STP Phase 2: The Complete Guide for Australian Small Business Owners

Single Touch Payroll Phase 2 (STP2) is now mandatory for all Australian employers. If your business transitioned to STP2 before the final deferrals expired, you may believe your compliance obligations are settled. But many businesses that made the transition haven't verified that their STP2 reporting is actually correct — and errors in STP2 create both ATO compliance risk and Fair Work exposure.

This guide explains what STP2 requires, how to verify your compliance, and what mistakes to watch for.

What Is Single Touch Payroll?

Single Touch Payroll (STP) is the ATO's system for receiving payroll information in real time — directly from employers' payroll software each time employees are paid. Under STP, you no longer wait until the end of the year to provide payment summaries; instead, year-to-date information flows to the ATO with every pay run.

STP Phase 1 (the original rollout) required reporting of gross wages, tax withheld, and superannuation.

STP Phase 2 expands reporting significantly — requiring disaggregated income type reporting and additional employee information.

What Changed with STP Phase 2?

1. Disaggregated Income Type Reporting

The core change in STP2 is that you can no longer report a single "gross wages" figure. You must separately report:

| Income type | Description | | ----------------------- | ------------------------------------------------------- | | Ordinary pay | Regular hours at the ordinary rate | | Overtime | Hours worked beyond ordinary hours | | Allowances | Each type reported with the specific ATO allowance code | | Leave payments | Annual leave, personal leave, long service leave, etc. | | Bonuses and commissions | Separately identified | | Directors' fees | If applicable | | Lump sum payments | Termination payments, redundancy, etc. |

This disaggregation serves two purposes for the ATO: better visibility of income types for tax purposes, and the ability to cross-reference employee income reporting with employer data.

For compliance purposes, it also means the ATO can now see whether you're paying penalty rates, overtime, and allowances separately — which creates a paper trail that may be used to cross-reference Fair Work compliance.

2. Employment Information

STP2 requires you to report each employee's:

• Employment basis — full-time, part-time, or casual
• Tax scale — the PAYG scale applied
• Residential status — for tax purposes
• Working holiday maker status — if applicable

3. Income Stream Collections

STP2 organises income into "income stream collections" that categorise employee types:

• SAW — Salary and Wages (most employees)
• WHM — Working Holiday Makers
• CHP — Closely Held Payees (family members employed in a family business)
• FEI — Foreign Employment Income

Getting the right collection assigned to each employee type is important — particularly for WHM visa holders who have different tax rates.

4. Child Support

If you receive child support notices for any employees (requiring you to withhold child support from wages), STP2 includes reporting these directly to the ATO. This replaces the previous manual reporting to Services Australia.

How to Verify Your STP2 Compliance

Many businesses transitioned to STP2 by enabling it in their payroll software without verifying that all the required information is being reported correctly. Here's how to check:

Step 1: Confirm Your Software Is STP2-Enabled

Log into your payroll software and confirm it has STP2 enabled (not still on STP Phase 1). Most providers switched by the final deferral date, but verify.

Step 2: Check Income Type Disaggregation

Review a sample pay run. Can you see separate line items for:

• Ordinary hours pay
• Overtime (if applicable)
• Each allowance type (with the correct ATO allowance code)
• Leave payments (separately from ordinary pay)

If everything is reporting as a single "gross wages" figure, your STP2 disaggregation is not configured correctly.

Step 3: Check Allowance Codes

Review the allowance types you pay and confirm each has the correct ATO code:

| Common allowance | ATO code | | -------------------------- | -------- | | Laundry | AL | | Tool | AT | | Vehicle | AV | | Travel (domestic/overseas) | DO | | First aid | AF | | Other | OD |

Using "OD" (Other) for an allowance that has a specific code is non-compliant.

Step 4: Check Employee Income Stream Collections

Review the income stream collection assigned to each employee. WHM visa holders must be in the WHM collection, not the SAW collection.

Step 5: Check Employment Basis Records

Confirm each employee's employment basis (full-time, part-time, casual) is recorded correctly in your payroll system and is being reported via STP2.

Step 6: Verify Year-End Finalisation

Each financial year, you must submit a finalisation declaration via STP2 for each employee. Check that you completed this for the previous financial year by 14 July. Employees cannot lodge accurate tax returns until you finalise.

Common STP2 Mistakes

1. Single gross figure reporting: The most common error — not disaggregating income types.

2. Generic allowance codes: Using OD for everything when specific codes apply.

3. Missing WHM setup: WHM employees in the wrong income stream collection, receiving incorrect tax rates.

4. No employment basis recorded: Legacy employee records with missing employment basis.

5. Late finalisation: Year-end STP2 finalisation not submitted by 14 July, meaning employees can't finalise their tax returns.

6. Child support not configured: Businesses receiving child support notices that aren't reporting via STP2.

The ATO's STP2 Enforcement Approach

The ATO is using STP2 data to:

• Cross-reference income reporting between employers and employees
• Identify patterns of unreported income
• Assess PAYG withholding compliance
• Potentially cross-reference with Fair Work compliance data

Businesses with STP2 errors may receive contact from the ATO to correct their reporting. In more serious cases — particularly where STP2 errors reflect underlying payroll compliance issues — ATO action could follow.

STP2 and Fair Work Compliance

STP2's disaggregated reporting means the ATO has detailed visibility of what types of pay employers are paying to employees. While the ATO and Fair Work Ombudsman are separate agencies, there are information sharing arrangements, and STP data that shows no overtime, no penalty rates, and no allowances for employees who should be receiving them may be a trigger for FWO interest.

How Reguladar Helps

STP Phase 2 compliance sits alongside super guarantee obligations, BAS lodgement, award rate compliance, WHS obligations, and licensing in a complex ongoing compliance picture. Reguladar gives Australian small business owners a single compliance dashboard tracking all their obligations across all domains.

Start your free compliance check at Reguladar →