What is the second stage of single touch payroll, and is your SME ready?

The journey to single touch payroll phase two (STP2) has been full of delays, but the deadline for switching it on is looming.

STP2 began from January 1 but many well-known payroll digital service providers (DSP) secured deferrals that effectively pushed the STP2 deadline back to the end of 2022.

But with the grace period rapidly shrinking, it’s time for companies to turn the function on with their DSPs and, where necessary, communicate with employees about the new rules.

To recap, STP2 will shift the way that payroll items are reported. In short, the Australian Taxation Office (ATO) will require more detail about payments made by companies with employees.

Until now through single touch payroll, items such as gross salary, bonuses, leave, commissions, and other elements were grouped in together.

STP2 expands this reporting requirement, in what it calls the disaggregation of gross. So instead of putting everything to gross wages, it must now be itemised and every payment needs to be directed to the correct category as determined by the ATO.

If an employee is handed a bonus, it must be reported as a bonus, so the ATO can see exactly what that amount is for the employee. When leave is taken, it is similarly reported as leave, not as gross wages.

STP2 reporting also starts to segregate income types. For example, employers making payments to closely held employees (such as family members, directors of beneficiaries of a trust) have been required to declare them since July 2020, either on or before each payday, or quarterly. 

Employers will now need to disclose that the individual being paid is a closely held payee using the Closely Held Payee (CHP) income type.

All these changes are designed to give the ATO much greater visibility and they will ask questions if items are not reported correctly. After December 31, 2022, there are financial penalties for mistakes.

SMEs may need to tighten up their payroll reporting because the new system will raise red flags to auditors if items do not add up. 

If an employee has earned $100,000 in total wages during 2021-22, the ATO would expect to see $10,000 in superannuation paid. If only $9000 in super was paid, the company will be on notice to explain why the employee is $1000 short. 

The explanation might be legitimate — for example, certain types of allowances are not subject to super. But it must be reported correctly to satisfy auditors.

Super is a key focus area for the ATO, which was owed $2.9 billion in tax charged to employers that failed to pay superannuation according to a report from the Australian National Audit Office.

It is important that companies do not simply assume they are allocating line items to the right place. They should get the proper list from the ATO, an accounting firm, or their software provider to ensure they do not get caught in the wrong area. 

There are several types of car allowances, for example, and every one of them has a separate STP2 category, so it’s very easy to put them in the wrong place.

Unused leave entitlements on termination would have previously been heaped together with gross wages in the end of year payment summaries, but this item must now be a separate line under unused annual leave on termination. 

Redundancy payments are another complex area because the tax treatment is different, depending on what type of termination payment is applied.

Mum-and-dad companies may not have that knowledge base to do that correctly. High-end software products will be able to calculate those terminations but there is still an element of skill to work out the correct tax.

This more stringent reporting coincides with Services Australia applying greater scrutiny to people claiming benefits, as it starts to match its own payment data with that provided by employers to the ATO, to improve welfare integrity.

SMEs, as well as family companies, that handle their own payroll need to consider the implications of STP2 and obtain professional advice where necessary to ensure compliance.