Payroll & Compliance

Single Touch Payroll Phase 2: Complete Guide for Employers

Published January 2025 • 14 min read

Single Touch Payroll (STP) Phase 2 represents the biggest change to payroll reporting in Australia since STP was first introduced. While Phase 1 required reporting of gross wages, tax withheld, and super, Phase 2 goes much deeper - requiring the disaggregation of gross into specific income types and breaking down allowances and deductions.

This guide explains what's changed, what you need to report, and how to stay compliant.

2M+

Australian employers now reporting through STP Phase 2

What is STP Phase 2?

STP Phase 2 expands on the original STP by requiring employers to report additional payroll information to the ATO. The key changes include:

Income type disaggregation: Breaking gross payments into specific categories
Country codes: Reporting employee country of origin for tax purposes
Employment basis: Full-time, part-time, casual, or labour hire
Tax treatment codes: Replacing tax file number declarations
Allowance and deduction breakdowns: Itemised reporting

Phase 1 vs Phase 2: Key Differences

STP Phase 1

Gross wages (single amount)
PAYG withholding
Super liability
Basic employee details

STP Phase 2

Disaggregated gross by income type
PAYG withholding
Super liability
Employment basis codes
Tax treatment codes
Itemised allowances
Itemised deductions
Country codes

Income Types Explained

Under STP Phase 2, you must categorise each payment using the correct income type code. Here are the main categories:

Code	Income Type	Description
SAW	Salary and Wages	Regular wages, salary, commissions, bonuses
CHP	Closely Held Payees	Directors, family members in family businesses
IAA	Inbound Assignees to Australia	Foreign employees on assignment in Australia
WHM	Working Holiday Makers	Employees on 417 or 462 visas
SWP	Seasonal Worker Programme	Seasonal workers from Pacific nations
FEI	Foreign Employment Income	Australian residents working overseas
JPD	Joint Petroleum Development Area	Employees in the Timor Sea joint area
VOL	Voluntary Agreement	Contractors under voluntary PAYG agreements
LAB	Labour Hire	Workers supplied through labour hire arrangements
OSP	Other Specified Payments	Specified ABN payees with voluntary agreements

Most Common: The majority of Australian employees will fall under SAW (Salary and Wages). Only use other codes when the employee's situation specifically matches that category.

Employment Basis Codes

You must now report each employee's employment basis:

Code	Employment Type	Characteristics
F	Full-time	Ongoing, works 38+ hours per week (or full-time equivalent)
P	Part-time	Ongoing, works regular hours less than full-time
C	Casual	No guaranteed hours, paid casual loading
L	Labour hire	Worker supplied through labour hire arrangement
V	Voluntary agreement	Contractor with voluntary PAYG withholding
D	Death beneficiary	Payment to estate or beneficiary of deceased employee
N	Non-employee	Closely held payees who are not employees

Tax Treatment Codes

Tax treatment codes replace TFN declarations for STP reporting purposes. Each employee needs a six-character tax treatment code.

Tax Treatment Code Structure

The code is built from six components:

Character 1 - Tax scale type: R (regular), A (actors), S (seniors), H (horticulture/shearing)
Character 2 - TFN status: T (TFN quoted), N (no TFN), D (TFN under declaration)
Character 3 - Residency: R (resident), F (foreign resident), W (working holiday maker)
Character 4 - Tax-free threshold: T (claimed), N (not claimed)
Character 5 - STSL debt: S (has debt), N (no debt)
Character 6 - Medicare levy variation: F (full exemption), H (half exemption), N (no variation)

Example: An Australian resident employee with a TFN, claiming the tax-free threshold, with no STSL debt and full Medicare levy would have the code: RTRTSN

Allowances Under STP Phase 2

Allowances must now be itemised and reported separately. The ATO has defined specific allowance types:

Type	Allowance	Tax Treatment
CD	Cents per km	Exempt up to ATO rate (88c/km for 2024-25)
AD	Award transport	Exempt if paid under award and meets conditions
LD	Laundry	Exempt up to reasonable amount ($150)
MD	Overtime meals	Exempt if paid under award and meets conditions
RD	Domestic travel	Exempt up to ATO reasonable amounts
TD	Tools and equipment	Taxable unless reimbursement
QN	Qualifying (non-exempt)	Taxable - qualifies for deduction
OD	Other allowances	Various - depends on nature

Important: You must correctly categorise allowances. Incorrect coding can affect employee tax returns and may trigger ATO reviews.

Lump Sum Payments

STP Phase 2 requires specific reporting of lump sum payments:

Code	Payment Type
Lump Sum A	Payments related to earlier income years (e.g., back pay)
Lump Sum B	Payments for unused leave on termination (pre-1993 service)
Lump Sum D	Tax-free component of genuine redundancy or early retirement scheme
Lump Sum E	Back pay for prior year(s) - return to work payments
Lump Sum W	Return to work payments - workers comp makeup pay

Deductions (Child Support)

Child support deductions must now be reported through STP rather than being reported separately to Services Australia.

Child Support Reporting Requirements:

Report child support deductions each pay period
Include the child support reference number (CSRN)
Deduction amounts must match notices from Services Australia
Still remit payments to Services Australia as normal

Country Codes

You must report a country code for employees where relevant. This is particularly important for:

Working holiday makers (417/462 visa holders)
Foreign residents
Inbound assignees
Seasonal worker programme participants

Use the two-letter ISO country code (e.g., AU for Australia, NZ for New Zealand, GB for United Kingdom).

Finalisation Process

STP finalisation requirements remain similar to Phase 1, with some additional considerations.

Payee Type	Finalisation Deadline
Employees (standard)	July 14 following the end of the financial year
Closely held payees	September 30 following the end of the financial year
Terminated employees	With final pay run or next scheduled pay run

Finalisation Declaration: Once you submit your finalisation declaration, employees can access their income statement through myGov as "Tax ready". This replaces paper payment summaries.

Setting Up STP Phase 2

Step 1: Update Your Payroll Software

Most payroll software providers have released STP Phase 2 updates. Check with your provider that you're running the latest version.

Step 2: Review Employee Records

Before your first Phase 2 submission, review each employee record for:

Employee Record Checklist:

Correct income type (SAW, CHP, WHM, etc.)
Employment basis (F, P, C, L, V)
Tax treatment code components
Country code (if applicable)
STSL status
Allowance types correctly categorised
Deductions correctly categorised

Step 3: Map Pay Items

Review all pay items in your payroll system and ensure they're mapped to the correct STP Phase 2 category:

Wages and salary → Gross payments
Allowances → Specific allowance type (CD, AD, LD, etc.)
Overtime → OTE or non-OTE component
Bonuses → Bonus payment category
Leave loading → Separate reporting

Step 4: Test Submission

Many payroll systems offer a test or preview feature. Use this to review your STP report before submission.

Common STP Phase 2 Mistakes

Wrong income type: Using WHM for all foreign workers instead of only 417/462 visa holders
Incorrect employment basis: Coding casual workers as part-time (or vice versa)
Tax treatment errors: Not updating when employee circumstances change
Allowance miscoding: Reporting all allowances as "Other" instead of specific types
Missing country codes: Required for specific income types but often overlooked
Lump sum classification: Not correctly categorising back pay and termination payments
Child support reporting: Forgetting to include CSRN or amounts

Penalties for Non-Compliance

The ATO takes STP compliance seriously. Penalties can apply for:

Late or non-lodgement of STP reports
Failing to finalise by the deadline
Providing false or misleading information
Not keeping adequate records

Penalty Units: Administrative penalties are calculated in penalty units. For 2024-25, one penalty unit = $313. Late lodgement penalties can range from 1 to 50 penalty units depending on entity size and failure period.

STP and Employee Tax Returns

One of the biggest benefits of STP Phase 2 is streamlined tax time for employees:

Pre-filled returns: Income information flows directly to myGov
Itemised allowances: Employees can see exactly what allowances they received
Faster refunds: ATO can process returns faster with verified data
Reduced errors: Less manual data entry means fewer mistakes

Support and Resources

ATO Resources

STP Phase 2 employer reporting guidelines
Tax treatment code generator tool
Allowance and deduction mapping guides
Business portal for viewing lodged reports

Software Support

Contact your payroll software provider for:

Phase 2 setup guides
Pay item mapping assistance
Training materials and webinars

Manage Your Payroll Efficiently

Use BizziKit's HR Operations Suite to track employee information and stay organised for STP reporting.

Open HR Suite

Key Takeaways

Disaggregation is key: Gross payments must be broken down by income type
Codes matter: Income type, employment basis, and tax treatment codes must be accurate
Allowances need detail: Itemise allowances using the correct STP categories
Keep records updated: Employee changes should be reflected immediately
Use your software: Modern payroll systems handle most complexity automatically
Finalise on time: July 14 for most employees, September 30 for closely held payees

Final Tip: If you're unsure about any STP Phase 2 requirements, consult with a registered BAS agent or tax professional. Getting it right from the start is much easier than correcting errors later.