Updating Pay Items

Here’s how to disaggregate and update your Pay Items for Single Touch Payroll (STP) Phase 2 compliance.

A person paying their employees in Xero on their laptop

Breaking down the gross wage

With the incoming STP Phase 2 changes, gross amounts for each income type will need to be reported as a separate, itemised amount. This ensures that the data can be easily understood by different government departments, for example, Service Australia, will use different itemised amounts to support their calculations of welfare benefits provided to recipients.

Income payments are to still be reported as year to date (YTD) amounts, however, instead of reporting a single gross amount, you will now separately report (disaggregate) them into one of the below categories:

  • Gross will report the total of reportable income subtracting the separately itemised components
  • Paid Leave will be reported separately and broken down into subcategories, to determine things such as Ordinary Time Earnings (OTE) and termination payment amounts for Services Australia
  • Allowance Items are reported separately with additional subcategories.
  • Overtime will be reported separately to an employee’s OTE, where extra work is performed in addition to the employee’s normal working hours.
  • Directors' fees will be used to report payments to the director of a company, or to a person who performs the duties of a director of the company.
  • Bonuses and Commissionsrepresents payments to employees for bonus and commission payments to reward their performance, service, or for meeting a specific goal.
  • Salary Sacrifice: both pre and post tax sacrifice income will now be reported to the ATO
  • Lump Sum Payments
  • Workers Compensation

To learn more about each of these pay categories, check out this Xero Central article and watch this video about how to easily update your existing pay item in Xero.

Below is an example of how you can disaggregate Directors’ fees to report correctly for STP Phase 2 compliance in Xero Payroll.

1. Identify all Directors’ Fees pay items that don’t have an earnings category of Directors’ fees

a) It’s likely Directors’ fees are currently reported as ‘Ordinary Time Earnings’

GIF of someone following these steps in Xero

2. To update the earnings category to Directors’ fees, click on the three dots and select ‘Replace’ to access the pay item transition tool

3. The pay item transition tool will then automatically update the affected employee pay templates

4. Identify all Directors’ Fees pay items that don’t have an earnings category of Directors’ fees.

a) It’s likely Directors’ fees are currently reported as ‘Ordinary Time Earnings’

5. To update the earnings category to Directors’ fees, click on the three dots and select ‘Replace’ to access the pay item transition tool

6. The pay item transition tool will then automatically update the affected employee pay templates

Carry out the above steps again to disaggregate your other pay items in Xero Payroll.

If you’re unsure about any of the steps in the above process, please reach out to your advisor.

Learn more about STP Phase 2 reporting at the ATO website