STP Phase 2: What to Check in a Client’s Payroll

STP Phase 2 separates payroll into reporting categories, so review every pay item against what it actually pays. For an inherited employer file, reconcile one completed pay run and the reported year-to-date figures before trusting the mapping.

What Phase 2 Reporting Changed in Every Pay Event

Phase 2 breaks the single gross figure into separate components in each pay event. The reporting category behind each pay item decides how the ATO describes that payment.

You separately report gross, paid leave, allowances by type, overtime, bonuses and commissions, directors’ fees and salary sacrifice. Lump sums and employment termination payments also have their own reporting rules. Gross is the remaining reportable ordinary earnings after amounts belonging in separate categories have been removed.

The pay event also includes the employment basis, tax treatment code and cessation reason when employment ends. Common employment bases are full time, part time and casual. The software builds the six-character tax treatment code from the employee’s tax information, including residency, threshold claims and relevant loan or Medicare settings.

Phase 2 changes how pay is described to the ATO. It does not change the employee’s wage entitlement, the employer’s withholding obligation or the need to pay super.

The mandatory Phase 2 transition was a historical change. A claimed software-provider extension is useful only if it covered this employer and remains valid. Match the employer’s payroll product to the provider’s deferral, check the expiry and retain the confirmation. Employers covered by a provider deferral must start Phase 2 from the next pay run after it expires.

Use the ATO’s transition and deferral guidance for the exact transition boundary. If an inherited client still reports Phase 1, establish any valid exemption or deferral first. Confirm the provider’s Phase 2 readiness and arrange the transition and any required corrections under ATO guidance. An old product extension is insufficient evidence.

Keep that work separate from the annual STP finalisation declaration. Finalisation confirms the income-year totals after reconciliation.

Checking the Disaggregation of Gross in a Client’s File

Review the complete pay item list when you take on an employer client. Include unused items that could appear in the next pay run.

1. Open each item’s STP reporting category. Record its label, purpose and current category.
2. Compare the purpose with the employment agreement, award or other source of the payment. A label such as extra hours does not establish its category.
3. Identify allowances folded into gross, bonuses coded as ordinary wages and directors’ fees reported as salary. Review overtime even when the employer pays it at an ordinary hourly rate.
4. Select a completed pay run containing the client’s different payment types. Compare each employee’s payslip and payroll detail with the corresponding pay-event breakdown.
5. Reconcile the year-to-date category totals, PAYG withholding and reported super amounts. Explain each difference before accepting the file.

For overtime, the hours and entitlement decide the classification. An ordinary rate does not automatically make the payment ordinary gross. Conversely, a shift penalty for ordinary hours can remain gross. The ATO employer reporting guidelines distinguish these payments.

A payroll ledger total can balance while its categories are wrong. Check the composition as well as the total. Repeat the review when a new pay item, salary sacrifice arrangement or termination payment appears.

Mapping Allowances, Leave and Salary Sacrifice Correctly

Map an allowance by its purpose before choosing a code. An expense reimbursement, a fringe benefit and an allowance can have different reporting treatment.

Payment	Reporting category	What to distinguish
Business use of the employee’s own car, paid per kilometre	Cents per kilometre, CD	Flat car allowances belong in other allowances, generally OD with V1.
Award transport payment	AD for eligible historical payments only	The ATO has closed this category to later payments. Apply its payment boundary before using AD.
Cleaning qualifying work clothing	Laundry, LD	Buying a uniform and washing ordinary private clothing have different categories.
Qualifying overtime meal allowance	Overtime meals, MD	Ordinary meal allowances do not automatically belong here.
Reportable overnight work-travel allowance	Travel, RD	Apply the ATO’s reasonable-amount and travel tests. Some qualifying allowances within the reasonable amount are not reported.
Overseas accommodation allowance	Other allowances, OD with G1	The employer guidelines distinguish this from RD.
Supplying or maintaining work tools	Tools, TD	Direct reimbursement of the employee’s expense is different.
Getting or keeping a work qualification, certificate or licence	Qualifications and certifications, QN	Extra duties, such as acting as first aider, can instead be task allowances.
Extra duties or difficult working conditions	Tasks, KN	Higher base salary without a separate allowance remains the appropriate earnings payment.
Allowance outside the specific categories	Other allowances, OD	Select the matching description, including ND for non-deductible private expenses.

The ATO’s allowance rules give the payment boundary for AD and the tests for travel allowances. For later transport payments, use the category matching their purpose. Retain AD only where the historical payment qualifies. Do not carry a legacy AD mapping into new payments unchanged.

Unusual allowances need the same purpose-based review. Record what the employee receives the money for, identify the ATO category and document why it applies. A payroll product’s default is not a tax determination.

Paid Leave Categories

Annual leave and personal or carer’s leave taken during employment generally belong in other paid leave, type O. Ordinary leave loading goes there too, except loading tied to a lost opportunity to work overtime. That loading belongs in overtime.

Leave payment	Paid leave type	Review point
Ordinary annual, personal or other qualifying paid absence	O	Keep amounts in paid leave instead of gross.
Paid parental leave	P	Separate the leave payment from wages for days actually worked.
Employer-paid workers compensation for an eligible absence	W	Payments for duties actually performed belong in gross. Private income-protection payments have different treatment.
Ancillary and defence leave	A	Includes qualifying community service or defence absences.
Leave cashed out while employment continues	C	Distinguish cashing out from taking leave.
Unused leave on termination	U where the ATO rules assign it there	Some termination leave belongs in lump sum categories instead. Review its accrual and termination circumstances.
Unpaid leave	No paid leave amount	Keep the absence in payroll records. Do not report a wage amount the employee was not paid.

Salary Sacrifice Categories

Report effective salary sacrifice to super as type S and effective sacrifice to other benefits as type O. Report the earnings before sacrifice in their correct payment categories. Show the sacrificed amount separately so the ATO can calculate the income after sacrifice.

Compulsory employer super is not salary sacrifice type S. An after-tax deduction is not an effective salary sacrifice arrangement. Review the arrangement before changing either item’s mapping.

What a Mis-Mapped Category Does Downstream

A wrong category travels from payroll to the employee’s income statement. The ATO uses the income statement’s total gross and total allowances to prefill the employee’s return. It also shares STP information with Services Australia, which uses it when dealing with employees who receive its payments.

Consider this fictional pay run. An employee receives $2,000 ordinary wages and a $50 work-tool allowance. The correct reporting shows $2,000 gross and $50 tool allowance. A mapping error instead reports $2,050 gross and no allowance.

The payment total is unchanged, but the income statement loses the separate allowance. The employee or their tax agent must identify the expense and any deduction independently. Receiving an allowance does not create an automatic deduction for the same amount.

The ATO income-statement explanation shows how gross and allowances feed the return. If the payroll item also applies the wrong withholding setting, the employer can underwithhold or overwithhold. A reporting-category change alone does not settle that separate calculation.

Compare payroll and ATO year-to-date amounts category by category. A total-only reconciliation will miss the fictional error. A difference can also mean a pay event failed, an adjustment was never reported or the report uses a different payroll identifier.

Directors’ fees in gross lose their separate description. Lump sums or an employment termination payment in gross can lose the reporting information needed for their tax treatment. Review the payment’s purpose and the relevant termination rules before sending a correction.

Correcting a Wrong Mapping and Reporting It Again

Correct the pay item and the year-to-date information already reported. Changing the item’s category alone can leave the ATO holding the old figures. Sending a correction without fixing the item can recreate the error next pay run.

1. Record the affected employees, income year and pay items. Save the original category totals and the relevant payroll reports.
2. Change the pay item to the supported STP category. Check its withholding and super settings separately.
3. Recalculate or reclassify the affected year-to-date amounts using the payroll product’s correction procedure. Confirm that the original category decreases and the correct category increases.
4. Send an update event with the corrected year-to-date figures. Where appropriate, the ATO also allows correction in the next regular pay event for a continuing employee within the same income year.
5. Check the submission result and compare the reported figures with the corrected payroll totals. Retain the receipt and reconciliation.

The ATO’s Phase 2 correction rules allow employee-level corrections within 14 days of identifying the need. They also allow the next regular pay event in the same income year where the employee has continuity of employment.

If that period has passed, lodge the correction promptly and address any ATO notice through the employer’s authorised agent channel. The correction period does not excuse a pay event that was never lodged. For a prior-year or already-finalised error, use the ATO’s amendment guidance and the software’s supported update procedure.

After finalisation, the ATO’s amendment instructions require an update event and prompt notification to affected employees. An employee who used the earlier figures may need to amend their return. If employer-level withholding changes, correct the relevant activity statement or withholding payment as well. The BAS preparation checklist covers that reconciliation.

A file note can record the discovery date, affected category, source rule, original and corrected totals, lodgement receipt and employee notification. State whether withholding or super changed and how those differences were handled.

For the fictional tool allowance, your client message can say: We have corrected the STP classification of the tool allowance. The payroll payment total is unchanged. The employee’s income statement will show the allowance separately after the ATO processes the correction. Please tell the employee to review the updated statement before lodging their return.

What to Set Up When You Take on an Employer Client

Confirm the reporting authority and payroll identifiers before the practice lodges its first pay event. Access to the client’s payroll file alone does not authorise an agent lodgement.

Collect the employer’s ABN and branch, legal entity details, STP enabled payroll software and provider. Record the software identifier, who lodges pay events, the last successful lodgement and whether reporting has moved to Phase 2. Keep any deferral or exemption evidence with the employer’s records.

1. Verify the employer entity and the person authorising you. Complete client nomination where required and establish the practice’s correct ATO client relationship.
2. Obtain the employer’s written authority for STP lodgements. Use pay-event declarations or a valid STP engagement authority covering the reports you will lodge.
3. Confirm staff permissions and the agent reporting identity. Check the provider’s software authorisation against the correct ABN and reporting arrangement.
4. Review the employee tax information, employment basis and payroll identifiers. Reconcile opening balances and the latest accepted year-to-date totals.
5. Review pay item mapping and the first proposed pay-event breakdown before lodgement. Confirm receipt after sending it.

The ATO’s cloud software authorisation guidance explains software-ID notification and agent-client relationship checks. Follow the provider’s connection model. Keep the client relationship, employer declaration and software authorisation as separate checks.

Use the new employee forms checklist to collect the tax and super information behind employee setup. Review payday super obligations separately from the STP category work.

Taking Over a Payroller Account

Payroller’s Phase 2 help distinguishes new employer accounts already configured for Phase 2 from inherited accounts needing additional employee tax information. Its historical transition pop-up and extension do not establish the current status of your client’s account.

Review the employee’s income tax type, residency information and employment basis. Payroller’s employee-details help supports reviewing the employment and tax records. Check allowances and leave against the ATO categories before reviewing the first pay event.

Compare Payroller’s payroll activity report and employee payslip year-to-date figures with the submitted STP totals for the same income year. Include opening balances and any adjustments. Investigate a difference before resubmitting the pay run.

Payroller distinguishes a completed payroll run from a successful STP report. Its help describes Saved as completed payroll awaiting STP reporting, Pending as sent for processing and STP Reported as successfully received and processed by the ATO. STP Failed requires investigation of the error.

For missing employee data, review the employee tax record and whether the inherited account was converted to Phase 2. For an authorisation error, check the correct software ID and ABN pairing. Retain the accepted report and reconciliation before taking responsibility for the next payroll lodgement.