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1300 710 863 | hello@aboutbusinessbooks.com.au
Understanding Single Touch Payroll (STP) Phase 2 Compliance
The End of “Gross Wage” Reporting
For years, processing payroll for a small business was relatively straightforward. You calculated an employee’s total earnings, withheld the appropriate tax (PAYG), and reported a single “Gross Wage” figure to the Australian Taxation Office (ATO).
As of the nationwide rollout of Single Touch Payroll (STP) Phase 2, those days are officially over. The ATO, in conjunction with Services Australia (Centrelink), now demands unprecedented, real-time visibility into exactly how you are paying your staff. Failing to comply with STP Phase 2 in 2026 does not just risk ATO fines; it can directly impact your employees’ access to government benefits.
What Exactly is STP Phase 2?
STP Phase 2 requires employers to disaggregate (break down) the gross pay figure into highly specific categories every single time they run payroll. You can no longer hide allowances, bonuses, or overtime inside a generic hourly rate.
Here are the key elements you must now report separately:
1. Income Types and Country Codes
You must specify the exact type of income an employee is receiving (e.g., salary and wages, working holiday maker, closely held payees). If you employ backpackers or foreign residents on the Central Coast, their income must be distinctly categorized with corresponding country codes.
2. Disaggregation of Gross Earnings
Your payroll software must be configured to split the paycheck into:
- Ordinary Time Earnings (OTE): The base rate of pay.
- Allowances: Every allowance (tool, laundry, travel, meals) must be mapped to specific ATO codes.
- Overtime: Must be separated from standard hours so the ATO can track Superannuation Guarantee (SG) accuracy.
- Bonuses and Commissions: Must be reported independently of standard wages.
- Paid Leave: Annual leave, sick leave, and parental leave must all be categorized separately.
3. Termination Reasons
When an employee leaves your business, you no longer need to issue a physical Employment Separation Certificate. Instead, you must report the exact reason for termination (e.g., voluntary cessation, redundancy, dismissal) directly through your STP Phase 2 software.
The Risks of Getting It Wrong
If your Xero or MYOB account is not mapped correctly for Phase 2, the data being fed to the ATO is corrupted.
| The Mistake | The Consequence |
|---|---|
| Failing to separate Overtime from Ordinary Time Earnings. | You will overpay Superannuation, costing your business thousands in unnecessary overheads. |
| Incorrectly mapping an Allowance as standard gross pay. | The employee may be taxed incorrectly, and Services Australia may unfairly reduce their family benefits. |
| Ignoring STP Phase 2 deadlines. | The ATO issues strict Failure to Lodge (FTL) penalties that compound quickly. |
How to Guarantee Compliance
Navigating the backend settings of accounting software to map dozens of pay items to specific ATO codes is a nightmare for most business owners. This is the realm of payroll professionals.
At About Business Bookkeeping, our Registered BAS Agents ensure your payroll file is 100% Phase 2 compliant. We audit your existing setups, fix broken pay items, and handle your weekly or fortnightly pay runs with total precision.
Book a payroll compliance review with us today and protect your business from the ATO’s digital spotlight.
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