STP Phase 2 Employment Information and Tax Treatment

One of the many goals of the second stage of the Single Touch Payroll implementation is streamlining the employee onboarding process and timely capturing any changes to the employee’s working and tax conditions during the course of their employment.

STP Phase 2 expands the range of employment information originally submitted through the Tax File Number declaration and also includes these details into the STP event submitted to the ATO upon completion of each pay period.

STP Phase 2 reporting expands both the employee’s employment information and tax details submitted to the ATO.

STP Phase 2 – Employment Information

As well as still providing the basic employee details (employee’s name, address, date of birth and gender), STP Phase 2 reporting includes the following employment information:

• Employment Commencement Dates;
• Employment Basis;
• TFN or ABN;

Employment Commencement Dates

One of the required fields in the Tax File Number declaration form is the employee’s start date. This is the date the employee is due to start working for their new Employer.

The Employment Start Date is a very significant piece of information and drives the employee’s calculation of a number of important payroll entitlements, including Long Service Leave and Redundancy payments.

STP Phase 2 expands on this concept and further provides additional guidelines when dealing with specific circumstances.

In STP Phase 2 employers have two commencement dates:

• Start Date – this is the same field from the TFN Declaration, employers must enter the commencement date when hiring a new employee;
• Re-hire Date – new to STP Phase 2, the re-hire date applies in two specific circumstances
  • when an employee is transferred from one entity to another that are part of the same group;
  • when an employee returns to the same employer after having left for a period of time;

The re-hire date was introduced to correctly calculate Long Service Leave entitlements in the above scenarios.

In addition, the ATO has provided specific instructions on how to deal with the Start Date when dealing with other occurrences. It is important to remember that with STP Phase 2, Employment information is submitted at every pay run, not just at the start of the employment relationship.

Employers should use the date 01/01/1800 in the following instances:

• when the start date of the employee is unknown;
• when a death beneficiary is entered into a payroll system to pay a Death Benefit Employment Termination Payment.

Employment Basis

​Previously optional, reporting of employment basis is mandated under Phase 2 reporting. Employment basis options have also expanded from the ones available on the Tax File Number declaration.

The choice of employment basis now includes:

• Full-Time (F), Part-Time (P) and Casual (C) Employment (same as the TFN Declaration);
• Labour Hire (L) (same as the TFN Declaration);
• Non-Employee (N) – New to STP Phase 2, defines a contractor, not in scope with STP where the employer is still required to pay Superannuation;
• Voluntary Agreement (V) – New to STP Phase 2, defines a contractor employment arrangement where the contractor enters into a Voluntary Withholding Agreement;
• Death Beneficiary (D) – New to STP Phase 2, this is a non-employee that has been entered into the payroll system to receive a Death Benefit Employment Termination payment.

As employment basis is now included in the STP Pay event, the ATO will be immediately notified when an employee changes employment basis with the same employer.

Tax File Number or ABN

The Tax File Number Declaration only included the requirement to provide the employee’s Tax File Number. STP Phase 2 has expanded this requirement to also include the Australian Business Number applicable to Employer vs Contractor working relationships.

STP Phase 2 – Tax Treatment

STP Phase 2 completely revamps the employee’s Tax Treatment information submitted to the ATO.

The Tax File Number Declaration included three Tax Treatment options:

1. Residency for Tax purposes;
2. Tax-free threshold;
3. Higher Education Loan Programs;

The Tax File Number Declaration assumed the employee had no Medicare Levy Reduction, Surcharge or Exemptions. An Employee had to complete a separate Medicare Levy Variation form to apply for additional Medicare benefits.

STP Phase 2 includes Medicare Levy Tax Treatment, removing the need for the Medicare Levy Variation form.

STP Phase 2 includes six Tax Treatment components:

1. Tax Scale Category – replaces the residency for tax purposes and adds more options to further classify different types of employment relationships;
2. Category Option – replaces the tax-free threshold option and adds more choices which vary depending on the Tax Scale Category selected;
3. STSL (Study or Training Support Loans) – replaces the Higher Education Loan Programs option;
4. Medicare Levy Surcharge
5. Medicare Levy Exemption 
6. Medicare Levy Reduction – these three separate Tax Treatment options replace the Medicare Levy variation form.

Each option available within each of the six Tax Treatment components is identified with a character. When the STP Phase 2 Pay Event is submitted to the ATO, the employee’s correct tax treatment is made by a 6-character code (an identifiable character for each of the 6 tax treatment options) that provides the ATO with the correct employee’s tax treatment.

The 6-character tax treatment code will also allow the ATO to identify if the employee has provided the Employer with the correct tax information and rectify any incorrect tax information leading to a possible overdue tax bill at the end of the Financial Year.

Although the Business’ STP solution will automate the reporting of these codes and ensure that the tax treatment code reported to the ATO is valid, it is important for employers to correctly understand the meaning of the various Tax Treatment options.

A full list of all Tax Treatment options and combinations is available on the ATO Website.

STP Phase 2 – Income Types and Country Codes

Income Types

With STP Phase 2 each amount paid to an employee is also assigned to an income type. Employers can report amounts assigned to multiple income types throughout the year.

Income types introduced with STP Phase 2 are:

• SAW (salary and wages) – this is the most common income type and was formerly known as Individual Non-business (INB);
• CHP (closely held payees) – applies when the payee is directly related to the employer, such as family members. Businesses that are using the concessions available to closely held payees must report these payments under this income type. This type of income was formerly included with the Individual Non-business (INB);
• WHM (working holiday makers) – applies to temporary visitors to Australia who hold a Working Holiday visa (subclass 417) or Work and Holiday visa (subclass 462);
• FEI (foreign employment income) – applies to assessable income paid to payees (who are Australian tax residents) that is subject to tax in another country for work performed in that country, if the qualification period is met;
• IAA (inbound assignees to Australia) – some multinational payers exchange, or transfer, payees between affiliated entities in different tax jurisdictions. Businesses that are using the concessions available to inbound assignees to Australia must report these payments under this income type;
• SWP (seasonal worker programme) – applies to regional programmes for government-approved employers, administered by the Department of Employment, Skills, Small and Family Business. This type of income was formerly part of Individual Non-business.
  Note: this Income Type does not include workers under the Pacific Labour Scheme which is recorded as SAW;
• JPD (joint petroleum development area) – this Income type only applies to making modifications to a past employee’s pay that used to work in the Joint Petroleum Development Area prior to 1 July 2020;
• VOL (voluntary agreement) – applies to contractors paid under a Voluntary agreement;
• LAB (labour-hire) – applies to payments by a business that arranges for persons to perform work or services, or performances, directly for clients of the entity.
  Note: Employees of Labour-Hire firms should be reported as SAW;
• OSP (other specified payments) – this income type has limited application. It exclusively applies to specified payments by regulation 27 of the Taxation Administration Regulations 2017.

Country Codes

When reporting payments classified under three specific Income Types, employers will also need to report a Country Code under STP Phase 2.

• ​WHM (working holiday makers) – Employers should select the Country Code where the Visa was approved from;
• ​IAA (inbound assignees to Australia) – Employers should select the Country Code of the payroll where the employee is paid from;
• ​FEI (foreign employment income) – Employers should select the Country Code where the employee is working.

Conclusions

Once a business shifts to STP Phase 2, it will no longer require to send key employment forms to the ATO including:

• TFN Declarations;
• Withholding Declarations;
• Medicare Levy Variations;
• Voluntary Withholding Agreements.

Employers are still required to provide these Employment Forms (or equivalent) to gather the relevant employment information and retain it for a period of 5 years.

As the Employment information is submitted with every pay run, the ATO is immediately notified of any changes in the employment conditions, including:

• Employment Information;
• Tax Treatment;
• Income Types, and
• Country Codes.

This will allow the Australian Taxation Office to identify any incorrect tax treatments and avoid potential overdue tax bills for individual taxpayers at the end of the year.

References

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

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.