If running payroll used to feel like playing a familiar three-chord song, Single Touch Payroll Phase 2 has turned it into a full orchestral arrangement. More complex? Absolutely. But once you understand the new score, it's actually a far richer system - for your business, your employees, and the government agencies that rely on accurate income data to do their jobs properly.
Single Touch Payroll (STP) Phase 2 is the Australian Taxation Office's (ATO's) expanded payroll reporting framework, requiring every Australian employer - regardless of business size - to submit more detailed employee and payroll information directly to the ATO with every pay run. It became mandatory from 1 January 2022, and as of 2026, the ATO has shifted firmly from an education-first approach into full enforcement mode.
If you're a creative professional, a small business owner in Penrith or anywhere across Sydney, or simply someone trying to wrap your head around what all this means for your payroll obligations, you're in the right place. This guide breaks it all down - clearly, concisely, and without the unnecessary jargon.
Single Touch Payroll was first introduced in 2018, with mandatory reporting commencing from 1 July 2019 for most employers. That original version - now referred to as STP Phase 1 - was a meaningful step forward. Employers were required to report gross pay as a single aggregated figure, Pay As You Go (PAYG) withholding, superannuation contributions, and employee commencement and termination dates.
But STP Phase 1 had a fundamental limitation. Government agencies like Services Australia (Centrelink and Child Support), the Department of Social Services, and the Department of Veterans' Affairs were still relying on separate reporting channels to access employment income data - creating redundancy, delays, and frustrating inaccuracies for both businesses and the employees who depended on those services.
STP Phase 2 was announced in the 2019–20 Federal Budget specifically to fix this. By expanding the scope and granularity of payroll reporting, the ATO created a single pipeline of data that flows in near real-time to multiple government agencies simultaneously. The result is less duplication, greater accuracy, and a meaningful reduction in the administrative burden of reporting separately to multiple bodies.
In short, STP Phase 2 doesn't just tune up the reporting system - it rewires the whole amp.
The single most significant change under STP Phase 2 is the disaggregation of gross pay. Where Phase 1 required employers to report one consolidated gross payment figure, Phase 2 requires that figure to be broken down into its individual components. This matters because different government agencies assess income differently - what counts as taxable income for the ATO may be calculated differently for Centrelink's Family Tax Benefit or a child support assessment.
The table below outlines the key differences between the two phases:
| Reporting Element | STP Phase 1 | STP Phase 2 |
|---|---|---|
| Gross Pay Reporting | Single aggregated figure | Disaggregated into components (wages, overtime, leave, bonuses, etc.) |
| Income Type Codes | Not required | Mandatory (SAW, CHP, WHM, VOL, LAB, etc.) |
| Employment Basis | Not reported | Mandatory (full-time, part-time, casual, etc.) |
| Tax Treatment Codes | Not required | Mandatory per employee |
| Allowance Reporting | Limited | Detailed categorisation with specific ATO codes |
| Cessation Reason | Not required | Mandatory cessation reason code |
| TFN Declaration | Submitted to ATO | Retained by employer; embedded in STP report data |
| Child Support Reporting | Separate process | Optional direct reporting via STP |
| Salary Sacrifice Reporting | Net amounts only | Pre-sacrificed gross must be reported |
According to the ATO, most of the additional data required under Phase 2 should already exist within current payroll software systems. The challenge is less about creating new data and more about ensuring it is correctly mapped and accurately reported.
STP Phase 2 introduces several specific obligations that every Australian employer must satisfy. Understanding these in detail is critical - not just for compliance, but for avoiding the penalties that now accompany getting it wrong.
Every pay run must separately identify and report applicable pay components, including ordinary salary and wages, overtime payments, bonuses and commissions, paid leave (annual, personal, parental, and long service leave), directors' fees, salary sacrifice amounts (reported at pre-sacrificed gross), allowances categorised with specific ATO codes, and lump sum or termination payments.
Every employee payment must carry a specific income type code. Common codes include:
Correct income type classification determines the appropriate tax table and withholding calculation applied to an employee's income - getting this wrong creates downstream consequences for both employers and employees.
Employers must report whether each employee is full-time (F), part-time (P), casual (C), or engaged under another arrangement. Tax treatment codes must also reflect the applicable tax scale and any Medicare levy variations in place for each individual.
Most allowances must be itemised separately using ATO-designated reporting codes. Common examples include travel allowances (RD code), cents per kilometre allowances (CD code), laundry allowances (LD code), task allowances for dirty work, heights, or confined spaces (KN code), and other allowances such as home office equipment (OD code).
When an employee leaves, their cessation date, reason code, and any applicable termination payment amounts must be reported with the correct lump sum classification codes. This replaces the requirement for separate employment separation certificates - a genuine administrative win under Phase 2.
Think of STP reporting deadlines like a gig schedule. Miss your slot, and there are consequences - some of them costly.
Regular Pay Events: Reports must be submitted on or before the payday - meaning the date funds are deposited into the employee's bank account.
Annual Finalisation Declaration: Due by 14 July each financial year for standard (arms-length) employees. This allows employees to access their finalised income information via myGov to complete their individual tax returns.
Closely Held Payees: Finalisation is due by 30 September each year for closely held payees such as directors, family members, and shareholders of private companies. If your business has 20 or more employees and reports closely held payees with each regular pay run, the earlier 14 July deadline applies instead.
As of 2026, the ATO has made its position unambiguous: the grace period has ended. Full enforcement now applies across the board.
| Business Size | Penalty per 28-Day Period | Maximum per Lodgement |
|---|---|---|
| Small business | $220 | $5,250 |
| Medium/Large business | $1,100 | $5,250 |
One penalty unit currently sits at $330 (as at 2026), with penalties capped at five units per lodgement and doubled rates applying to medium-sized businesses with annual turnover between $1 million and $20 million. Employers who submit false or misleading information face separate penalties based on the degree of carelessness, recklessness, or intent involved.
Superannuation guarantee failures carry even heavier consequences - up to 200% of unpaid amounts, plus 10% interest and a $20 administration fee per employee per quarter. Director penalty notices may also apply for unresolved superannuation underpayments.
The important caveat: most errors identified and corrected within 14 days attract no penalty at all. The ATO provides clear correction pathways - pay events, update events, adjustment events, and full file replacements - and proactive correction consistently results in far better outcomes than waiting for the ATO to identify the issue independently.
The regulatory landscape continues to evolve, and 2026 introduces some significant new requirements that Australian employers need to understand.
From 1 July 2026, STP becomes the primary reporting mechanism for the new Payday Super regime. The ATO will match STP-reported superannuation against actual contributions received via SuperStream - within a seven business day window after each payday. Errors in superannuation reporting will be identified more rapidly than ever before, and employers who fall short will face scrutiny and potential penalties far more quickly than under previous arrangements.
The ATO has published draft Law Administration Practice Statement PS LA 2026/D2, formally signalling its shift to active, enforcement-focused administration of STP obligations. The ATO is now examining patterns of errors across reporting history - not just isolated incidents - meaning businesses with recurring payroll issues are at significantly elevated risk.
The ATO has publicly identified the most frequent compliance failures under STP Phase 2, including:
If any of these patterns sound familiar in your payroll process, they are worth addressing before the ATO raises them with you.
STP Phase 2 is not approaching - it is here, actively enforced, and fundamentally reshaping how Australian payroll operates. For employers in Penrith, across Greater Sydney, and throughout Australia, the ATO's message is unambiguous: accurate, complete, and timely payroll reporting is a non-negotiable business obligation.
The ATO's real-time data sharing with Services Australia, Centrelink, Child Support, and the Department of Veterans' Affairs means that payroll errors no longer sit quietly in a filing cabinet. They ripple outward, affecting employees' Centrelink payments, family tax benefit calculations, and child support assessments. That's a responsibility worth taking seriously - and one that rewards businesses who invest in getting it right.
Businesses that are managing STP Phase 2 well aren't necessarily the largest or best-resourced - they're the ones who took the time to audit their payroll systems, correctly map their pay codes, train their payroll staff, and engage professional support where needed. In an enforcement environment that's only going to intensify, solid payroll foundations aren't a luxury. They're a competitive advantage.
Ready to crank your finances up to 11? Let's chat about how we can amplify your profits and simplify your paperwork – contact us today.
Yes. Single Touch Payroll Phase 2 has been mandatory for all Australian employers since 1 January 2022. Only very limited exemptions exist for businesses with extremely low digital capability or those operating in areas with genuinely unreliable internet access. Aside from these, all employers are required to comply fully as the ATO has shifted from an educational approach to active enforcement.
The primary difference lies in the level of detail required in reporting. STP Phase 1 required employers to report gross pay as a single aggregated figure, whereas STP Phase 2 mandates that this figure be disaggregated into individual components, such as ordinary wages, overtime, bonuses, paid leave, and allowances. Additionally, Phase 2 introduces mandatory income type codes, employment basis codes, tax treatment codes, cessation reporting, and more detailed allowance categorisation.
Most errors corrected within 14 days of identification attract no penalty. The ATO provides several correction pathways—such as pay events, update events, adjustment events, and full file replacements—to rectify mistakes. However, recurring or uncorrected errors can result in penalties, which range from $220 per 28-day period for small businesses up to a maximum of $5,250 per lodgement.
For standard arms-length employees, the annual finalisation declaration is due by 14 July each financial year. This deadline ensures that employees can access their finalised income data via myGov for completing their individual tax returns. For closely held payees such as directors or family members of private companies, the deadline is 30 September, unless the employer has 20 or more employees—in which case the 14 July deadline applies.
From 1 July 2026, STP becomes the primary reporting mechanism for the Payday Super regime. The ATO will match the superannuation data reported via STP against actual contributions received through SuperStream within a seven business day window after each payday. This tighter integration ensures that any discrepancies or errors in superannuation reporting are identified and addressed more swiftly.
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