What’s coming up for Single Touch Payroll (STP) Phase 2 in Xero

Small Business

Changes are coming about how you manage payroll with Single Touch Payroll (STP) Phase 2.

Xero Accounting Software have been busy working in the background to get Xero Payroll updated and ready to help you transition ahead of the compliance date later this year. So if you’re wondering when you’ll need to make changes (or have noticed some updates in Xero already), here’s the latest on our STP Phase 2 rollout.

As always, we’ll continue to make sure you have all the information and tools you need to guide you through this process.

Remind me – what is STP Phase 2 again?

Most Australian employers are familiar with Single Touch Payroll. STP Phase 2 is the next stop on this journey. Where phase one was a way of reporting employees’ tax and super to the ATO, STP Phase 2 expands the program to capture more detailed information. This will reduce the compliance burden for employers and individuals, and help the admin side of things for Services Australia.

Although you need to provide the ATO with more information, the way you submit STP reports won’t change; how much it differs from your current process will depend on the nuances of your unique business and employees.

When will the changes be rolled out in Xero?

We have secured a deferral for all Xero Payroll users until 31 December 2022, and we’re working closely with the ATO to rollout the Phase 2 changes. To help you adjust to the shift and ensure a smooth transition within Xero ahead of the compliance date, we’ll be rolling these out in three stages over the year.

When will each stage begin?

Stage one: The first stage will start being available within Xero from mid-April onwards. This will include updates to the way new employee records are set up in payroll, ensuring STP Phase 2 compliance.

Stage two: The second stage will begin rolling out within Xero mid-year. This will extend the set up process to enable the transition of existing employee payroll records to STP Phase 2 compliance. This will provide ample time for you to ensure all employees in your business are correctly set up for STP2 Phase 2 compliance.

Stage three: The final stage will be available in the second half of this year. It will see the new pay items from STP 2 finalised in Xero, with product support to review existing pay items that may need to be changed to those stipulated by STP Phase 2.

Meanwhile, many of these new pay items are already available in Xero Payroll and will continue to be released over the coming months so you can start to use them ahead of the compliance date.

We will continue to let you know as these progress and make sure you have the information you need to transition as seamlessly as possible. This will include support in Xero, education webinars and guides to help you adjust to each stage.

What updates have you already made?

You may have seen some new additions within Xero already as we’ve been busy working on items to help you become STP Phase 2 compliant. While these are not mandatory yet, they’re available now for you to start getting ready ahead of the transition.

This includes new payment types that help capture the more detailed payroll information needed for STP Phase 2. These are:

  • Bonuses and commissions: Previously they were reported as part of gross payments, but for STP Phase 2 will be reported separately.
  • Lump sum W (return to work) payments: A return to work amount is paid to induce an employee to resume work – previously this was reported as a gross sum.
  • Lump sum E payments: This is used when you make lump sum payments for back pay from prior income years and is now done via STP instead of a letter.
  • Director’s fees: If you pay directors’ fees, you must separately include these in your STP Phase 2 report.
  • New allowance types: Under STP Phase 2 reporting, allowances for task, tools or qualification need to be reported under new labels.

When it comes to inputting employee information, you are now also able to add a termination reason when one of your team wraps up with the business. This gets rid of the need for an employment separation certificate to be issued.

More details on these changes are available in the STP Phase 2 Information Hub via the Single Touch Payroll section of your Xero account, and we’ll continue to share the status of new functions as they are added.

What will be included in stage one of the rollout?

The first stage of STP Phase 2 updates will be going live in Xero from around April, with some tweaks to how you onboard new employees. The Employment and Taxes tab in payroll employee setup will have a makeover and include some new fields to help you on the journey to STP Phase 2 compliance.

When it comes to adding employment details, from April you’ll need to select whether a new team member is an employee or contractor. You’ll also need to choose their income type, such as salary and wages, closely held payees (including family members of a family business, directors of a company and shareholders or beneficiaries,) seasonal workers or working holiday makers, and add their employment basis (full-time, part-time or casual).

For contractors, there’ll be the need to select their income type too – either:

  • Non-employee, an independent contractor, or;
  • Labour hire, outsourced labour from a hiring agency

When it comes to tax setup, there are a few things that will look a little different. Tax scale is a new STP Phase 2 requirement and you will have to select between:

  • Regular
  • Seniors & pensioners

This is to help manage how much tax is withheld for PAYG. This will all be detailed in Xero as it goes live, to clearly guide you through the changes.

Is there anything else on the way?

Yes – there are more additions coming soon that will appear in Xero over the next few months. These include cashed out leave and better defined paid leave items, so you’ll have plenty of time to get familiar with them before the compliance deadline. We’ll update the STP Phase 2 page in Xero as the additions go live and keep you across on how to use them.

Do I need to do anything right now?

Just take some time to get familiar with the new pay items and other additions that are available within Xero now. We’ll continue to let you know as changes are rolled out and make sure you have everything you need to get STP Phase 2 ready.

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