Overview of STP Phase 2

The implementation of STP Phase 1 in 2018 represented one of the most significant changes in the way payroll data is sent from Australian Employers to the ATO.

The main goals of the first implementation of Single Touch Payroll were:

• Gaining transparency of Employers’ Superannuation reporting and payment obligations;
• Receiving information on taxable and non-taxable wages in real-time from Employers.

Single Touch Payroll also uncovered a number of hidden benefits that proved to be significant for the Australian Government, including:

• Ensuring a full digitalisation of payroll data. With Single Touch Payroll, Employers of all sizes were forced to change their payroll processes from manual to electronic;
• The ability to provide financial support during the COVID pandemic by introducing a number of Subsidy Schemes like JobKeeper and JobMaker Hiring Credits that heavily relied on Single Touch Payroll data.

Now the ATO is ready to implement the next stage of the Single Touch Payroll scheme expanding its reporting benefits to other Government Agencies.

This blog article provides an overview of the second phase of Single Touch Payroll Reporting. It’s been developed to provide a summary of the key changes the new scheme will bring to business reporting. More detailed blog articles are available to provide a more in-depth understanding of the new scheme.

STP Phase 2 – Benefits and Goals

The main goal of Single Touch Payroll Phase 2 is to support the administration of the Australian Social Security System by integrating the payroll information sent from Employers to the ATO with Services Australia.

The Payroll data will feed directly into Services Australia’s agencies, decreasing the amount of paperwork required to report and make claims and increasing the accuracy of payments due.

This will ultimately reduce the compliance burden for both Australian businesses and individuals who are currently required to report to both Centrelink and Child Support Australia.

Another key benefit is the ability to streamline both the employee onboarding and offboarding process by moving it to a paperless, electronic process.

With STP Phase 2 Employers will no longer need to post TFN Declarations to the ATO. The information traditionally included in the Tax File Number Declaration will be sent electronically to the ATO as part of the STP Pay events. The ATO will use STP Phase 2 to expand the range of Tax Treatment options available for individuals and introduce new tax options including Income Types and Country Codes.

​However, employers will still be required to hand out these forms when hiring new employees and to retain them for a period of 5 years.

Employee information has also been expanded to provide greater visibility of the breakdown in income when filing tax returns. Additional information includes new Income Types (i.e. Closely Held Payees and Seasonal Workers), Tax Scales, and Country codes.

Offboarding will also be streamlined by removing the requirements of filling out Separation Certificates for Centrelink.

Additional changes and reforms include: digitising back payments (Lump Sums E) related to multiple previous Financial Years and simplifying the transfer of payroll data from one Payroll system to another.

In order to achieve these goals, the second phase of STP will expand on the data businesses are required to report to the ATO in the STP pay event files by including a much more granular way of reporting payroll information like gross earnings, allowances, salary sacrificed amounts and employment termination payments.​

STP Phase 2 – What is changing and what is staying the same

STP Phase 2 will bring a number of changes to the way payroll data is reported to the ATO. However, not all payroll processes previously implemented during the first phase of STP will change. In this blog article, we will provide an overview of:

• What is staying the same;
• What is changing from STP Phase 1 to STP Phase 2;
• What is new in STP Phase 2.

STP Phase 2 – What is staying the same

Although the next phase of STP Phase 2 will bring significant changes to the way payroll information is reported to the ATO, some of the key requirements originally introduced in 2018 will remain the same, including:

1. The way Businesses must submit STP events to the ATO.
   The submission process is also the same; STP events need to be submitted electronically via a certified Digital Service Provider (DSP)
2. The deadline ​applicable to STP Events.
   ​STP events must still be submitted to the ATO either on payday or before payday, not after payday.
3. The way STP Finalisation is submitted to the ATO.
   The finalisation process which allows individuals to lodge their Tax Returns via myGov will also remain unchanged. The changes applicable to the second stage of STP have been developed to cater to other Government Agencies’ requirements. STP Phase 1 already provided the correct earnings and tax reporting requirements to suit the ATO’s needs.

STP Phase 2 – What is changing

As Services Australia requires more detailed information to determine the assessable income for Social Security purposes, the second implementation phase of Single Touch Payroll expands the requirements to more granular reporting.

Disaggregation of Earnings

Previously reported under Gross Earnings, new STP Requirements will ‘break down’ these earnings into multiple earning types including Overtime, Paid Leave, Bonuses & Commissions, and more.  Allowances, some of which were already detailed in the first phase of STP, will be further classified under STP Phase 2.

This process, which is defined as ‘Disaggregation of Earnings’, will not only apply to standard pay rates but also to compound rates (award rates inclusive of Allowances) and, depending on how the Employment contract is drafted, to Annualised Salaries. Reporting the disaggregated income means each pay component can be identified and treated correctly.

Salary Sacrifice Arrangements

The way Salary Sacrifice Arrangements are reported under STP Phase 2 will change. Previously in Phase 1 STP simply reported the post Salary Sacrifice amount whereas STP Phase 2 will report the Pre-Tax Amount and the Salary Sacrifice component.

Two Types of STP Events

One of the major challenges of STP Phase 1 happened when correcting payroll mistakes. Some Payroll Systems allowed users to delete Payroll transactions, causing issues when sending the STP event for the amended pay. This created discrepancies between the payroll figures processed in the Accounting Systems and the information saved in the ATO. On many occasions, these discrepancies could only be fixed by the ATO.

STP Phase 2 will introduce two types of Pay Events: a New Pay Event and an Updated Pay Event. When submitting an STP file related to the same pay period as a pay event already filed, the payroll software will allow the user to determine if the STP File is either a New Pay Event (additional employees paid over the same period) or an Updated Pay Event (a payroll correction).

STP Phase 2 – What’s new

Integration with Services Australia – Centrelink

Phase 2 of STP will link the ATO with Services Australia. This will facilitate social security reporting to Centrelink both when individuals are reporting income during employment and when applying for unemployment benefits.

When an individual reports income to Services Australia whilst employed, the Income figures will pre-populate on the Centrelink form from STP Reporting.

When an employment relationship ends, the Employer will be required to report both the Cessation Date and Cessation Reason on the final pay. The Cessation details, together with the reports on detailed earnings, will form a new electronic version of the Separation Certificate for ​Services Australia, eliminating the paper form.

​Integration with Services Australia – Child Support Australia

Employers may also choose to report Child Support deductions and garnishees to Child Support Australia via STP.  Although Child Support payments will still need to be processed manually, STP will remove the requirements to send payment remittances to Services Australia.

Child Support reporting via STP is optional both for the Digital Service Providers and the Employer.

STP Phase 2 – Implementation Timeline

Implementation Dates

The ATO has mandated all Australian employers to start STP Phase 2 reporting requirements from 1 January 2022.

However, the ATO also confirmed a flexible and reasonable approach to STP Phase 2 based on business readiness and individual circumstances.

A blanked deferral has automatically been granted to all Employers up to 1 March 2022.

Payroll Providers (DSPs) who need more time to make the changes and update their solutions to support STP 2 can apply for additional time. If they get a Deferral application approved this will automatically apply to all their customers.

Based on the Payroll Solutions supported by Evolution Cloud Accounting, the following deferrals have been obtained by the software providers:

• MYOB – MYOB has obtained an STP Deferral until the 1st January 2023. However, they are planning to have their AccountRight solution STP2 ready from version 2022.4. This version is planned for release between April and May 2022;
• Xero – Xero has also secured an STP extension until the 1st of January 2023. Xero will implement a staggered approach to STP2 with different STP2 features available progressively over 2022;
• KeyPay – KeyPay will be STP2 ready by 1st March 2022.

Once a Digital Service Provider’s solution is STP2 ready, their customers should start Phase 2 reporting.  However, businesses that are still not ready to report, can apply for an individual Deferral either directly via ATO Online Services for Business, or through their Registered Tax Agent.

Fines & Penalties

Part of the ATO’s flexible and reasonable approach also includes leniency toward penalties for genuine mistakes during the first year of STP Phase 2 reporting.

However, penalties will still apply for late or missed reporting compliance. The penalty for missed reporting is $210 for every 28 days the STP report is late, up to a maximum of:

• $1,050 for small businesses;
• $2,100 for medium entities;
• $5,250 for large companies; and
• $525,000 for Global Corporations.

Conclusions

Although the second phase of STP sets to provide great benefits for both employers and individuals, its complexity in reporting should not be underestimated.

Businesses should start working with their advisors and update their resources to shift to the new employee onboarding processes and assess their payroll setup to correctly apply the process of disaggregation of earnings.

For employers and their advisors, the first step is to familiarise themselves with STP2 obligations and specifically, how these impact the Business reporting requirements.

Making time for in-depth discussions to ensure their payroll setup and reporting requirements are structured correctly for STP Phase 2.

From that point on, preparation involves implementing a plan that will step the business towards the compliance deadline.

But unlike the first stage of STP, getting the right setup will not be enough in this new phase. STP Phase 2 will require ongoing detailed payroll knowledge when processing every pay run.

With these new detailed requirements, the complexity of Payroll has now come to the surface. Businesses should seriously consider delegating this task to a knowledgeable professional, rather than facing breaches of compliance resulting from a lack of knowledge and understanding.

References

https://www.ato.gov.au/Business/Single-Touch-Payroll/In-detail/Single-Touch-Payroll-Phase-2-employer-reporting-guidelines/

Disclaimer

This blog and attached resources are of general nature designed for informational and educational purposes only. They should not be construed as professional financial advice for your individual business. Should you need such advice, consult a licensed financial or tax advisor.