Single Touch Payroll Phase 2 for Small Business: 2026 Guide

Single Touch Payroll Phase 2 changed the way Australian employers report payroll. Instead of a single "gross pay" figure, you now break down each pay run into specific categories — and the ATO uses that data to pre-fill employee tax returns, integrate with Services Australia (Centrelink), and detect non-compliance.

If you're still treating STP like Phase 1, the ATO is already noticing.

What's different in Phase 2

Phase 1 (2018–2022) reported:

• Total gross pay
• Tax withheld
• Super liability

Phase 2 (mandatory from 1 January 2022, deferred to 31 December 2022 for some software) reports the same plus:

• Gross pay disaggregated into salary/wages, overtime, allowances, bonuses & commissions, lump sum payments, paid leave
• Employment conditions: basis (full-time, part-time, casual, labour hire, etc.), tax-free threshold claimed, Medicare levy adjustment
• Country code for employees working overseas
• Income type (salary and wages, working holiday maker, foreign employment, etc.)
• Termination reason when an employee leaves
• Child support garnishees and deductions

The detail allows the ATO to:

• Pre-fill personal tax returns with the right components
• Apply correct PAYG calculations for Working Holiday Makers (15% flat)
• Detect underpayment of awards
• Cross-match with Services Australia for income support recipients

The ten allowance categories

Phase 2 splits allowances into ten categories rather than reporting them as one lump:

Most modern accounting and payroll software auto-categorises these as you set up the pay item. If you're using Excel or a deprecated tool, this is the year to upgrade.

What stays the same

• Real-time reporting at every pay event
• No P35-equivalent annual return — finalisation is via the STP feed itself
• 14-day correction window to fix errors in the next pay event
• Annual finalisation declaration by 14 July following financial year-end (employee-by-employee)
• Working Holiday Makers, foreign workers, child support remain in scope

Annual finalisation

By 14 July following the 30 June year-end, every employer must finalise STP for each employee. This:

1. Sets the year-to-date amounts as final
2. Triggers pre-fill of the employee's personal tax return
3. Makes the data visible in the employee's myGov

Closely-held payees (e.g. directors, family members of small business owners) have an extended date — usually their normal lodgement date or 30 September, whichever is later.

Common Phase 2 errors

1. Allowances reported as gross

A common pre-Phase 2 habit was bundling allowances into gross pay. In Phase 2, allowances must be in the right code (CD, MD, etc.), or PAYG calculation goes wrong and the employee's tax return won't pre-fill correctly.

2. Overtime not separately disaggregated

Overtime must be reported separately. This affects:

• Super calculation (overtime is generally not OTE)
• Employee tax return pre-fill
• Award compliance audits

3. Tax treatment code errors

Each employee has a 6-character tax treatment code (e.g. RTXXXX for "Regular employee, with tax-free threshold, not a foreign resident, no Medicare exemption"). Software should set this automatically from the TFN Declaration, but errors propagate quickly.

4. Income type misclassification

Income types include:

• SAW — Salary and Wages
• WHM — Working Holiday Maker
• FEI — Foreign Employment Income
• IAA — Inbound Assignee from Abroad
• VOL — Voluntary Agreement
• CHP — Closely Held Payee

Misclassifying a Working Holiday Maker as SAW (taxed at progressive rates) instead of WHM (taxed at 15% flat) is a common bug.

5. Closely-held payees flagged incorrectly

A closely-held payee is a non-arm's-length payee — typically directors, family employees of micro businesses. They get extended STP reporting deadlines but must still be finalised annually.

Integration with super and BAS

STP, super and BAS are increasingly integrated:

• STP feeds the ATO's super monitoring — they detect SG underpayment
• Payday Super (from 1 July 2026) ties super payment to each STP event
• PAYG withholding (W2 on the BAS) reconciles to STP-reported amounts. The ATO compares — discrepancies trigger automated review

Penalties

STP-related penalties:

• Failure to lodge STP report on or before pay date: standard FTL penalty (1 unit per 28 days)
• False or misleading information: up to 75% of the shortfall
• Failure to keep records: up to A$11,000 per offence

In practice, the ATO's first response is usually education and a request to fix. Repeated or deliberate failure escalates.

STP and contractors

STP is for employees. Contractors paid via invoice are NOT reported through STP — they're either:

• Reported via the Taxable Payments Annual Report (TPAR) if you're in a relevant industry (building, cleaning, courier, IT, security, freight)
• Or reported nowhere if you're outside those industries

But the test for "contractor" is substantive, not just contractual. The ATO's Employment vs contractor decision tool uses the high court's recent decisions (Personnel Contracting and Jamsek). Many "contractors" are actually employees — and missing STP for them is the same penalty as missing it for clear employees.

Tax File Number Declarations and stapled super

When a new employee starts:

1. Collect a TFN Declaration before their first pay
2. Submit the TFN Declaration via STP (this replaces the old paper form)
3. Check the ATO's stapled super fund service if they don't nominate a fund
4. Pay first SG only after stapling is confirmed

How AccountsOS handles STP Phase 2

AccountsOS is live in Australia and operates STP Phase 2 natively:

• Disaggregates gross pay into Phase 2 categories automatically
• Categorises the ten allowance types from your pay items
• Submits STP at every pay event (no manual upload)
• Handles WHM, FEI, IAA income types
• Generates 14 July finalisation flow
• Director-only Pty Ltd workflow with closely-held payee flag
• Ready for Payday Super integration in 2026

Try AccountsOS free or read about AccountsOS in Australia.

Related reading

• Company tax in Australia: 25% vs 30% explained
• Quarterly BAS and GST guide
• Superannuation Guarantee 2025: 11.5% to 12% transition
• Pty Ltd vs sole trader: choosing your structure