As of 2025, Single Touch Payroll (STP) Phase 2 is fully in effect, and it has completely reshaped how Australian employers report payroll data to the ATO. While it may seem technical, STP Phase 2 is ultimately about protecting your business from penalties, ensuring employees are taxed correctly, and making payroll smoother and more transparent. This guide explains each part in clear and practical terms.

STP Phase 2 is now the standard reporting method for all employers, with no further extensions expected.

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How STP Evolved in Australia

Single Touch Payroll was introduced in 2018 with one primary goal: To improve the accuracy and efficiency of payroll reporting. Under Phase 1, employers reported wages, PAYG withholding, and super every payday.

In 2022, the ATO launched STP Phase 2, an expanded, more structured reporting model aimed at improving cross-agency data quality and reducing manual admin for businesses.

Key goals of STP Phase 2 include:

• Improving the accuracy of tax and government support calculations
• Reducing the need for TFN declarations, employment separation certificates, and other duplicated reporting
• Ensuring employees receive the right benefits (e.g. Child Support, Services Australia assessments)
• Helping employers avoid overpayments or underpayments caused by incorrect payroll classification
• Creating a consistent national payroll reporting standard

By 2023–2025, nearly all major payroll vendors completed their ATO deferrals and transitioned clients to STP Phase 2.

What’s New in STP Phase 2

STP Phase 2 doesn’t change how employees are paid, but it significantly changes how income is classified and reported. The ATO now requires more granular data to ensure the right tax rules and government obligations apply.

• Income Types and Country Codes

Employers must now report income under specific ATO-defined income types, such as:

• Salary and wages
• Closely held payees
• Working holiday makers (including visa subclass codes)
• Foreign employment income (with country codes)
• Inbound assignees
• Labour hire income

This helps the ATO apply correct tax tables and prevents incorrect withholding.

• Disaggregation of Gross

Previously, a single “gross” figure covered all earnings. Under STP Phase 2, employers must break this down into specific components, such as:

• Overtime
• Paid leave (annual, personal, long service)
• Bonuses and commissions
• Directors’ fees
• Allowances (allowance categories must match ATO codes)
• Salary sacrifice (super and non-super)
• Lump sum payments (A, B, D, E, W categories)

This prevents incorrect taxation and ensures more accurate income information for Services Australia programs such as Centrelink and Family Tax Benefit assessments.

• Employment and Tax Information

STP Phase 2 now incorporates TFN declaration details within your payroll report, such as:

• Employment basis (full-time, part-time, casual, labour hire, volunteer)
• TFN or exemption codes
• Medicare levy exemptions
• Student loan status (HELP, VSL, TSL, SSL)
• Tax treatment codes

This removes the need for paper TFN declarations.

• Child Support Reporting (Optional)

Employers can now report:

• Child support deductions
• Child support garnishees

This optional feature reduces the need for separate monthly reporting to the Child Support Registrar.

The ATO has confirmed that the Phase 2 reporting structure is stable, and employers should expect these rules to continue unchanged into 2026.

Common STP Phase 2 Errors

Even in 2025, many employers struggle with the expanded reporting structure. The most frequent issues include:

• Selecting the wrong income type (e.g. incorrectly classifying a contractor as a salary-and-wages employee)
• Failure to disaggregate gross earnings correctly
• Incorrect or outdated tax treatment codes
• Using payroll software that hasn't fully transitioned to Phase 2
• Duplicate pay events
• Incorrect fringe benefits reporting
• Misclassified allowances (e.g. travel vs meals vs car allowances)
• Incorrect country code used for foreign employment income

These issues can lead to mismatched data, employee tax issues, or ATO “Action Required” notifications.

How Payroll Software Simplifies STP Phase 2

Trying to manage STP Phase 2 manually is risky and time-consuming. Modern payroll systems take over most of the heavy lifting by automatically applying income categories, breaking down gross amounts, validating tax codes, and sending STP reports directly to the ATO.

A strong payroll platform will:

• Automatically classify income and apply ATO-approved reporting rules
• Perform real-time error checks before submissions
• Allow easy corrections and resubmissions
• Maintain a clear audit trail for future reference

With automated payroll, you reduce compliance risks and free up time for higher-value HR and finance work.

ATO Penalties and Correction Process

While the ATO focuses on supporting employers, penalties still apply for incorrect or late reporting. These may include failure-to-lodge penalties (up to $1,375 for small businesses), penalties for false or misleading information, or Super Guarantee Charge if super reporting is wrong.

The good news is that the ATO allows most errors to be corrected within 14 days without penalty. Simply identify the issue in your payroll system, submit an amended event, and keep a record showing your intent to comply.

Penalty values may be indexed periodically, but the structure of these STP obligations and the 14-day correction window remain the same across 2025 and 2026

Because STP Phase 2 is an ongoing, permanent ATO requirement, employers who stay compliant today will remain compliant into 2026 without needing to make extra changes

Conclusion

STP Phase 2 might feel like extra work, but with the right processes and payroll tools, it becomes part of your normal routine. Accurate reporting protects your business, builds trust with employees, and helps the ATO deliver fair and timely services. Whether you're running payroll in a small business or managing HR for a larger organisation, making STP Phase 2 compliance seamless is one of the best ways to stay ahead.

FAQs

• What is STP Phase 2?

It’s the second stage of the ATO’s digital payroll reporting system, requiring detailed breakdowns of pay, tax, and employment information.

• Who needs to comply?

All Australian employers must use STP Phase 2-compliant software.

• What if I report the wrong income type?

It may affect employee entitlements and could attract penalties-but you can fix it by submitting a correction through your payroll software.

• Is there a correction window?

Yes. The ATO allows 14 days for most corrections without penalty.

• Does modern payroll software support STP Phase 2?

Yes. Most updated payroll systems in Australia now handle STP Phase 2 automatically, reducing manual work and preventing errors.