Single Touch Payroll Phase 2 (STP 2) is a sweeping change to the existing Single Touch Payroll (STP) system that has been in operation for a few years now.
The government require you to adopt STP 2, it is not optional.
Why STP Phase 2?
Since the ATO initially brought in STP, the scope has expanded, and Phase 2 allows payroll data to be reported to multiple government agencies, the ATO.
Data sharing means that the agencies are not reliant on information from employers or employees that may be incorrect or outdated. Instead, they get the data as soon as it is processed by the employer, making it easier for Services Australia to work out payments such as pensions or child support for employees. In future, the data will be shared with other agencies such as State Revenue Offices.
STP Phase 2 reporting started on 1 January 2022 for employers using software ready for STP Phase 2.
What’s New in STP Phase 2?
Extra fields to report more detailed payroll information, such as payroll categories and the many different types of allowances. Wages and salaries are reported separately to include categories such as bonuses, overtime, paid leave and director fees.
Tax file numbers are reported directly to the ATO.
Employee termination information, including the reason for termination.
Superannuation is reported according to the type – superannuation guarantee, salary sacrifice, employer additional or employee additional.
Data matching across government agencies and ATO departments have been improved for both businesses and individuals.
Lump sum payments include more detail about the type and related financial year.
Child support payments are now reported directly to the child support registrar.
Employment termination payments (ETPs) include more detail.
Payments that require specific tax treatment, such as for overseas workers, are included.
The payroll software must map all the different pay categories to relevant ATO codes. For the most part, the software will take care of the mapping; however, if you use customised pay items to comply with specific award conditions, you will need to check that the categories are mapped to the correct ATO codes.
What Hasn’t Changed?
STP can only be submitted digitally and should be reported to the ATO on or before the day employees are paid. STP cannot be reported through the ATO online services for businesses or agents. Therefore, you need to use STP-enabled payroll software or a Standard Business Reporting provider to submit the STP reports to the ATO. (Note we wait until we can see that employees have been paid from the bank before filing STP).
An end of financial year finalisation process is still required. The more accurate the data is throughout the year, the easier this process is; however, if there are any inaccuracies in the payroll accounts, this process can be time-consuming and complex. This replaces the annual payment summary that used to be given to employees. Now, they get their income statement directly in their myGov account online, and the data is automatically prefilled to the ATO tax return form.
You still need to give employees a pay slip, either paper or digital.
You still include gross wages and PAYGW on the BAS.
Xero and STP Phase 2
STP reporting had to be redesigned entirely with Phase 2, as it is a change of technology, not simply expanding the fields in the existing STP system in Xero.
Xero has a deferral in place until 31 December 2022, so if you’re already using Xero, you don’t need to worry about doing anything differently just yet.
Xero is bringing in the Phase 2 functionality in three stages and has already released some changes you may have noticed. For example, employee records now include more fields to prepare for STP Phase 2, more categories are available in pay items, and termination information is also included in the employee record.
Effect on Employers?
The fundamental basis of STP 2 is that more payroll data is being transmitted to more government departments who will rely on that data for their accurate administration.
Employee circumstances will be shaped by this data and employers are obligated to ensure its accuracy.
In order to meet the challenge of transmitting correct payroll data there are two broad challenges for employers to overcome:
1. Payroll Software
2. Payroll Skills
Some of the options chosen in STP 2 payroll processing affect your employee’s Services Australia entitlements, Child Support Agency position or income tax outcome, so care needs to be exercised in understanding the different codes selected.
The necessary payroll skill requires an understanding of what information is sought in each of the STP 2 labels.
There are quite a lot of labels and codes that need to be correctly chosen from, to accurately process payroll under STP 2.
Here is the list:
· Employment Basis – 7 codes
· Cessation Type – 7 codes
· Employment Category – 10 codes
· Tax Treatment – 9 codes
· Medicare Surcharge – 3 tiers
· Medicare Levy Exemption/Reduction – 2 codes
· Study & Training Support Loans – 2 codes
· Income Stream Types – 10 choices
· Paid Leave Types – 6 choices
· Allowance types – 10 choices
· Salary Sacrifice – 2 types
· Lump Sum – 6 types
· Eligible Termination Payments – 8 types
· Deductions – 4 types
· Superannuation Entitlements – 3 codes
· Reportable Fringe Benefits – 2 types