Single Touch Payroll Phase 2: What you can expect and how to get Xero ready

Single Touch Payroll Phase 2 What you can expect and how to get Xero ready

So, you want to know about Single Touch Payroll Phase 2? We’ve got you. Here’s the key insights you need to know about what’s changing in Xero and how to prepare for your transition. 

Most of you will be familiar with Single Touch Payroll (STP). STP Phase 2 is the simply next step in the journey towards fully digital and online reporting. The goal is to make it easier for businesses to report employee information to multiple government agencies. 

For all our Xero Payroll users, you have a big of wiggle room in your reporting. Though mandatory reporting for Phase 2 started on 1 January 2022, Xero has secured a deferral deal from the ATO until 31 December 2022. That’s why we love them, they’re always one step ahead.  

What is STP Phase 2 

STP is a reporting system that sends employee information about gross wages, tax withholding and superannuation to the ATO. Phase 2 simply expands the service of STP and provides more detailed info to the ATO.  

We’ll go into more detail about what’s changing below but here’s a quick summary of the benefits you can expect: 

  • Automated TFN declarations 
  • No more Lump Sum E letters to your employees 
  • Streamlined requests between Services Australia, Centrelink, and Medicare 
  • No more separation certificates 

For the most part, reporting for STP will stay the same in Xero including how we file: 

  • Reports to the ATO 
  • Due Dates 
  • Types of payments 
  • PAYG withholding 
  • Superannuation reporting 
  • End of Financial Year reporting 

What’s already changed for STP Phase 2 in Xero?Termination reason:  

It will now be mandatory to include a reason for termination when an employee leaves, but you won’t have to complete a separation certificate. 

Lump Sum E Tax year:  

Information usually included in Lump Sum E letters will now be included in the pay event prior to finalisation of the employee’s Income Statement. So, manual lump sum E letters won’t need to be sent to your employees anymore. 

Lump Sum W:  

STP Phase 2 has a new way of reporting gross payments for employees who resume work. 

Bonuses and commissions:  

Lump sum payments to employees as part of their bonuses or commissions will be reported as a separate category in the new reporting phase. 

Allowance types:  

All allowances will be reported separately to the ATO as part of Phase 2 reporting. 

What changes are coming soon? Tax File Number (TFN) declaration:  

TFN declarations will be sent automatically to the ATO via STP Phase 2 reporting. That means there’s no more manually sending copies to the ATO. 

Tax codes:  

STP Phase 2 reporting includes a six-character tax treatment code for each individual employee to determine what influences the amount of withholding on Xero payroll. 

Employee’s paid leave payments will be reported separately, using itemised leave type codes. 

Cashed out leave:  

A new workflow is being developed for leave that’s cashed out. 

Salary sacrifice:  

Salary sacrifice can no longer be used to reduce ordinary earnings or count towards superannuation obligations. It will be reported separately in STP, and you won’t report the post-sacrificed amount via payroll. 

What do you need to do to get ready? 

Xero will be rolling out new functionalities for STP Phase 2 in four separate stages over the rest of the year. The first stage will go live in Xero around April, so keep your eye out.  

For right now, all you need to do is get familiar with the new pay items and additions available in Xero now.  

As each new phase is rolled out, we’ll keep you up to date. If you have any questions about the rollout of STP Phase 2 in Xero, we’re here for you.  

Contact our team today and we’ll point you in the right direction. 

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