Single Touch Payroll explained (all the phases)
STP? Yeah you know me.
We’re not just riffing off a ’90s rap lyric. As an employer, you likely do know a bit about STP (Single Touch Payroll) because Phase 1 came into play in July 2018.
Initially, STP meant that employers with more than 20 employees had to report to the Australian Taxation Office (ATO) with each pay run from 1 July 2018 onwards. A year later, that was extended so that all employers (no matter how small) had to do the same from 1 July 2019.
So, from July 2019, all employers in Australia have been required to report PAYG and super info to the ATO with each payroll event. STP is a reporting requirement only. It doesn’t change PAYG or super payments or how often you make them. It also doesn’t change your BAS obligations.
For our clients, STP is handled through Xero, which they either take the time to manage themselves or outsource to us. But that’s a different story.
Why did the ATO introduce it?
We can’t speak for the ATO but STP seems to be about a few things:
- Streamlining employers’ reporting obligations and making them digital
- Tightening up employer obligations for PAYG and super, including for contractors
- Reducing the reporting burden for employers. So while you still need to submit your BAS as normal, STP means that income statements (formerly known as payment summaries or group certificates) are published directly to MyGov where the ATO and employees can access them
Rise and shine for STP Phase 2
You guessed it, STP Phase 2 is the expansion of STP. It was due to start on 1 January 2022 but all employers using Xero for payroll were given an extension until 31 March 2023.
From then on, Phase 2 is all go so snap those yawns shut and let’s dig into what you need to know about STP2.
What’s changing in Phase 2
In a nutshell, STP2 expands:
- The employee info you need to report to the ATO
- Who you need to report for (including ‘closely held employees’ and some contractors)
Let’s break that down.
The employee info you need to report
Under STP2, you can’t report gross income as a single amount. It needs to be separated into different categories, including:
- Paid leave
- Allowances (broken into different categories)
- Bonuses and commissions
- Directors’ fees
- Lump sum wages
- Salary sacrifice
STP2 also involves several new fields or categories of reporting, namely:
- TFN declarations
- Tax scale types such as regular, horticulturists or shearers, actors, variety artists and other entertainers, and seniors or pensioners have been added
- Country codes for working holiday makers for the following income types: foreign employment income (FEI), inbound assignees to Australia (IAA), and working holiday maker (WHM)
- Child support garnishees and deductions – you’ll have the option to include these in your STP report rather than providing separate remittance advice to the Child Support Registrar
Who you need to report for
Under STP2, you need to report pay run info to the ATO for the same employees you’ve been reporting it for under STP Phase 1 plus an additional two types of people. They are:
- ‘Closely held employees’
- Contractors who need to be treated as employees for superannuation purposes
Let’s break this down, too.
CLOSELY HELD EMPLOYEES
A ‘closely held employee/payee’ is a person who is directly related to the entity they receive payments from. These are:
- Family members of a family business
- Company directors or shareholders
- Trust beneficiaries
For these people, STP2 means you need to report salary/wages and directors’ fees. For the sake of simplicity, it makes sense to include this in your regular STP2 reporting and you are required to do this if you have more than 20 employees all up. If you have fewer than that, you can choose to report ‘closely held employee’ payments in your regular STP2 reporting or on the same reporting cycle as your activity statements (which are monthly or quarterly).
Note that STP2 does not require you to report distributions to a trust beneficiary or dividends paid to a shareholder. You also don’t need to report loans to ‘closely held employees’ except under certain circumstances such as a director drawing money from the business as a loan, and then later on that loan is used to pay the director’s fees. In that case, the amount used for the director’s fee is subject to PAYG and needs to be reported through STP.
CONTRACTORS WHO NEED TO BE TREATED AS EMPLOYEES FOR SUPER PURPOSES
In recent years, the ATO has been tightening up the definition of employees versus contractors.
We’ve put together this article to help you understand whether you need to pay payroll tax and/or superannuation for contractors. In short, there’s a strong chance you do need to. And that means you need to report these payments via Single Touch Payroll (Phase 2).
You can continue to pay these contractors via invoice (you might hear them called ‘contractor employees’ or ‘non employee contractors’ – they mean the same thing). These payments will be picked up (identified by the contractor’s ABN) and reported to the ATO through Xero’s STP reporting. It’s yet to be confirmed whether this will be separate or scheduled alongside normal pay run STP reporting.
What’s not changing
Phew! Some things are staying the same, mainly:
- The way you file your pay run to the ATO (through Xero payroll)
- The types of payments to be reported, although these are now broken out
- The due date of the STP report (i.e. as you process the pay run)
- End of year finalisation requirements
- Taxation and superannuation laws
What we need from you…
… if you’re one of our payroll clients that is. In which case, we’ll be in touch personally but here’s a summary in case you’re hanging out to know (and if you’re not a client but want to find out what we do, head this way) 🙂 .
STP2 requires a bit of work. Xero is busy rolling out new functionality to capture and report the extra info it requires. In conjunction, we are updating Xero payroll info to:
- Update employee information with additional fields and to identify employees and contractors
- Update pay items (including director fees, bonuses, etc.) for a more detailed breakdown in pay runs
- Update leave types for reporting in pay runs
As we work our way through this, we’ll ask for your help with some of the additional information needed to populate Xero. For example, we might need your help identifying ‘closely held employees’ and contractors who will need to be treated as employees for payroll tax and super purposes.
More info on STP
- Head to the ATO’s STP2 page
- Visit Xero’s STP online resource
- Learn more about ‘closely held employees’ here
- There’s always the option of outsourcing payroll to us. Head here for details or get in touch
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Photo credits: Fauxels (banner pic), Arindam Raha (pic 2) and Andrea Piacquadio (pic 3).