Understanding Single Touch Payroll Phase 2: What Melbourne Employers Need to Know in 2025
Single Touch Payroll (STP) is a reporting system that has transformed how Australian businesses report wages, tax and superannuation to the government. If you’re like many Melbourne small business owners, you’ve been using STP since it became mandatory in 2019.
Now, in 2025, STP Phase 2 is in full effect bringing new reporting requirements that all employers need to understand and comply with. This blog post will break down what STP Phase 2 is, explain the changes in simple terms, outline compliance steps for businesses already on STP, and guide those who haven’t updated yet.
Our goal is to make STP Phase 2 clear and approachable, so your Melbourne business can stay compliant without stress.
What is Single Touch Payroll (STP)?
Single Touch Payroll (STP) is an Australian Taxation Office (ATO) initiative that streamlines payroll reporting. Introduced in stages (initially for large employers in 2018, then for all employers by 1 July 2019), STP requires you to send employees’ salary, tax withheld, and super information to the ATO every pay run. In the past, businesses would provide this data in batch at year-end (via PAYG payment summaries and annual reports). With STP, each payday’s data is reported automatically through STP enabled payroll software.
For small business owners, Single Touch Payroll eliminated a lot of paperwork at EOFY. You no longer need to issue annual group certificates to employees instead, you finalise the year’s STP data in your software, and employees can access their income statements through myGov. STP also means the ATO and other agencies receive up-to-date payroll information throughout the year, improving accuracy and transparency. In short, STP made payroll reporting more efficient by integrating it into your regular pay cycle.
Recap of STP Phase 1
Under the first phase of STP, you reported totals for each employee’s earnings, tax and super each pay event. All employers (even those with only 1–4 employees) had to start STP reporting by mid-2019. If your business has been running payroll in Melbourne, you’ve likely been using STP via your accounting or payroll software for a few years now.
Single Touch Payroll (STP) Phase 2: What’s Changing and Why?
Single Touch Payroll (STP) Phase 2 is simply an expansion of the existing STP reporting it requires more detailed information in each report. The government announced Phase 2 in 2019, and it became mandatory from 1 January 2022 for all employers. In practice, the ATO allowed a transition period (via deferrals through 2022 and early 2023 for many software providers) to give businesses time to update their systems. Now in 2025, every employer should be reporting under STP Phase 2.
Why the change?
The main goal is to reduce duplicate reporting to multiple government agencies and to support Services Australia (e.g. Centrelink) with timely payroll data. By asking employers to itemise and classify payroll data in more detail, the ATO can share information with other agencies (like Services Australia for social security assessments) directly. This means less separate paperwork for you (for example, some forms you used to send to government are no longer needed) and faster, more accurate services for your employees (like pre-filled tax returns and correct benefit payments).
Key Changes in STP Phase 2 Reporting
Under STP Phase 2, you will continue to report the same kinds of payments as before (wages, salaries, commissions, bonuses, allowances, etc.), and the way and frequency you lodge reports doesn’t change. However, you’ll need to include additional details within those reports.
Here are the major changes Melbourne employers should know:
Disaggregation of Gross Income
Instead of reporting a single gross pay figure per employee, you now report the components that make up that gross amount separately. For example, you need to itemise paid leave, overtime, bonuses, commissions, allowances, and salary sacrifice amounts individually rather than lumping them into gross pay. This breakdown is important because different income types can have different tax treatments or benefit implications for employees.
Employment and Tax Conditions
Single Touch Payroll (STP) Phase 2 captures details about each employee’s work and tax setup that you previously might have reported on separate forms. You’ll include the employee’s employment basis (full-time, part-time, casual, etc.) and their tax scale factors (like whether they have a tax-free threshold claimed, are backpackers, seniors, etc. from their TFN declaration) in the STP report.
If an employee leaves, you also report the termination date and reason (resignation, redundancy, etc.) through STP now. This change means you no longer need to send certain forms to the ATO for instance, you don’t have to submit employee Tax File Number declaration forms or separation certificates separately, as that info is handled via STP.
Income Type Codes
Each payment to employees is classified by an income type code under Phase 2. For most regular employees, the income type is “Salary and Wages”, but there are others for specific cases – for example, Closely Held Payees (like family members on payroll in a family business), Working Holiday Makers, Seasonal Workers, etc. The income type lets the ATO know if special tax rules apply and signals if you’re using any reporting concessions (such as for closely held payees). It also helps pre-fill information in employees’ tax returns so they are taxed correctly on different income streams.
Country Codes for Overseas Employment
If you have Australian resident employees working overseas or foreign employees, you might need to include a country code in your report to indicate the host country of employment. This mainly affects businesses with international arrangements, but it’s now part of the STP schema if applicable.
Child Support Deductions/Garnishees (Optional)
Single Touch Payroll (STP) Phase 2 gives employers the option to report any child support deductions or garnishee amounts you deduct from employee salaries. Not all payroll software will support this, and it’s voluntary – but if you do include these in your STP report, you won’t need to send separate child support payment advices to the Child Support Registrar, simplifying that process.
BMS IDs for Software Changes (Optional)
If you change payroll software or your business structure and have to move payroll records, Phase 2 allows you to include old Business Management Software IDs or Payroll IDs in the report. This is to help the ATO link or avoid duplicate records for the same employee. It’s an advanced feature and optional, used when transitioning systems.
In summary, Single Touch Payroll (STP) Phase 2 involves more granular payroll reporting. Most of these details are information you likely already keep; now the government wants it reported through STP. Your payroll software update for STP 2 should have introduced new fields or prompts for these items (like asking you to categorise an allowance or specify an employee’s basis as full-time/part-time). It may take a little effort to set up initially, but it leads to more streamlined compliance in the long run.
How Single Touch Payroll Phase 2 Benefits Employers and Employees
You might be thinking, “This sounds like more work for me as an employer.” In the short term, yes – Phase 2 required a once-off update of your payroll system and employee data. However, it does reduce other administrative burdens.
Here are a few benefits:
Fewer Separate Forms
Because extra information is now in the STP reports, you no longer need to send certain forms to government agencies. For example, you don’t send the ATO employee TFN declaration forms anymore, and if you report a Lump Sum E payment (back payment for prior years) through STP, you don’t need to give the employee a separate Lump Sum E letter. Termination details in STP mean you don’t have to generate a manual separation certificate. All of it is handled in one report.
Streamlined Employee Services:
The additional data allows Services Australia to use STP info for things like income assessments. This can save your employees time when they apply for or report to Centrelink, etc., and it can improve the accuracy of payments (for family tax benefits, child support adjustments, etc.). At tax time, employees get a detailed income statement showing the breakdown of earnings (wages, allowances, etc.), making it easier for them to lodge returns and verify they were taxed correctly.
One Reporting Channel
STP Phase 2 is about “tell us once.” For instance, if you opt to include child support deductions in STP, you’ve fulfilled that obligation without separate mail. Likewise, by classifying income types, you signal to the ATO and other agencies in one go, instead of later providing additional info.
For most small businesses, these benefits will be somewhat invisible day-to-day (since your software handles the heavy lifting). But the key point is that STP Phase 2 is not just red tape – it’s designed to modernize payroll reporting and ultimately make things easier for both employers and employees. Next, let’s look at what you need to do to stay compliant with these Phase 2 requirements.
STP Phase 2 Compliance for Small Businesses Already Using STP
If your business has been reporting via STP already, you’re part-way there! Compliance with STP Phase 2 mainly means updating your processes and data to include the new details discussed above.
Here’s a clear 7 point checklist for Melbourne employers who are already on STP (Phase 1) to ensure you meet Phase 2 requirements:
1. Update Your Payroll Software to a STP 2-Compliant Version
All major payroll and accounting software providers (Xero, MYOB, QuickBooks, etc.) rolled out updates to support STP Phase 2 by early 2023. Make sure you’re using the latest version of your software and that the STP Phase 2 features are enabled. In many systems you may have had to “opt-in” or complete a setup wizard for STP 2. If you haven’t done that, do it now.
Tip: Check your software’s help resources for an STP Phase 2 guide if you’re unsure. Many providers had deferrals that ended 31 March 2023, so Phase 2 reporting is now mandatory for all users.
2. Review & Input Required Employee Details
Go through your employee records in the software and ensure fields like employment type/status (full-time/part-time/casual), hire and termination dates, and tax declarations are up to date. STP Phase 2 uses these details. For example, if an employee has been marked incorrectly as full-time when they’re actually casual, update that it will be reported to the ATO. If someone has left your business, make sure you process their termination with a cessation reason so it gets reported.
3. Map and Itemise Payroll Categories
This is a crucial step. Review your payroll pay items (earnings categories, allowances, etc.) and map them to the new STP Phase 2 labels. For instance, you might have a single “Allowance” category in Phase 1 – in Phase 2, you should split different allowances (like car allowance, travel allowance) if required and assign them the correct label for STP (e.g. Allowance – Car (kms), which is treated differently for tax). Likewise, ensure things like overtime or bonuses are identified separately.
Most modern software has updated default categories (often automatically mapping common ones), but if you use custom pay items, you may need to manually classify them. Taking the time to do this now ensures your STP reports are accurate and you won’t get error warnings from the software or ATO.
4. Assign Income Types to Each Employee
As part of setup, designate the appropriate income type for each of your payees. For most, “Salary and Wages” is the right choice (often the software assumes this by default). If you have directors on payroll, some software might ask if they are “Closely held” (which would be an income type) – answer accordingly. Contractors who are paid via payroll with voluntary agreements would be a different income type, and so on. Check if any of these special cases apply to your business. This step helps the ATO understand the nature of payments and any special tax rules, so it’s important for compliance.
5. Continue Reporting On Time for Each Pay Run
The due dates and frequency of STP reports remain the same in Phase 2 – generally you must send the STP report on or before each pay day. Small employers (19 or fewer staff) have had some leniency in the past (such as reporting by the next business day), but by 2025 you should be adhering to on-payday or very shortly after. Timely reporting is a compliance requirement; late or missed STP reports can attract penalties. (Under tax law, failing to lodge STP on time can incur around $210 for each 28 days overdue, up to $1,050 for small businesses, so don’t let things slide.)
6. Finalise STP Data at Year-End
The end-of-year finalisation process is still required. By July 14 each year (for most employers) you need to mark all STP data as final for the previous financial year. Phase 2 doesn’t change the deadline or process much except you’ll be finalising the more detailed data. Ensure you complete this step so your employees can lodge their tax returns. There’s no need to issue PAYG summaries to staff as long as you finalise through STP; the data is available to them via myGov.
7. Watch for Errors or ATO Messages
After switching to Phase 2, pay attention to any error notifications your software gives when you do a pay run. Many systems will flag if something important is missing (for example, Xero might show a warning if an employee’s data is incomplete for Phase 2. Fix these issues promptly it’s part of staying compliant. Likewise, if the ATO sends a message (through your software or letter) about your STP reports, address it. Common issues might include incorrectly classified payments or records that need correction.
By following the above steps, businesses already on STP will ensure they meet the Phase 2 requirements. In essence, it’s a one-time adjustment to how you report, not what you pay. Your obligations like withholding the correct tax and paying super don’t change, you are just reporting more detail now.
The ATO has stated they took a flexible approach in the initial transition, not penalising genuine mistakes in the first year of STP 2. But that first year grace period ended 31 December 2022. Here in 2025, accuracy and timeliness count so make sure your payroll processes are up to scratch.
Next Steps for Melbourne Businesses That Haven’t Switched to Single Touch Payroll Phase 2
What if you realize you haven’t completed the STP Phase 2 update yet? Perhaps you’re a solo operator who only started hiring recently, or you’ve been putting it off. First, don’t panic but do make this a top priority. By now, all deferral periods have lapsed, so any employer still reporting old STP (Phase 1) or not reporting at all is technically out of compliance.
Here are 5 steps you should take immediately:
1. Check Your STP Reporting Status
Log in to your payroll or STP solution and verify what version of STP you’re on. If your software has an STP Phase 2 setup that you never completed, it will likely still be flagging you. For example, you might see an alert or a prompt to “Get started with STP Phase 2”. Identify what needs to be done from the software’s perspective. If you’re not using any software (e.g. you’ve been doing manual payroll and not reporting via STP), understand that you must start using an STP-enabled solution. The ATO provides a list of free or low-cost STP solutions for micro employers – so there’s no real barrier to complying.
2. Run the Software Update/Setup Process
Follow your provider’s instructions to transition. This usually involves updating the software to the latest version and then entering the additional details (as described in the compliance checklist above). It might be a guided process where you confirm each employee’s data. Complete all steps – e.g. Xero had multiple setup steps (add details, update pay items, then formally “enroll” in STP 2 reporting). Until you finish them, your STP reports aren’t being sent in Phase 2 format. Don’t delay – doing this now will enable you to start reporting correctly on the very next payday.
3. Back-report if Instructed
In some cases, if you missed the transition deadline, the ATO may want you to include year-to-date figures or lodge an update event to essentially “catch up” your data in the new format. Check if your software or advisor says anything about this. Often, simply beginning Phase 2 reporting will include YTD values automatically. The key is to ensure the ATO gets the full current financial year’s data under Phase 2. If you haven’t filed any STP reports at all for a while, you may need to lodge those ASAP (Phase 1 or Phase 2) to avoid penalties for missed periods
4. Communicate with Your Bookkeeper/Accountant or the ATO
If you’re unsure how to proceed or fear you’re significantly behind, reach out for help. A registered BAS agent or accountant (like our team at Igniite Business Solutions) can assist in reviewing your payroll records and safely transitioning you to Phase 2. They can also liaise with the ATO on your behalf if needed. In some circumstances, the ATO might grant a short deferral or exemption if you have genuine difficulty (for example, if your business was impacted by an unforeseen event).
These are handled case-by-case the important thing is to contact the ATO before they contact you if you need extra time. The ATO has a process for applying for a delayed transition for those who had legitimate reasons, but at this stage, approvals are harder as Phase 2 has been live for quite a while. Still, open communication can potentially reduce any failure-to-comply penalties.
5. Double-Check After Your First Phase 2 Report
Once you’ve updated and sent your first STP Phase 2 report, verify everything looks right. Have your employees check their myGov income statements after that pay to see if data is coming through correctly (they should see amounts categorised by income types, etc.). Also ensure subsequent pay runs have no errors. Essentially, monitor the transition in the first few weeks so you can fix any lingering setup issues.
Remember, STP reporting is mandatory for all employers, regardless of business size. If you’re paying yourself wages from your company or trust, or you have any staff, you cannot opt out of STP. The sooner you get Phase 2 going, the better it keeps you compliant and avoids potential fines. The ATO has begun enforcement now that the grace period is over, and businesses not reporting properly could face penalties or compliance audits. Transitioning now not only fulfills your obligations but gives you peace of mind that your payroll is in order.
Supporting Your Single Touch Payroll (STP) Phase 2 Compliance
Adapting to STP Phase 2 may seem daunting, especially if you’re not a “numbers person” or you have limited time as a business owner. The good news is you don’t have to tackle it alone. Igniite Business Solutions is here to support Melbourne businesses through this transition and beyond. Our goal is to provide clarity and hands-on assistance so you can focus on running your business.
How we help
Payroll Compliance Check-ups
We offer payroll services to ensure your payroll system is set up correctly for STP Phase 2. We can review your software settings, employee data, and payroll categories to confirm everything aligns with ATO requirements. If something’s amiss, we’ll fix it so your reports are accurate.
Training and Guidance
Not sure how to classify an allowance or handle a fringe benefit in STP? We can walk you through it. Our accountants and bookkeepers stay updated on ATO changes and can explain in plain language what you need to do. We’ll guide you or your staff on using your software’s STP features effectively. Think of it as having an expert co-pilot for your payroll.
Full-Service Payroll & Reporting
If you’d rather not worry about STP at all, we can manage it for you as part of our accounting and taxation support. Through our Accounting & Taxation services, we handle payroll processing, STP lodgements, superannuation, and BAS reporting for many small businesses. By letting professionals manage these tasks, you ensure compliance is maintained consistently (and you free up your time).
Keep Up with Changes
The world of tax and payroll can always change again. (For instance, if there’s an STP Phase 3 down the line or new state payroll tax rules, we’ll be on top of it.) By partnering with Igniite, you’ll receive updates and proactive advice on any new obligations relevant to Melbourne employers.
Our local expertise in Melbourne means we understand the context you operate in from Victorian payroll tax thresholds to the nuances of hiring in our city’s economy. We’re not just compliance robots; we’re your business partners who want to see you succeed without compliance hiccups.
Staying Compliant and Confident
STP Phase 2 is a significant change in payroll reporting, but with the right knowledge and support, it’s entirely manageable. By understanding the new requirements and following the compliance steps outlined above, Melbourne employers can ensure they’re meeting their obligations in 2025 and beyond. Embrace the detailed reporting as a positive move one that reduces other paperwork and improves the accuracy of data shared with government agencies.
If you’re ever unsure about your Single Touch Payroll reports or need a hand with payroll, remember that help is available. Igniite Business Solutions can assist you in navigating these changes, from setup to ongoing payroll processing and ATO compliance checks. Our aim is to remove the stress of regulatory compliance so you can get back to what you do best: running and growing your business.
Staying compliant with STP Phase 2 is not just about avoiding penalties; it’s about running a clean, efficient operation where your employees’ tax and super info is handled correctly and transparently. With the information and tips from this guide, you’re well on your way to mastering STP Phase 2. Keep good records, use your software to its fullest, and don’t hesitate to seek expert advice when needed. Your business will then be both compliant with the law and confident in its payroll processes a win-win for 2025 and years to come.
