Single Touch Payroll Phase 2

Single Touch Payroll Phase 2 is coming: Here’s what you need to know.

The expanded Single Touch Payroll (STP) Phase 2 is due to start on 1 January 2022. However, the ATO has just announced that there will be some flexibility with the reporting start date. Better yet, Xero has secured a 12-month deferral for all partners and customers until 31 December 2022. They are working closely with the ATO to roll out the Phase 2 changes in Xero Payroll. Another great benefit of being a Xero user!

What exactly is STP Phase 2, and how is it different from phase one?

Where phase one was a way of reporting employees’ tax and super to the ATO, STP Phase 2 expands the program to capture more information. This will reduce the compliance burden for employers and individuals and help the admin side of things for social support services – think Centrelink. When you do interact with government services, these changes will make that process easier.

 When do I need to be compliant?

There is no need for concern around the January deadline, although the official start for STP Phase 2 reporting is 1 January 2022. Xero partners and customers will be covered by a deferral until 31 December 2022.

 Why does Xero need a deferral, and what does it mean for me?

 Xero’s product suite was updated and enhanced to provide critical support during the COVID-19 crisis, with updates across cash flow management, tax and payroll to ensure we supported partners and customers when they needed it most. This additional work has, however, impacted our timeline on STP Phase 2. As a result, Xero has requested and received a deferral from the ATO, giving our partners and customers more time to transition. While there is nothing you need to do just yet, it’s essential to be across these new requirements. Rest assured our team will keep you updated throughout the transition, so you’re prepared.

 So, what new information will be included?

Under STP Phase 2, you will be required to report additional information to the ATO under a few new areas.

The following additional information will be required:

 Tax file number declaration: 

Currently, these declarations capture details on employment type (full time, part time or casual) and different tax factors that influence PAYG withholding, like a HELP debt, as well as the TFN itself. This will all be included in your STP report via an automated six-character tax treatment code for each employee and means TFN declarations will no longer need to be sent to the ATO after collection.

 Termination reason: 

The reason why someone leaves a business will need to be provided in your STP report, such as if it was voluntary or a redundancy. This means no more employee separation certificates.

 Employment basis:

Previously optional, it will become mandatory to report an employee’s work type. This includes full-time, part-time or casual, along with new categories like labour hire, volunteer agreement or non-employee.

 Income stream collection: 

Phase 2 will require employers to break down payments into more detail under a new grouping called income stream collection. This has three main areas:

 Income types: 

Before income was classified under one label, in Phase 2 each amount paid to an employee will now be assigned to an income type. These include salary and wages, closely held payees (e.g. family members), working holiday makers, and labour hire, among others.

 Country code: 

You will have to include a country code for employees who report to tax jurisdictions outside of Australia. This is most relevant for businesses with staff on certain visas (like working holiday) as you will need to provide their home country.

 Disaggregation of gross: 

Currently, STP reports include a gross (total) amount which is the sum of a number of payment types. This will now be broken into more detail to include: allowances (all must be separate); bonuses and commissions; directors’ fees; overtime; paid leave; salary sacrifice. Paid leave will also be categorised using leave type codes.

 Salary sacrifice: 

Since these contributions can no longer be used to reduce ordinary earnings or count towards superannuation obligations, they need to be separately reported in STP. You can no longer report the post-sacrificed amount via payroll.

 Lump sum E payments: 

This is used when you make lump sum payments for back pay from previous income years. Previously, it was shown on a separate line item in an employees’ payment summary. In Phase 2 it must be included in STP reports before finalising an employees’ records. This will remove the need to provide employees with Lump Sum E letters.

 What do these changes mean for my business?

 Although you will need to provide the ATO with more information, the way you submit STP won’t change. Ultimately, the impact of STP Phase 2 will differ based on the unique qualities of your business and employees. Our team will keep you updated on any changes that need to be made.

 What do I need to do right now?

 Nothing just yet. It’s a challenging time for small businesses and advisors – and we know you have a lot to focus on. Xero is working closely with the ATO to upgrade our payroll to capture all STP Phase 2 information. We’ll communicate as soon as these changes are available, so you’re prepared throughout the transition. Like with phase one, our team is working to make the entire process as simple as possible.