Are you ready for STP phase 2?

Single Touch Payroll phase 2 (STP2) - A young woman works on a laptop from home

Single Touch Payroll Phase 2 (STP 2) is a sweeping change to the existing payroll reporting system and is not optional.  The key outcome is the sharing of payroll data with several other government departments to improve delivery of government services. Initially this will be Services Australia and the Child Support Agency but potentially Fair Work Australia and others over time.

To achieve the objectives of STP 2, a large amount of additional information needs to be accurately extracted from payroll systems and transmitted with each pay run.


What is STP 2?

The fundamental basis of STP 2 is more payroll data being transmitted to more government departments who will rely on that data for their proper administration. Employee circumstances will be shaped by this data and employers are obligated to ensure its accuracy.

To meet the challenge of transmitting correct payroll data there are a number or broad challenges for employers to overcome:

  1. Payroll Software: The payroll software challenge will largely be addressed for you when your chosen payroll software supplier has been approved by the ATO to transmit STP phase 2 data. This means that your software will come pre-configured with the available labels and codes to operate STP 2.
  2. Payroll Skills:
    • Working knowledge of your chosen payroll software.
    • Next, bookkeeping, and organisational skills to efficiently process a payroll, including a working knowledge of the available STP 2 labels and codes- there are quite a lot of these available in a process the ATO call disaggregation.
    • Finally, and most importantly, there is a payroll knowledge base (terminology, legislation, employer obligations etc) to properly select STP 2 labels and codes when processing payroll.  This step does require input from you as an employer.

As mentioned above, 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 properly process payroll under STP phase 2:

  • 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

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. Therefore, care needs to be exercised in understanding the different codes selected.

Also, the disaggregation of allowances from a normal “All-purpose rate”, will require information supplied by you as the Employer. This information relies on your Industry Contracts or FairWork Awards, indicating base rates, allowances, overtime, etc. We recommend you have a clear understanding of your employee’s entitlements to fully implement STP Phase 2.


Checklist for implementation

To properly implement STP 2 we suggest you work through the following:

Implementation timetable and payroll software

STP 2 was operative from 1 January 2022, however most Payroll Software (ATO acronym: DSP = Digital Service Provider) have obtained extensions to 31 December 2022, as they have not been ready.  MYOB, Xero and Reckon have been granted extensions to begin STP Phase 2 from 1st January 2023. Due to these DSP negotiations, there is no need for you to seek any deferral confirmation directly from the ATO until such time as that DSP deferral deadline has passed. Please check your provider or contact us, for this extension.

Inform your employees

Your employees will be impacted by STP 2, many will be unfamiliar with it. We have prepared a Fact Sheet which explains what STP 2 means for your employees from their perspectives. You are free to distribute it to them to assist their understanding.

Assign payroll roles

There are two key roles to assign: part way through a financial year you will need to select either the Replace Payroll ID or Hybrid methods. Procedures need to be established around capturing the correct employee payroll data to be able to operate the new software. A methodical and considered approach to set up and configuration of STP phase 2 will get you off on the right foot.

Continued payroll processing of your business’s payroll

You need to assign personnel, employed (or contracted), that possess the necessary payroll and software skills that will be capable of properly processing your payroll.

Employees’ information:

    • Your employees’ contracts or FairWork Awards will provide the necessary information to be calculated out by your payroll expert. Employment basis and categories will also be assigned from this information.
    • Complete and correct Employee information, backed up with compliant paperwork, such as TFN Declarations, Super Choice forms, etc. This will allow your payroll expert to allocate the correct tax treatments.
    • Ensure all payroll change requests are held in writing for each employee. These also will be required to ensure correctly applied for STP 2 reporting.


Further help:

If you have any questions about how Single Touch Payroll phase 2 affects your business, our bookkeeping team are happy to work through it with you. Please contact us on (07) 3023 4800 or at

You can find out more about working with Marsh & Partners here. As your Absolute.Account.Ability partner we’re on a mission to make your business life better. We’ll help you set goals for your business, devise an Action Plan to make them happen and meet with you regularly to ensure you stay on track.

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