By now, the majority of small businesses and advisors would consider themselves well-versed in Single Touch Payroll. You’ve done a great job getting STP up and running, and there is now more to come as the ATO initiative progresses.
The program is being rolled out in stages so it is easier to manage and this next phase is the natural expansion of the STP you’re used to. This means there are a few more changes on the horizon as we get ready to say hello to STP Phase 2.
So, when does it begin? Xero has secured a 12-month deferral for all partners and customers until 31 December 2022, and we’re working closely with the ATO to roll out the Phase 2 changes in Xero Payroll. This means there’s nothing you need to do just yet – and when there is, we’ll make sure you’re prepared. If this is the first time you’re hearing about the coming changes or if you’re still not quite sure what they mean, we’ve mapped out everything you need to know right now.
What exactly is STP Phase 2 and how is it different from phase one?
This is the next stop on the STP 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 information. This will reduce the compliance burden for employers and individuals, and help the admin side of things for social support services – think Centrelink. When you do interact with government services, these changes will make that process easier.
When do I need to be compliant?
Although the official start for STP Phase 2 reporting is 1 January 2022, Xero partners and customers will be covered by a deferral until 31 December 2022 – so there’s no need for concern around the January deadline.
Why does Xero need a deferral and what does it mean for me?
Xero’s product suite was updated and enhanced to provide critical support during the COVID-19 crisis, with updates across cash flow management, tax and payroll to ensure we supported partners and customers when they needed it most. This additional work has, however, impacted our timeline on STP Phase 2. As a result, Xero has requested and received a deferral from the ATO which gives our partners and customers more time to transition. If you’d like a copy of the deferral letter from the ATO, this is available within the payroll section of Xero (you’ll need to log in to access this).
While there is nothing you need to do just yet, it’s important to be across these new requirements. Rest assured we’ll keep you updated throughout the transition so you’re prepared.
So, what new information will be included?
Under STP Phase 2, you will be required to report additional information to the ATO under a few new areas. The main ones to be aware of relate to the following:
- Tax file number declaration: Currently, these declarations capture details on employment type (full time, part time or casual) and different tax factors that influence PAYG withholding, like a HELP debt, as well as the TFN itself. This will all be included in your STP report via an automated six-character tax treatment code for each employee and means TFN declarations will no longer need to be sent to the ATO after collection.
- Termination reason: The reason why someone leaves a business will need to be provided in your STP report, such as if it was voluntary or a redundancy. This means no more employee separation certificates.
- Employment basis: Previously optional, it will become mandatory to report an employee’s work type. This includes full-time, part-time or casual, along with new categories like labour hire, volunteer agreement or non-employee.
- Income stream collection: Phase 2 will require employers to break down payments into more detail under a new grouping called income stream collection. This has three main areas:
- Income types: Where before income was classified under one label, in Phase 2 each amount paid to an employee will now be assigned to an income type. These include salary and wages, closely held payees (e.g. family members), working holiday makers, and labour hire, among others.
- Country code: You will have to include a country code for employees who report to tax jurisdictions outside of Australia. This is most relevant for businesses with staff on certain visas (like working holiday) as you will need to provide their home country.
- Disaggregation of gross: Currently, STP reports include a gross (total) amount which is the sum of a number of payment types. This will now be broken into more detail to include: allowances (all must be separate); bonuses and commissions; directors’ fees; overtime; paid leave; salary sacrifice. Paid leave will also be categorised using leave type codes.
- Salary sacrifice: Since these contributions can no longer be used to reduce ordinary earnings or count towards superannuation obligations, they need to be separately reported in STP. You can no longer report the post-sacrificed amount via payroll.
- Lump sum E payments: This is used when you make lump sum payments for back pay from previous income years. Previously, it was shown on a separate line item in an employees’ payment summary. In Phase 2 it must be included in STP reports before finalising an employees’ records. This will remove the need to provide employees with Lump Sum E letters.
You can find further details on Xero Central.
What do these changes mean for my business?
Although you will need to provide the ATO with more information, the way you submit STP won’t change. Ultimately, the impact of STP Phase 2 will differ based on the unique qualities of your business and employees. We’ll keep you updated on any changes that need to be made.
What does this mean for me as an advisor?
Advisors who manage payroll are in the same boat; we’ll keep you informed as the roll out progresses so you’re equipped to support your clients through the transition. If you’d like to learn more about the STP Phase 2 guidelines, more information is available via Xero Central.
What do I need to do right now?
Nothing just yet. It’s a challenging time for small businesses and advisors – and we know you have a lot to focus on. Xero is working closely with the ATO to upgrade our payroll to capture all STP Phase 2 information. We’ll communicate as soon as these changes are available so you’re prepared throughout the transition. Just like with phase one, the Xero team is working to make the entire process as simple as possible.
Will I be able to start setting myself – or my clients – up to transition to STP Phase 2 ahead of the deferred compliance date?
While there is nothing you need to do just yet, you will be able to begin the transition ahead of the deferred compliance date so you have time to adjust. When this functionality is updated, we’ll be providing the support – both within Xero and through educational resources – to help you transition employee records to STP Phase 2.
How can I find out more?
Xero Central has more details on STP Phase 2 and what it will mean for you. You’ll be notified when it’s time to make any changes in Xero and we will continue to share the information and resources you need as Phase 2 develops.