Single Touch Payroll Phase 2: What to expect and how to get ready

**This blog post has been recently updated and will continuously be updated. For the most up to date STP news, check out our support articles and keep an eye on the ATO website.**‍

What is Single Touch Payroll phase 2?

STP phase 2 aims to streamline the reporting obligations for the payer and payee and remove the need for manual reporting to other government agencies. 

Phase 2 is about establishing an "all inclusive" baseline dataset that incorporates reporting requirements for multiple government agencies. With this, phase 2 will bring more complex reporting and requires additional preparation for the challenges of the next roll-out.

What changes have been made for STP phase 2?

We've summarised some of the main changes to STP reporting that accountants, bookkeepers and outsourced payroll providers will need to be aware of when running payroll for their clients:

Termination reason

A reason for termination is mandatory when an employee finishes their employment. Previously, an employer may be asked to provide an employee with an employment separation certificate upon an employee’s termination of employment. Phase 2 requires the reason for termination to be included in the STP report sent to the ATO and so takes away the need for an employment separation certificate to be issued to the employee altogether. KeyPay already built out the termination reason reporting functionality, in preparation for Phase 2.

Child support garnishee / deduction amount

Previously, a deduction report had to be submitted on behalf of an employer to the relevant child support agency when they deduct the child support from an employee's pay. Phase 2 allows child support deductions/garnishees to be reported via pay events thus removing the need to report separately on a monthly basis.  This is initially voluntary reporting and if clients do not choose to report via STP monthly reporting will need to continue as per the existing processes.

Disaggregation of gross

Previously, the gross amount that was reported on behalf of clients and their businesses contained different types of amounts depending on the particular income type. With phase 2, components of gross earnings are now itemised separately, with all payment types being reported consistently for each income type - this is to streamline the different income assessments required by government agencies. Check out our video explaining the changes:

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Income stream collection

Payments made to an employee will now need to be classified following an ATO term called “Income stream collection” when STP reports are submitted to the ATO. This includes income type, payment type and may also include a country code (for specific income types).

Tax file number declaration 

Previously, a tax file number declaration was required to be submitted to the ATO detailing the tax information for clients’ new employees and any existing employees where their tax situation changes. Phase 2 incorporates employee tax information via STP reporting, thus eliminating the need to submit tax file declarations to the ATO as a separate process. Once the transition to phase 2 reporting is complete, we will be switching off the electronic lodgement capability in KeyPay.

Tax treatment codes

Previously, employee tax information was part of the tax file number declaration. Phase 2 introduced a 6 character tax treatment code to indicate what PAYG tax scales and other components were applied to the employee to determine withholding amount. This is something the payroll software vendor should have changed in their system for STP reporting rather than a new process for payroll providers and their clients.

Lump sum E letters

At present, a payroll provider’s clients are required to provide lump sum E letters to employees each financial year. The STP changes mean that this information is in the pay event prior to finalisation of the payee Income Statement and so takes away the need for a lump sum E letter to be provided altogether.

Transitioning employees from another payroll system

If you’re an outsourced payroll provider transitioning your clients from one payroll system to another, you are able to enter the previous BMS ID/payee IDs in the new system and then proceed to use the new system’s BMS ID/payee ID. The ATO links the information so that there is only one income statement reported for each of your clients’ employees. This replaces the need for manual adjustments to ensure employee YTD earnings are not overstated.

Paid leave

Paid leave is no longer incorporated as part of gross earnings when reporting earnings via STP. Rather, paid leave is reported using itemised leave type codes.

Allowance items

Additional allowance type codes have been added to meet the new reporting requirements. This allows the ATO to assist the employee when completing their IITR.

What should you be doing to prepare?

Although phase 2 reduces the burden of compliance for employers, there is a greater need to be using reliable and compliant payroll software. Ensure that you're using a software that's transparent in letting you know what they're doing to prepare for the new reporting requirements, such as KeyPay. We're preparing for our users to ensure that gross amounts are reported correctly, through 3 separate activities:

Review pay category payment classification mappings: We've added a number of new payment classification options to the pay category settings; if you're a KeyPay user, we'll automatically update these classifications on your behalf to eliminate the need for manual intervention.

Review leave category payment setup: To ensure that any earnings associated to any paid leave is reported correctly, we've detailed steps that KeyPay users need to take in order to correctly lodge STP events with the new phase 2 reporting requirements.

Assign new classifications to salary sacrifice deduction categories: We've added 2 new classification options to the deduction category settings in KeyPay to meet the new requirements for salary sacrifice amounts to be itemised.

Get ready for Single Touch Payroll Phase 2 with KeyPay

Ensuring you’re using a reliable software vendor for processing your clients’ payroll is crucial to achieving STP success and compliance. With over 750 partners (who process payroll for over 200,000 Australian businesses on the platform), KeyPay is an Australian leader in compliance who always handles the ATO's changes for you with ease.

Our team have been hard at work preparing for the phase 2 STP changes and ensuring that the new reporting requirements are implemented correctly. With compliance built at its core, KeyPay has the proven ability to not only meet ever-evolving Australian legislation such as STP, but makes managing it as seamless as possible for payroll administrators and outsourced providers. Read more about the changes we're implementing in KeyPay to guarantee STP phase 2 compliance.

If you’re keen to ensure that your business meets STP phase 2 requirements, get in touch with KeyPay here.

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Disclaimer: The information in this article is current as at 1 June 2022, and has been prepared by Webscale Pty Ltd (ABN 70-154-693-955) and its related bodies corporate (KeyPay). The views expressed in this article are general information only, are provided in good faith to assist employers and their employees, and should not be relied on as professional advice. The Information is based on data supplied by third parties. While such data is believed to be accurate, it has not been independently verified and no warranties are given that it is complete, accurate, up to date or fit for the purpose for which it is required. KeyPay does not accept responsibility for any inaccuracy in such data and is not liable for any loss or damages arising either directly or indirectly as a result of reliance on, use of or inability to use any information provided in this article. You should undertake your own research and to seek professional advice before making any decisions or relying on the information in this article.