or contractor)
  • Income type (i.e. salary and wages, working holiday maker, closely held payee)
  • Employment basis
  • Cessation type
  • Leave type
  • Tax scale (i.e. regular, horticulturists or shearers, seniors or pensioners, etc.)
  • Medicare surcharge
  • Medicare levy/exemption

Some of the options chosen in STP2 payroll processing will affect your employee’s Services Australia entitlement, Child Support Agency obligations or income tax outcomes.  Therefore care needs to be taken to ensure label and code allocations in your payroll software are correct.

Next steps

Most DSPs are currently rolling out STP2 setup items to be actioned now, such as re-mapping pay codes or assigning income types to payments made.  Your employees’ contracts, FairWork Awards or industrial instruments will provide much of the information required for STP2 setup.  Ensure your payroll specialist understands the application of any such industrial instruments and Awards with regard to STP2 code and label mapping.

Ready to transition?

Your DSP will advise when your payroll solution is ready to commence STP2 reporting. 

Once your payroll solution is STP2 ready, you can transition at any time throughout the financial year.  The way you transition from STP1 to STP2 reporting will depend on your circumstances and the solution you use.  The ATO provides a comprehensive guide for employers transitioning from STP Phase 1 to Phase 2 reporting.

We can help

If you need assistance with your STP2 setup, our business advisers are here to help.  Contact our friendly team today on 07 3217 2477.