Single Touch Payroll Phase 2: What Australian Employers Must Do Now

STP Phase 2 Is Now Permanent – and More Critical Than Ever

Single Touch Payroll Phase 2 is the ATO's expanded payroll reporting standard, requiring employers to report disaggregated gross pay, income types, allowances, and employment basis on every pay event rather than a single gross figure. It became mandatory from 1 January 2022. As at 2026, there are no further extensions or deferrals—every employer should be actively reporting under Phase 2.

STP Phase 2 represents a fundamental shift in how Australian employers interact with the ATO. Rather than reporting a single gross pay figure at the end of each pay run, employers must now provide detailed, disaggregated data about every component of an employee's pay. This change was designed to simplify reporting for employees, reduce the administrative burden on employers in the long run, and provide the ATO with more accurate data to support social security and tax administration.

For employers who have not yet fully transitioned to Phase 2, the time to act is now. The ATO has made it clear that there will be no further extensions, and businesses that are not reporting under Phase 2 may face compliance action. This guide explains what changed from Phase 1, the mistakes nearly everyone makes, and what you need to do to ensure your business is fully compliant before Payday Super takes effect on 1 July 2026.

What Changed From Phase 1

Instead of one lump gross pay number, every pay run must now disaggregate: Income type—a code telling the ATO what category of earnings a payment represents (e.g., regular salary, overtime, commission, bonus, leave loading). Allowances—reported individually by type (travel, meal, car, tool), not bundled into gross income. Overtime—reported separately from ordinary hours and non-overtime leave loading. Employment basis and country codes—for foreign workers and various employment types.

Once you start reporting via STP Phase 2, this data replaces sending TFN declarations to the ATO separately. The new reporting structure means that employees can see their year-to-date earnings and tax withheld in real time through their myGov account, reducing the need for manual reconciliation at year-end.

The disaggregation of allowances is one of the most significant changes. Under Phase 1, all allowances were simply included in gross pay. Under Phase 2, each allowance type must be reported separately, with a specific code indicating what it is for (e.g., travel allowance, meal allowance, car allowance, tool allowance). This provides the ATO with greater visibility into how different types of allowances are being used and ensures that employees are correctly taxed.

The Mistake Nearly Everyone Makes

Many businesses transitioned to Phase 2 by simply updating their payroll software and assuming everything was handled. In a meaningful number of cases, the software updated its connection while the underlying payroll configuration—income type codes, allowance classifications, salary sacrifice settings—was left on old Phase 1 logic. This is one of the most common and consequential errors in Australian payroll right now.

For example, a business might have updated its payroll software to the latest version that supports Phase 2, but the payroll officer may not have updated the income type codes for each employee. This means that the software is sending disaggregated data to the ATO, but the underlying classification is incorrect. The ATO receives data that appears to be Phase 2 compliant, but the actual figures are wrong.

This error often goes undetected for months because the gross pay total still reconciles with the employee's payslip. However, the disaggregated data is incorrect, and this can have downstream consequences for the ATO's data matching, employee tax calculations, and your business's compliance status. The ATO has been actively educating employers about this risk, but many businesses are still making this mistake.

Why This Now Directly Affects Your Super Compliance

An allowance incorrectly coded can mean your Ordinary Time Earnings (OTE) base is understated on every single pay event. Multiplied across 52 weekly pay runs, the cumulative Super Guarantee shortfall becomes material. From 1 July 2026, under Payday Super, your STP report will include both OTE amounts and total super liability for each employee—and the ATO will match this against actual super receipts via SuperStream. A mismatch triggers review or an SGC assessment.

The linkage between STP Phase 2 and Payday Super is one of the most significant developments in Australian payroll compliance. From 1 July 2026, employers will be required to pay superannuation at the same time as wages, and the ATO will use STP Phase 2 data to verify that super is being paid correctly. If your STP Phase 2 data is incorrect, your super compliance will also be incorrect, potentially triggering Superannuation Guarantee Charge (SGC) assessments and penalties.

For example, if an allowance is incorrectly coded as a non-OTE allowance when it should be OTE, your OTE base will be understated, and your super contributions will be lower than required. Over the course of a year, this can amount to thousands of dollars in unpaid super, plus SGC penalties and interest. The ATO's automated systems will detect this mismatch, triggering a review.

The Annual Finalisation Deadline

Regardless of pay-run reporting, employers must make a finalisation declaration by 14 July each year so employees can access accurate income information for their tax returns. Closely-held payees (directors, family members of business owners) generally get an extended date—their normal lodgement date or 30 September, whichever is later.

The finalisation declaration is a critical step in the STP process. It confirms that all payroll data for the financial year is accurate and complete, and it allows employees to lodge their tax returns using the prefilled data in myGov. If you miss the 14 July deadline, your employees may not be able to lodge their tax returns on time, and you may face penalties.

Penalties for Getting It Wrong

Failure-to-lodge penalties use the standard $330 penalty unit, charged per 28-day period, capped at 5 units for small entities—doubled for medium businesses. Separately, false or misleading statements (including incorrectly coded income types) carry their own penalties based on whether the ATO views the error as carelessness, recklessness, or intentional.

The ATO distinguishes between different types of errors when applying penalties. A simple carelessness error might result in a warning or a small penalty, while a reckless or intentional error could result in significant penalties and even prosecution. The key is to demonstrate that you have taken reasonable care to comply with your obligations and that any errors are genuine mistakes rather than attempts to evade tax.

The ATO Allows a Grace Window for Corrections

Most errors can be corrected within 14 days without penalty. Submit an amended STP event through your payroll software as soon as you identify the issue, and keep a record showing your intent to comply. The ATO encourages employers to correct errors promptly rather than waiting for the annual finalisation declaration.

The 14-day grace window is a valuable opportunity for employers to correct errors without penalty. If you identify an error in your STP reporting, you should submit an amended STP event as soon as possible. The ATO will generally not apply penalties if the error is corrected within 14 days, provided you have taken reasonable care to comply with your obligations.

What to Do Before 1 July 2026

Run a test reconciliation comparing your STP-reported totals against your payroll system totals. Confirm your software supports Payday Super reporting. Verify employee TFNs, super fund details, and employment basis codes are current. Check that all income type codes and allowance classifications are correctly configured for Phase 2.

Employers should also review their payroll processes and consider whether they need additional training for staff. Payroll officers should be familiar with the Phase 2 requirements, including income type codes, allowance classifications, and the new reporting structure. Many businesses find that investing in training and process improvements pays off in reduced errors and compliance risk.

If you want your payroll configuration properly reviewed before Payday Super takes effect, our team at CA-Sir helps Australian employers get STP Phase 2 and Payday Super compliance right. We can review your payroll configuration, identify any issues, and help you implement the necessary changes to ensure you are fully compliant by 1 July 2026.

Conclusion: Get STP Phase 2 Right Before It's Too Late

STP Phase 2 is now the permanent payroll standard, and it is about to become the backbone of Payday Super from 1 July 2026. Employers who have not yet fully transitioned to Phase 2 need to act now to ensure their payroll configuration is correct and their reporting is accurate.

The cost of getting STP Phase 2 wrong can be significant, including penalties, interest, and SGC assessments. By taking the time to review your payroll configuration, train your staff, and implement the necessary changes, you can avoid these costs and ensure your business is fully compliant.

If you want your payroll configuration properly reviewed before Payday Super takes effect, our team at CA-Sir helps Australian employers get STP Phase 2 and Payday Super compliance right. Contact us today to book a consultation and ensure your business is ready.