ramco

    What Is Single Touch Payroll Phase 2?

    Key Takeaways
    • Detailed Payroll Data Reporting: Enables employers to report granular payroll information, including income types, allowances, tax treatment codes and employment details through STP Phase 2.
    • Improved Compliance and Accuracy: Helps organisations maintain correct payroll classifications, meet ATO reporting requirements and reduce errors through automated validation and coding controls.
    • Payday Super Readiness: Supports accurate superannuation calculations and reporting by ensuring payroll data aligns with STP Phase 2 requirements and future compliance obligations.

    Single Touch Payroll Phase 2 (STP 2)

    Single Touch Payroll Phase 2 (STP2) is the expanded version of the ATO's real-time payroll reporting framework. It requires employers to disaggregate gross income into specific income types and payment components for each pay event, rather than reporting a single lump-sum gross figure. STP Phase 2 has been mandatory for all Australian employers since 1 January 2022, with extensions granted to some software providers until 31 December 2022.

    Phase 2 changed how payroll data must be categorised, not just whether it is reported. Where Phase 1 accepted a single gross figure, Phase 2 requires separate reporting of ordinary salary, overtime, allowances and bonuses. Most allowances must be itemised separately rather than bundled together. Payroll accuracy now depends on correct coding rather than only correct dollar totals reaching the ATO.

    What Are the Key Changes Under STP Phase 2?

    STP Phase 2 expanded both the data fields employers report and the coding requirements that determine how each payment category appears in the report. The expansion changes how payroll teams configure their systems because the same dollar amount can carry different STP treatment depending on its income type, allowance type or tax treatment code.

    • Disaggregated gross income: Employers must report ordinary salary, overtime, allowances and bonuses separately rather than combining them into one gross figure on the STP report.
    • Income type classification: Each payment must carry an income type code, distinguishing between salary and wages, working holiday maker income, foreign employment income and other defined categories.
    • Allowance itemisation: Most allowances must be coded individually rather than reported as a single allowance total, requiring the payroll system to maintain a separate code for each allowance type.
    • Tax treatment codes: Each employee carries a tax treatment code combining tax scale type, tax offset claims and other tax-relevant attributes into a single code the ATO uses for verification.
    • Employment and cessation details: STP Phase 2 reports the employment basis and, on termination, the cessation type code and date that previously sat outside the STP data stream.

    How Does STP2 Differ From STP Phase 1?

    The core difference between STP Phase 1 and Phase 2 lies in the level of detail reported for each pay event. Phase 1 reported summarised payroll information including total gross pay, tax withheld and superannuation. Phase 2 expanded this into a granular breakdown of each payment component, allowing the ATO to automatically match each portion of an employee's income to the correct tax and contribution treatment.

    This change has direct consequences for how the ATO uses payroll data. With disaggregated income reporting, the ATO can determine which portions of gross pay attract super, which qualify as ordinary time earnings and which are excluded from calculations. Phase 1 data lacked this granularity, which limited the ATO's ability to cross-check super contributions against the earnings that should have triggered them.

    The transition also removed the need for separate TFN declarations to the ATO. Tax file number information for each employee is now embedded in the STP Phase 2 report, streamlining new-hire onboarding and ensuring the ATO maintains current TFN status for every employee in the payroll system without requiring a separate submission.

    What Income Types Must Employers Report Under STP2?

    STP Phase 2 distinguishes among several income types, each with different tax treatment and reporting requirements. Misclassifying an income type results in incorrect employee records and triggers ATO follow-up, as the data appears inconsistent between the employer's submissions and the employee's myGov record.

    • Salary and wages: Standard employment income paid to Australian resident employees performing work in Australia.
    • Working holiday maker: Income paid to employees on a working holiday visa, which attracts different withholding rates than standard salary and wages.
    • Foreign employment income: Income paid to Australian resident employees performing work outside Australia, with specific reporting requirements for the foreign service component.
    • Closely held payees: Income paid to family members and related parties of the business owner, with separate reporting and finalisation timelines from standard employees.
    • Labour hire and other categories: Payments to labour hire workers and other defined categories each carry their own income type code under the STP Phase 2 framework.

    How Does STP Phase 2 Affect Allowance Reporting?

    Allowance reporting under STP Phase 2 requires itemisation rather than aggregation. Where Phase 1 allowed an employer to report a single "total allowances" figure, Phase 2 requires each allowance to be reported under its own code. The codes cover specific allowance types including car, travel, meal, laundry, tools and qualifications.

    This itemisation matters because different allowance types carry different tax treatment. Some allowances are exempt from PAYG withholding up to a defined limit, while others attract full withholding from the first dollar. Some count as ordinary time earnings for super guarantee purposes while others are excluded. The ATO uses the allowance codes to verify that the correct tax and super treatment has been applied to each component of an employee's pay.

    Employers who treated STP Phase 2 as a technical software update without revisiting their allowance configurations often carry hidden compliance gaps. Many payroll systems were updated for the technical fields without updating the underlying allowance codes, which means the system accepts the lodgement while the data inside is incomplete or incorrect.

    What Are the Most Common STP Phase 2 Reporting Errors?

    STP Phase 2 errors fall into several recurring categories that the ATO identifies through automated data review. Understanding these common errors helps payroll teams audit their configuration and correct gaps before they trigger ATO notifications or affect employee tax outcomes during income statement finalisation each July.

    • Incorrect income type classification: Payments classified as salary and wages when they should appear under working holiday maker or another defined income type produce inaccurate employee records.
    • Bundled allowances under one code: Reporting multiple allowance types under a single code or as a generic "other" allowance creates compliance gaps that misalign with the ATO's expected allowance categorisation.
    • Wrong tax treatment codes: Tax treatment codes that do not match the employee's TFN declaration produce incorrect PAYG withholding calculations and trigger ATO review of the affected pay events.
    • Missing cessation details: Failing to report cessation type and date when an employee terminates leaves the ATO without the information needed to update Services Australia and other connected systems correctly.
    • Salary sacrifice misreporting: Salary sacrifice arrangements that are not reported under the correct STP Phase 2 codes affect both the employee's reportable income and the employer's super calculation accuracy.

    Why Does STP2 Matter More Under Payday Super?

    STP Phase 2 carries new compliance weight from 1 July 2026 because Payday Super uses STP Phase 2 data as the primary mechanism for verifying super guarantee compliance. The ATO uses STP Phase 2 data to monitor super payments in near real-time, comparing the super liability reported in each STP pay event against the contributions funds confirm receiving within the seven-business-day window.

    This means that a misconfiguration in STP Phase 2 creates a direct Payday Super compliance risk rather than only a reporting risk. If the income type disaggregation is wrong, the calculated Qualifying Earnings will be wrong, the super guarantee liability will be wrong and the contribution amount the fund receives will not match what the ATO expected from the STP data. The mismatch results in a Super Guarantee Charge assessment, which the ATO now issues directly.

    Employers who configured STP Phase 2 in 2022 and have not revisited the configuration since carry the highest exposure under Payday Super. The data quality issues that were tolerable under quarterly reporting become visible to the ATO at every pay cycle from 1 July 2026 forward.

    How Does Ramco Payce Support STP Phase 2 Compliance?

    Ramco Payce applies correct STP Phase 2 coding to every pay event across all active Australian entities. The platform maintains income type classification, allowance itemisation, tax treatment codes and cessation reporting for every employee, with validation checks that flag inconsistencies before any STP submission reaches the ATO. Ramco has been successfully reporting through STP Phase 2 since its mandatory commencement.

    Payroll Workspace gives payroll operators real-time visibility of every STP Phase 2 submission status, with anomaly detection flagging configuration gaps that could affect Payday Super compliance from 1 July 2026. BInGO delivers STP Phase 2 reconciliation reporting that finance and compliance teams use to verify income coding accuracy across all pay events before each quarterly BAS cycle.

    Book a free demo to get started.

    FAQs

    Can employers reuse Phase 1 payroll codes under STP Phase 2?

    No. STP Phase 2 introduced new code structures for income types, allowances and tax treatment that did not exist under Phase 1. Employers who transitioned to Phase 2 by updating their software without re-mapping the underlying payroll codes typically carry configuration gaps. A full audit of payroll code mapping against the current STP Phase 2 requirements is the only way to confirm the configuration matches the reporting standard.

    What is a tax treatment code in STP Phase 2?

    A tax treatment code is a single code that combines multiple tax-relevant attributes for each employee into one field in the STP Phase 2 report. The code combines tax scale type, tax-free threshold claim status, study loan debt indicator and any applicable tax offsets. The payroll system generates the correct code from the employee's TFN declaration, and the ATO uses it to verify that the correct PAYG withholding has been applied at each pay event.

    How does STP Phase 2 handle child support deductions?

    STP Phase 2 includes specific reporting fields for child support garnishee orders and child support deductions, which previously sat outside the STP data stream. Employers must report the deduction amount and the type of order via STP Phase 2 for each pay event to which the deduction applies. This reporting reduces the need for separate communications with the Child Support Registrar and provides Services Australia with automatic visibility into the deductions processed each cycle.

    What happens if an employer reports under Phase 1 after the mandatory Phase 2 start date?

    Employers reporting under Phase 1 after the mandatory commencement date for STP Phase 2 are non-compliant with the reporting framework. The ATO initially provided education and software upgrade assistance during the transition period, with formal enforcement intensifying after the transition deadline passed. Employers still operating under Phase 1 logic should upgrade their software, remap their payroll codes, and lodge updated STP submissions in the Phase 2 format without further delay.