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Stage two of Xero’s STP Phase 2 roll out is coming: Here’s what you need to know

Posted 2 months ago in Advisors by Anthony Jones
Posted by Anthony Jones

Single Touch Payroll (STP) Phase 2 will see Australian businesses build on their existing STP reporting to share more information with the ATO and other government agencies each time you process a pay run. The first stage arrived within Xero in late August. Now, it’s time to get ready, because stage two of the transition is rolling out in Xero Payroll over the coming days.

What does this mean for you? For a quick refresher, STP Phase 2 is being rolled out across three stages within Xero. This means that every employer reporting through STP in Xero will need to proceed through the three stage transition process to ensure your payroll data meets STP Phase 2 compliance.

Xero’s STP Phase 2 reporting deferral has been extended through to 31 March 2023, meaning Xero Payroll customers will have until the New Year to activate STP Phase 2. However, you can get your data ready today. In fact, it is recommended that you complete each stage sequentially as they are made available in Xero Payroll.

We’re now arriving at stage two within Xero’s STP Phase 2 transition timeline

Stage one – Delivered in August: The first part of this process is transitioning your existing employee profiles to be STP Phase 2 compliant. This means providing new details on existing staff, like whether they’re an employee or contractor.

Stage two – Rolling out late September: You’ll need to identify and update certain pay items with the new earnings categories defined by the ATO for STP Phase 2 reporting. Read more about this stage below.

Stage three – Coming soon: This is the final step in the STP Phase 2 transition and will break paid leave down into additional subcategories. We’ll support you with a guided experience in payroll to more easily update existing paid leave types to meet the new reporting requirements.

Stage two involves the introduction of new earnings categories

STP Phase 2 introduces a set of new ATO earnings categories for use in your pay items. This is because gross amounts for each income type will now need to be reported as a separate, itemised amount. What will this look like in action under stage two of the transition within Xero? You will now need to itemise and report on the following individual income components:

When these types of payments are correctly itemised in your STP filing, the data can be shared across government departments (like Services Australia). You can learn more about the process of updating your earnings categories in Xero Payroll here:

It’s important to note that amounts you pay to employees through STP that are not separately itemised will be reported as gross or ordinary time earnings (OTE). Only pre-sacrifice amounts that are classified as OTE should be included as gross. Learn more about gross reporting.

We’ll be launching the pay item transition tool to help you with stage two

Xero has built a transition tool to assist you with seamlessly replacing your existing pay items with new pay items to meet STP Phase 2 reporting requirements. We’ve also been rolling-out changes to Xero Payroll in preparation for STP Phase 2 for some time. As a result, it’s likely that some of your earnings pay items may already have the correct reporting category assigned.

For example, Bonuses or Commission payments have the earnings category Bonus and Commission. In this instance, these pay items do not need to be replaced as they will automatically report correctly to the ATO through STP Phase 2.

You will need to update each of your active employee profiles and mark that step as complete in the STP Phase 2 portal. The pay item transition tool will only be made available once Step 1 has been marked as complete.

How to disaggregate all purpose allowances for STP Phase 2

Many modern awards include allowances that are added to an employee’s hourly rate and are paid for all purposes of the award (such as when calculating payments for penalty rates, overtime and leave). Paying all purpose allowances to employees is based on the specific requirements of the modern award that each employee falls under. 

If you require information about the allowances that may be applicable for your employees under a particular modern award, visit the Fair Work Ombudsman’s website or seek independent legal advice. 

With STP Phase 2, you must separately report all purpose allowances against the relevant allowance type in Xero Payroll. You can learn more about how to disaggregate all purpose allowances in Xero Central.

You will be notified within Xero Payroll when each stage is available 

The transition to STP Phase 2 reporting will be gradual, and we encourage all customers to action the steps as soon as they become available within Xero Payroll. This will be made clear to you within your account, complete with guidance on what needs to be done (as will be the case for the stages to follow).

Start planning for your transition now

While you’ll have the time to make all relevant changes, the best approach is to get started as soon as possible. This might require some planning to ensure you have all the information needed. If you’re unsure about updating your payroll data for STP Phase 2, speak to your advisor.

Xero’s educational resources and transition tools will help you through the process

  • Register for our upcoming STP Phase 2 webinar
  • Watch the pay item transition video
  • Download the pay item transition fact sheet

Looking for more information on STP Phase 2? Check out our Resource Hub, guide to STP Phase 2, timeline infographic and this handy checklist. You can also visit Xero Central or refer to the ATO’s employer reporting guidelines.


September 28, 2022 at 11.37 pm

Xeros whole payroll approach to the hospitality industry in Australia is worse than amateurish.
I cannot believe the over-complicated tyrode you are exhausting us..
instead of simple facts.
Whilst. We . In our thousands… are still complaining to you with thousands complaints about the holiday pay accruals in hospitality industry.

Suzanne Saide
October 11, 2022 at 3.41 pm

Re Phase 2, Step 2 of changes to STP:
The Salary Sacrifice aspect was not included in the phase 2 video yet it is a confusing item that warrants a better explanation. Reading the information on the ATO (from your link) doesn’t clarify the changes in Xero payroll as well as a demonstration might. The 2 types of Salary Sacrifice couldn’t be seen in the Pay Employees process either so I don’t know if I’ve set this up correctly. As the STP report is not something that can be looked at to review I have to trust that I’ve set the Salary Sacrifice up correctly and Xero has handled it the way it’s intended – checks and balances required.
I have done salary sacrificing in payroll for many years and believe other users would appreciate your providing more information on the Xero process with Salary Sacrificing in Phase 2 of STP.

Xero in reply to Suzanne Saide Xero
October 18, 2022 at 1.42 pm

Hi Suzanne,

When reporting salary sacrifice amounts, there are two types that you can report through Xero Payroll:

Super (type S) – for super sent to a complying fund or retirement savings account.
Other employee benefits (type O) – for benefits other than super.

You can set up salary sacrifices for ‘Other employee benefits’ by creating pre-tax deductions in payroll. This may be for a benefit such as a novated lease.

For the super salary sacrifice, this will need to be added as an additional superannuation line in the employee’s draft payslip or pay template, using the Pre-Tax Voluntary Contribution (RESC) contribution type.

Once we transition to STP Phase 2 filing, amounts reported against each of these salary sacrifice types will be reported under either Salary Sacrifice Other Benefits or Salary Sacrifice Super to the ATO (you will be able to check this is reported correctly once you’ve filed your pay run).

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