Single Touch Payroll Phase 2: A small business guide
The good news is that STP Phase 2 should prove less onerous for business owners to implement than Phase 1 was. But there are a few key things to help you understand before 1 January 2022.
What is STP Phase 2?
Neil Rustidge, Product Manager at Reckon, explains:
Single Touch Payroll (STP) is a current ATO compliance regulation that requires employers to send employee payroll information including salary, wages, PAYG withholding and superannuation to the ATO at the same time as their standard pay run.
Phase 2 of the STP scheme will require businesses to begin reporting on richer sets of their employees’ pay data to a wider range of government bodies. The broadened data submissions should be automatic when you process payroll in an accounting or payroll platform.
The increased reporting for STP Phase 2 will include:
- Reason for cessation
- Child support deductions
- Salary sacrifice
- Employment basis
- Paid leave
- Expanded reporting of allowances
Essentially, when you run payroll, STP Phase 2 will see expanded payroll data automatically reported to the government, with new fields reporting a wider set of data.
What are the outcomes of Phase 2?
A rundown from Jason Daniels, Director at BusinessDEPOT:
STP Phase 2 is designed to further reduce the reporting burden on businesses that have to report information about an employee to multiple government agencies. Businesses won’t need to send TFN declarations separately to the ATO anymore, while dealing with child support garnishees and deductions will be easier.
Because the ATO will capture more information about income type, it can then break down gross income paid to employees in more detail – think bonuses and commissions, salary sacrifice, directors’ fees and overtime. This will allow the ATO to pre-fill more of an individual’s tax return and check that employers are taxing the components of staff income correctly.
A notable change introduced in Phase 2 is the separate reporting of salary sacrificed superannuation contributions.
There will also be country codes added that will identify inbound workers, working holiday makers or Australian residents working overseas.
What do small business owners need to do?
Thankfully, small business owners who are already using a modern payroll or accounting platform likely need to do very little.
“Most changes will be automatic,” says Neil. “As a business owner, you simply need to be sure you have a trustworthy single touch payroll-enabled accounting solution.”
While your STP solution should automate the tax treatment codes that come into play with Phase 2, the ATO recommends business owners understand what the codes mean. Review the tax treatment codes here.
Tax treatment codes are the abbreviated way Phase 2 communicates the factors that influence how much you withhold from payments to your employees. The tax treatment codes also allow the ATO to notify employees if they’ve provided incorrect information that may result in a tax bill.
So while some small businesses are unlikely to need to take specific actions to prepare for Phase 2, the more familiar you are with Phase 2 reporting, the better you can communicate accurate information with your employees.
Are there any potential issues I need to be aware of?
“You’ll need to make sure each of your employees is set up correctly and that each component of their take-home wages is correctly categorised and taxed,” says Jason, explaining that this is the most common source of payroll errors his team sees, and where he expects employers will need to invest some time once the tax treatment changes are available in the payroll platforms.
“One example could be where commissions and allowances haven’t been taxed properly in the past but the ATO haven’t been able to tell from the aggregated data in STP Phase 1,” Jason says. “In Phase 2, business owners will show those lines of income separately and there will be more focus on making sure they are correctly taxed. Staff who have been incorrectly taxed in the past could see a difference to their take-home cash – though not to their overall annual taxable income.”
Are there penalties for not complying with STP Phase 2?
“The mandatory start date for STP Phase 2 will be 1 January 2022,” says Neil. “It’s unclear exactly how flexible the ATO will be about the commencement date. However, there are already current STP late lodgment penalties in place, so a lack of cooperation with STP can certainly attract penalty measures.”
The ATO notes that some digital service providers may need more time to get ready and transition their customers, in which case they can apply for a deferral and advise customers of a later reporting start date.
Small businesses that need more time on top of any provider’s deferral must apply to the ATO. Applications will be accepted from 1 October 2021.