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

Single Touch Payroll Phase 2

**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 will be made for STP phase 2?

We've summarised some of the main changes to STP reporting that will impact businesses below:

Termination reason

A reason for termination will be 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 will require 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 has already built out the termination reason reporting functionality, in preparation for Phase 2.

Child support garnishee / deduction amount

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

Disaggregation of gross

Previously, the gross amount you reported contained different types of amounts depending on the particular income type. With phase 2, components of gross earnings will now be 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:

Income stream collection

Employers will now need to classify the payments made to an employee following an ATO term called “Income stream collection” when they submit their STP report 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, employers were required to submit a tax file number declaration to the ATO detailing the tax information for new employees and any existing employees where their tax situation changes. Phase 2 will incorporate 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 will introduce 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 will have to change in their system for STP reporting rather than a new process for employers.

Lump sum E letters

At present, employers are required to provide lump sum E letters to employees each financial year.  The STP changes will mean that this information will be included in the pay event prior to finalisation of the payee Income Statement and so will take away the need for the employer to provide the lump sum E letter altogether.

Transitioning employees from another payroll system

Businesses transitioning from one payroll system to another will be 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 will link the information so that there is only one income statement reported for each employee. This replaces the need for manual adjustments to ensure employee YTD earnings are not overstated. 

Paid leave

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

Allowance items

Additional allowance type codes will be added to meet the new reporting requirements. This will allow 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.

Download our free guide on how to prepare and the importance of transparent payroll software for Single Touch Payroll Phase 2.

Get ready for Single Touch Payroll Phase 2 with KeyPay

Ensuring you’re with a reliable software vendor that will be ready for the mandatory start date is key for STP success. With over 200,000 Australian businesses on the platform, KeyPay is an Australian leader in compliance who handles the ATO's changes for you with ease.

Our team are hard at work on the phase 2 STP changes to ensure the new reporting requirements are ready for January 2022. 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 at or try KeyPay for yourself - free for 30 days.

Kate Brown

Marketing Manager at KeyPay

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