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Single Touch Payroll (STP) Phase 2 is a relatively new reporting framework introduced by the Australian Government to streamline payroll reporting for businesses. The system is designed to improve data accuracy and transparency for employers, employees, and government agencies - and ultimately make payroll easier for employers to comply with.
STP Phase 2 builds on the success of the original STP system, which was introduced in 2019. This guide explains what STP Phase 2 is, why it was introduced, the benefits of the system, and other essential information that employers need to know.
What is Single Touch Payroll Phase 2?
STP Phase 2 is a mandatory reporting system that requires employers to report their employees’ payroll information to the ATO each time they run their payroll. The required start date for STP Phase 2 reporting was 1 January 2022, but has been deferred a number of times to help employers make the transition. Depending on the digital service provider used by the employer, deadline deferrals have been made to 31 March 2023.
Under this system, employers - as always - must report their employees’ salaries and wages, pay as you go (PAYG) withholding, and superannuation contributions to the ATO every payday. STP Phase 2 will then automatically generate a report for the ATO with information they need, including:
- the remuneration pays to its employees (including the type of income),
- everything that comprises the income, whether that be gross pay, leave or overtime,
- the amount of PAYG withholding withheld, and
- how the business calculated the amount of PAYG / liability under superannuation
The ATO then uses this data to pre-fill business activity statements (BAS) and streamline the tax return process for employers.
The STP Phase 2 reporting requirements apply to all employers.
Employers must report their payroll information to the ATO using STP-enabled software or a registered tax or BAS agent. The software must be able to transmit data in real-time, providing the ATO with up-to-date information on employees’ payroll.
Why was STP Phase 2 introduced?
STP Phase 2 was introduced to simplify the payroll reporting process for businesses and improve the accuracy of payroll data. The system eliminates burden businesses previously carried when it came to reporting requirements at the end of each financial year, as all relevant information the ATO needs to know is reported in real-time.
The ATO can use this information to pre-fill activity statements, reducing the time and effort required to complete tax returns. Additionally, STP Phase 2 helps to reduce the incidence of payroll errors, as the ATO can quickly identify discrepancies and take appropriate action to correct them.
Why should employers care about STP Phase 2?
It is imperative for business owners to adhere to the regulations set out in STP Phase 2, as non-compliance may lead to severe penalties from the ATO.
Businesses who did not roll out STP 2 after the 1 January 2022 required a deferral. Digital service providers (DSP) such as Xero or MYOB, were able to apply for deferrals on behalf of their customers. Deferrals currently exist for several programs until 31 March 2023.
With the expansion of this model to STP Phase 2, there will be additional reporting requirements that businesses must undertake, which will require an adjustment for many.
Data from MYOB revealed that, with five months remaining until the 1 January 2022 deadline, 69% of small business owners reported not understanding the steps required to become STP Phase 2 compliant.
Key changes introduced by STP 2
STP Phase 2 has brought about several significant changes that are designed to reduce the reporting requirements for businesses. The following sections provide a more detailed explanation of four key changes.
- Tax File Number Declarations no longer need to be provided
A Tax File Number (TFN) Declaration is a form that employees fill out to provide their employer with their TFN. It also includes other important information such as the employee’s employment type and whether they have a HECS-HELP debt. This information was previously provided to the ATO separately from STP reporting.
Under STP Phase 2, the information collected from TFN Declarations is now to be included in STP reports, meaning that businesses no longer need to send the declaration separately to the ATO. This change will reduce the administrative burden on businesses and streamline the reporting process.
- Employee Separation Certificates no longer required
Employee Separation Certificates are documents that employers must provide to employees when they leave their employment. These certificates outline the reason for the employee’s departure and their final pay details.
Under STP Phase 2, Employee Separation Certificates are no longer required as the reason for an employee’s departure from the company will now be provided through STP reports. This change will eliminate the need for businesses to prepare and distribute these certificates, which will save them time and money.
- Lump Sum E Payments included with STP reporting
A Lump Sum E payment is a one-time payment made by an employer to an employee for amounts owed from previous years (more than 12 month before the date of payment), such as unused annual leave or back pay. Previously, if an employer made a Lump Sum E payment, they would need to provide the employee with a Lump Sum E letter outlining the details of the payment.
Under STP Phase 2, the details of Lump Sum E payments must now be included in the Phase 2 reporting. This means that businesses will no longer need to provide a separate Lump Sum E letter to the employee, and payment details will appear in the employee’s income statement.
- Child Support incorporated into STP reports
Under STP Phase 2, businesses now have the option to include child support garnishees and deductions in their STP report. This option will reduce the need to provide separate advice to the Child Support Registrar.
Benefits of STP Phase 2 for employers
These changes provide a number of benefits for employers, which are outlined below in further detail.
- Reduced administrative burden
STP considerably reduces the administrative burden employers have needed to carry previously. As explained above, for instance, employers using STP 2 no longer have to send the ATO their TFN declarations - the employees simply provide it to them, and they will keep them as part of their broader employee records. STP will automatically report the information to the ATO.
Further, if a business decides to change their employee’s payroll ID, they are able to inform the ATO via their STP report (if their STP solution is able to do so).
- Streamlined compliance
Because STP Phase 2 simplifies the payroll reporting process, reducing the administrative burden on businesses, compliance with various laws and requirements of various government agencies becomes streamlined.
This is because all payroll data ‘feeds’ directly into the agencies of government, eliminating the need for employees and different government to request bits of employment information ‘here and there’ from employers. For example, Services Australia and the ATO established the ‘Mutual Client Register’, facilitating the ability of Services Australia to ‘match’ data for individuals that is held by the ATO.
- Improved data accuracy
By reporting payroll information in real-time, businesses can improve the accuracy of their payroll data and reduce the risk of providing inconsistent details to the ATO.
STP Phase 2 provides greater visibility of employees’ payroll information, making it easier to identify and correct errors.
- Pre-filled Activity Statements
STP Phase 2 enables the ATO to pre-fill activity statements, reducing the time and effort required to complete tax returns. This so-called ‘data matching’ helps to streamline compliance and considerably reduce the risk of errors, as data is transposed across multiple documents.
- Easier to avoid penalties (to an extent)
STP Phase 2 helps to reduce the incidence of payroll errors, as the ATO can quickly identify discrepancies and take appropriate action to correct them. This can help businesses to avoid penalties and other compliance-related issues.
However, note that failure to comply with the requirements of STP Phase 2 - and the failure to obtain a deferral if needed - may attract penalties.
- Greater transparency
STP Phase 2 provides greater transparency of payroll information, making it easier for businesses to identify and resolve payroll-related issues. This can help to improve employee satisfaction and (ultimately) reduce the risk of compliance-related issues.
What are the additional reporting requirements for STP 2?
There are number of key reporting requirements that have been added as part of the transition to STP 2.
- Employment Type
Under STP Phase 2, businesses must report on the employment type of their employees, including whether they are full-time, part-time, casual, labour hire or volunteer. This was previously optional but has now been made mandatory.
The aim of this change is to provide the ATO with a more comprehensive understanding of the nature of employment arrangements in Australia, and to ensure that businesses are correctly complying with relevant taxation laws and obligations with respect to their employees.
- Disaggregation of Gross Income
Another key change introduced by STP Phase 2 is the requirement to report income in a disaggregated form. Rather than reporting a gross income figure, businesses must now provide an itemised breakdown of each income component, including salary sacrifice, overtime, paid leave, bonuses, commissions, director’s fees and allowances (with each allowance itemised individually).
The aim of this change is to provide greater transparency around remuneration structures, and to enable the ATO to more easily identify potential compliance issues or areas of concern.
The payroll software that you use should break down the income types which need to be differently taxed. There should be a code used to differentiate each category of payment. Some examples of income types include:
- SAW (salary and wages): this is the regular code that captures the majority of employees in a business
- CHP (closely held payees): This code covers small business payees with who have exemptions allowing them to lodge once per quarter (instead of each pay run).
- WHM (working holiday makers): This code covers workers under 417 or 462 visas. This is often used by farmers.
- Country Codes
Under STP Phase 2, businesses with Australian resident employees working overseas must provide details of the host country.
This change is aimed at improving the accuracy of tax and superannuation reporting, and ensuring that overseas earnings are correctly accounted for in the Australian tax system.
It is also intended to help businesses comply with their reporting obligations under double taxation agreements.
Common mistakes made by employers in STP Phase 2
The ATO has reported that employers often make similar mistakes when it comes to complying with their reporting requirements under STP Phase 2. These are listed below.
- Breaking continuity of amounts from STP 1 to STP 2
One common mistake made by employers is breaking the continuity of year-to-date amounts from STP 1 reporting when transitioning to STP 2. Employers need to ensure that they maintain the STP 1 data that they have already reported unless they are using the replacing IDs method.
This can be managed with the help of accounting solutions and employers should contact their provider if they require assistance to comply with this requirement.
- Selecting “not reportable to the ATO” when setting up pay codes and categories
Another mistake is selecting “not reportable to the ATO” when setting up pay codes and categories. Most payments to employees need to be reported, except for:
- Travel allowance below the ATO’s reasonable amounts,
- Overtime meal allowance below the ATO’s reasonable amount, and
- Reimbursements, and
- Post-tax deductions (apart for those deductions that need to be separately identified).
- Not including a cessation date and a reason for cessation
Employers also fail to report the cessation date and the reason why an employee left the business. These fields need to be completed upon termination in the accounting solution used by the employer.
Reporting this information to the ATO means employers no longer need to complete a separation certificate for that employee. As explained above, this is because the ATO will automatically share this information with Services Australia.
- Incorrectly reporting an “NA” Country Code
Some employers are incorrectly reporting a “NA” country code, thinking that it means “not applicable.” In fact, it means “Namibia.”
If employers use “NA” in their reporting, they are telling the ATO that their employee is either working overseas in Namibia or is in Australia and they are from Namibia.
This mistake can be simply avoided by reporting the appropriate country code relevant to the employee.
- Allowances
All allowances must be reported separately using one of the eight specific allowance categories. Employers should not simply report an allowance to the “Other Allowance” category.
Each category is treated differently for tax, super, and social security purposes. Employers should only report an amount as Allowance type OD if it is an allowance that does not belong in one of the eight allowance categories specifically mentioned.
- Not reporting all-purpose allowances separately
Another common mistake made by employers is not reporting all-purpose allowances separately.
There are many modern awards that include allowances added to the hourly rate of an employee, expressed to be paid for “all purposes”. Under the STP Phase 2 regime, employers are obliged to report all-purpose allowances against the applicable allowance type. This is important from the ATO’s perspective, because they are treated differently. Failing to identify them may result in a disadvantage to an employee.
- Treating reportable employer super contributions and salary sacrifice as the same thing
Many employers get these two confused, when they are in fact entirely different. Under the STP Phase 2 regime, employers must report amounts that are salary sacrificed to superannuation - being the amount of salary and wages.
This is a different concept to reportable employer super contributions (RESC), which is used for a different purpose.
Both need to be reported as STP, but they must be reported correctly.
What must business do to become compliant with STP Phase 2?
To comply with STP phase 2 introduced by the Australian Tax Office, businesses must generally engage in four courses of action.
- Determine their deadline
Employers first determine if their payroll digital service provider is already reporting through STP Phase 2.
For those businesses who use Xero, they have until 31 March 2023, to update their pay items and check their payroll setup to be compliant with STP2. Xero has simplified the process, and businesses can access the STP2 menu through the Single Touch Payroll option in the menu and follow the steps provided.
- Double check what employees are getting paid
Businesses must update their employees, and then update their pay items. This is where things can get complicated, as it involves breaking down the gross pay of each employee.
Many employees will be covered by a modern award or an enterprise agreement, and so employers must ensure that they are paying their employees at least the minimum rate of pay specified in the award or agreement.
If no award or agreement applies, employers must ensure that the pay is consistent with the employee’s pay rate in their contract of employment.
- Break up pay items
Most employers do not break down the pay to determine how it is made up, which could cause problems when trying to comply with STP2.
Small business owners, who generally do not have a payroll department, often set their own pay and their employees’ pay above the minimum rate to avoid having to make constant adjustments, thus easing their administrative burden.
To comply with STP 2, however, business owners need to break down the gross pay of each employee and ensure that they are paying the minimum rate. This falls under the “disaggregation of gross” reporting requirement mentioned earlier in this article.
Example: Solomon the truck driver
Let’s work through a practical example.Solomon is a truck driver, covered by the Road Transport and Distribution Award 2020. He is classified as a Transport Worker Grade 7 and his ordinary hourly rate under the award is $24.73. He is also employed as a Leading Hand, and supervises over 20 employees. Occasionally, he is required to transport dirty material.
However, the award also specifies that employers must pay to an employee the allowances specified in the award.
This may include:
- Special vehicle allowance ($1.60 per week)
- Leading hand allowance ($79.40 per week)
- Miscellaneous driving allowance for carting, loading and/or unloading dirty material ($0.53 per hour)
Solomon’s employer will need to make sure:
- If they pay the him a flat hourly rate, it must take into account the various allowances in a way that is compliant with the Award; and
- under STP Phase 2, that his setup is done to separate the all-purposes allowances.
Failure to comply with these requirements may not only lead to a penalties for breaching the requirements under STP Phase 2, but also breaching the terms of a modern award. This gives rise to the risk of paying penalties for breaching national industrial relations legislation.
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