Single Touch Payroll (STP) Phase 2 - What you need to know
We have been using Single Touch Payroll (STP) for a while now, so you are (hopefully) all over the general concept of STP and what it is all about. We also found out in the 2019-20 Federal Budget that the Government planned to expand this to include additional information in your reporting.
Where phase 1 started reporting employees' tax and super directly to the ATO (Australian Taxation Office), STP phase 2 expands the program to include more information including details such as income or payment type and the reason for any cessation of employment. All Aussie businesses that have employees on their payroll will be impacted by this change!
Now, while you will need to provide the ATO with more information about your employees, the way you submit your pay runs should not change.
What can I do to get ready?
The transition to STP phase 2 reporting will be gradual. While you still have time to make all required changes, the best way to keep on top is to stay informed.
Xero’s payroll software has been granted a deferral on the start date of STP phase 2 (which will apply to all new and existing users). This means that all customers reporting STP using Xero Payroll have until 31 March 2023 to report their first STP Phase 2 pay run.
While we don't want you to rush and start making updates without all the tools and information, it is important to be aware of these new requirements. You will be able to begin the transition ahead of the deferred compliance date, so you have time to adapt. And remember, we are here to help at any time! Get in touch to start a transition plan with your advisor so you get everything sorted correctly from the get-go!
Get prepared with these handy resources
The best thing you can do is stay informed and in the loop. Get on top of all the changes and requirements with these resources:
Read the ATO's article on Expanding Single Touch Payroll (phase 2);
Check out the ATO Employer Reporting Guidelines;
Xero users can read their STP Phase 2 Guide;
Confidently prepare for STP Phase 2 in Xero Payroll with their detailed checklist;
What changes are coming from STP phase 2?
The main changes are:
- Tax file number declaration - Employers are currently required to submit a tax file number declaration to the ATO. Phase 2 will incorporate employee tax information via STP reporting, which eliminates the need to submit tax file declarations to the ATO as a separate process.
- Income type and country codes – While you already tell the ATO about the type of income your employees receive, STP phase 2 allows more flexibility to identify different payments with specific tax consequences, making it easier for them to complete their income tax return.
- Termination reason - Currently, an employer may be asked to provide an employee with an employment separation certificate upon an employee’s termination of employment. Phase 2 will require the reason for termination to be included in the STP report sent to the ATO.
- Paid Leave - Paid leave will not be included as part of gross earnings when reporting earnings via STP. You will still need to report leave payments made to your employees in your STP report. You can find more information about paid leave on the ATO website.
- Allowance types - You will now need to report all allowances separately in your STP Phase 2 report across most income types. This means that allowances previously reported as gross must now be separately itemised and reported.
- Directors' fees - If you pay directors’ fees, you will now need to include these in your STP Phase 2 report.
- Tax treatment codes - Your STP Phase 2 report includes a six-character tax treatment code for each employee. The tax treatment code is an abbreviated way of telling the ATO about factors that can influence the amount you withhold from payments to your employees. You can find more information on tax treatment codes on the ATO website.
- Bonuses and commissions - There might be times when you pay some employees bonus and commission payments, which are typically paid as a lump sum. Previously they were reported as part of gross payments, but for STP Phase 2 they will be reported separately.
- Lump Sum E payments - This is used when you make lump sum payments for back pay from prior income years. Previously, this was shown on a separate line item in an employee’s payment summary. STP Phase 2 requires these payments to be reported with the tax year they originated in before finalising an employee’s records. This removes the need to provide employees with Lump Sum E letters.
Changes to Xero for STP Phase 2
Xero is hard at work making changes to Xero Payroll platform to help you meet these new requirements. These changes will be rolled out in three stages throughout the year, with stage one changes already available in Xero Payroll:
- Stage one: Updated employee setup process to make sure new employee payroll profiles will be compliant with STP Phase 2. You will need to update your existing employee records with added details, like whether they are an employee or contractor (Xero has released this checklist for stage one and setting up employee profiles)
- Stage two: New earnings categories will be created in Xero Payroll so you can identify and reclassify pay items with the new earnings categories for STP Phase 2 (coming soon to Xero).
- Stage three: Paid leave is being broken down into additional subcategories, you will need review and update your existing leave items to the new categories (coming soon to Xero).
Stage one: employee profiles (now active)
What you need to know
STP Phase 2 requires more information on the individual parts that make up an employee’s pay. These include:
- Employment type – whether the individual is an employee or contractor.
- Income type – how the individual is paid, such as salary and wages.
- Employment basis – whether the individual is full-time, part-time, or casual.
- Tax scale – the PAYG (Pay as you go) tax scale category that determines how much tax should withheld for an employee.
Xero has released this checklist for stage one and setting up employee profiles.
Xero & STP phase 2 Frequently Asked Questions (FAQ)
When do I need to be STP Phase 2 compliant?
Xero has secured a deferral on the compliance date with the ATO until 31 December 2022 for all Xero customers lodging STP through Xero Payroll. Changes will be rolled out across the Xero platform in three stages throughout the year to help you meet this deadline.
What isn’t changing to the way I report in STP Phase 2?
While you will need to report additional information in your STP report, there are many things that are not changing, such as:
- The way you lodge your STP report.
- When STP reports are due. They are still due on or before pay day unless you are eligible for a reporting concession.
- The types of payments that are in-scope for STP reporting.
- Taxation and superannuation obligations.
- End of year finalisation requirements.
Who must comply with STP Phase 2?
All Australian businesses making payroll payments will need to report on the additional data required for STP Phase 2. Businesses reporting STP through Xero Payroll will need to be compliant by 31 December 2022.
Can I start submitting tax number declaration forms through Xero?
This feature is currently in development for launch later this year. For now, you still need to obtain a signed TFN declaration from your employees and keep it on file. When the feature is available, the STP filing will act as the ‘notification’ of the TFN declaration to the ATO. We will keep you updated when this is available.
Is there a cost to being STP Phase 2 compliant in Xero?
No, there are no extra costs for you to use the new STP compliance features we roll out across the year.
I only recently converted to Xero – can I still receive the deferral?
Yes, all customers reporting STP through Xero Payroll are eligible for the deferral date of 31 December 2022.
Is there an ATO guide for employers?
Yes, the ATO has detailed information on STP Phase 2 changes here.
Where can I find ATO deferral evidence?
You can download the deferral evidence letter from the Single Touch Payroll page in Xero
From the Payroll menu, select Single Touch Payroll
Select the STP Phase 2 tab
Click Read the ATO deferral to download a copy of the letter
Is there a way to update my payroll data in bulk?
Due to the complexity of STP Phase 2, Xero has not been able to build an option to update payroll data in bulk.
Will this change how I report STP data to the ATO right now?
Not yet – all Xero Payroll customers will continue to report STP Phase 1 for the time being. The roll out of STP Phase 2 updates to the employee setup process in Xero Payroll will not affect reporting or any YTD values sent to the ATO.
Xero Payroll will continue to report employees’ pay as a gross amount until you have completed all three stages of the STP Phase 2 transition.
I’ve noticed some other new additions in payroll relating to Phase 2 – can I use them now?
Yes, we’ve been developing payroll features to help you become STP Phase 2 compliant. While these aren’t mandatory yet, you can start using them now, so you are prepared for STP Phase 2 reporting. Be careful though and make sure you speak with your advisor or get across all the requirements before jumping in and setting anything up – As doing it incorrectly could create bigger issues down the track.
The changes include new earnings categories which capture the more detailed payroll information needed for STP Phase 2. These are:
Bonuses and commissions: Previously these were reported as part of gross payments, but will need to be reported separately for STP Phase 2.
Director’s fees: These must now be reported separately for STP Phase 2.
New allowance types: Allowances for task, tools or qualifications must be reported under new labels in STP Phase 2.
Lump sum W (return to work) payments: A return-to-work amount is paid to encourage an employee to return to work – this was previously reported as part of gross payments.
Lump sum E payments: A lump sum payment for back pay from previous income years.
You can now add a reason for termination to an employee’s record, removing the need for an employment separation certificate to be issued.
As leave needs to be reported separately, can I enter leave opening balances into Xero with STP Phase 2?
Yes, we’ll make changes to allow leave opening balances to be added to the employee opening balances page.
What impact will switching from STP Phase 1 to STP Phase 2 reporting in the middle of the financial year have on aggregated and disaggregated earnings amounts?
As Xero’s payroll users will be moving to STP Phase 2 reporting within a financial year, there will be both aggregated and disaggregated earnings information. We have made arrangements with the ATO, so you won’t need to do anything to finalise the aggregated amounts or retrospectively change the YTD totals for gross or disaggregated earnings.
What are the key changes to my employee profiles for STP Phase 2?
Employee profiles need additional information included to meet STP Phase 2 reporting requirements:
How is a contractor defined?
Contractors run their own business and sell their services to others, whereas employees work within a business. Contractors need to provide you with a valid Australian Business Number (ABN).
For more information on how contractors are defined, visit the Fairwork website.
If I have a contractor set up in Xero, how do I make sure their record is compliant with STP Phase 2 so I can file both their earnings and superannuation?
The ATO are implementing changes to contractor profiles for STP Phase 2. You will need to define the income type for the contractor record in Xero Payroll to be STP Phase 2 compliant.
Who can make changes to employees’ profiles to update them for STP compliance?
Anyone with the payroll admin user role can make changes to your employees’ profiles. Click here for more information about payroll user permissions.
It is important to be aware of these new requirements. You will be able to begin the transition ahead of the deferred compliance date, so you have time to adapt. And remember, we are here to help at any time! Get in touch to start a transition plan with your advisor so you get everything sorted correctly from the get-go!