What is STP Phase 2 reporting?

STP Phase 2 is an expansion of Single Touch Payroll that requires employers to report more detail with every pay event, including disaggregated gross amounts (bonuses, overtime, director fees and allowances reported as separate line items instead of one gross figure), an income type for every payment, and the reason an employee's employment ended. It removes the need to separately issue employment separation certificates and lodge TFN declarations, since the same information is now captured through STP.

What does disaggregation of gross mean in STP Phase 2?

Disaggregation of gross means splitting what used to be one combined gross wages figure into separate reportable amounts, including bonuses and commissions, overtime, director fees, salary sacrifice, and paid leave, plus PAYG withholding, exempt foreign income and residual gross. The ATO introduced this so it can identify amounts that carry different tax, superannuation or social security treatment without needing to ask the employer directly.

What are the most common STP Phase 2 mistakes?

The ATO's own guidance flags several recurring errors: leaving out the cessation date and reason when an employee leaves, wrongly marking pay categories as 'not reportable', losing continuity of year-to-date amounts when moving from Phase 1 to Phase 2, and using the country code 'na' to mean not applicable when a specific country code is required. Incorrectly assigning income types, particularly for closely held payees and working holiday makers, is another frequent issue.

What income type should most employees be reported under in STP Phase 2?

Most employees are reported under the salary and wages income type. Other income types exist for specific circumstances, including working holiday makers, closely held payees using a concessional reporting arrangement, and foreign employment income, and assigning the wrong income type can affect how an employee's income is taxed or reported to Services Australia.

Do NDIS providers and medical practices need to do anything extra for STP Phase 2?

The reporting rules are the same as for any employer, but NDIS and allied health providers running SCHADS Award pay structures with multiple allowances, penalty rates and leave loading have more pay categories to correctly map to STP Phase 2 fields than a simple salaried business, which is where most setup errors occur. Medical practices with a mix of employees and contracted practitioners also need to check each payee is assigned the correct income type.

STP Phase 2: What It Actually Requires and Common Setup Mistakes

STP Phase 2 has been mandatory for most Australian employers for several years now, yet it remains one of the most common sources of payroll errors we find when reviewing a new client's file, particularly for NDIS providers and allied health clinics running SCHADS Award pay structures with dozens of pay categories. Here's what the ATO actually requires, and where the setup usually goes wrong.

What STP Phase 2 Requires

Single Touch Payroll Phase 2 is an expansion of the original STP reporting standard, set out in the ATO's Single Touch Payroll Phase 2 employer reporting guidelines. Where STP Phase 1 only required employers to report a single gross wages figure, tax withheld and superannuation liability each pay run, Phase 2 requires far more granular detail to be reported at the same time, using the same pay event.

In practical terms, this means your payroll software needs to know, for every payment made to every employee, which specific category it falls into, what type of income it represents, and if the employee has left, why. The ATO designed Phase 2 this way to reduce the reporting burden elsewhere: employers no longer need to provide employees with a separate employment separation certificate, and new starters no longer need to lodge a TFN declaration with the ATO directly, because the same information now flows through STP.

Disaggregation of Gross

The centrepiece of STP Phase 2 is what the ATO calls disaggregation of gross. Instead of reporting one combined gross wages amount, employers must separately identify components including PAYG withholding, gross (the residual amount after other components are removed), salary sacrifice amounts, bonuses and commissions, overtime, director fees, and paid leave, with exempt foreign income and foreign tax paid required where relevant.

Component	What it covers
Gross	The residual gross amount after all other disaggregated components are removed
Overtime	Payments for hours worked beyond ordinary hours, reported separately from ordinary earnings
Bonuses and commissions	One-off or performance-based payments, reported as their own line item
Director's fees	Amounts paid to a director in that capacity, reported separately from wages
Salary sacrifice	Pre-sacrifice amounts and the sacrificed amount are both reported, not just the net figure
Paid leave	Leave categories such as annual, personal/carer's and other paid leave, reported by type

For a business with a simple salaried pay structure, this is a relatively small change. For an NDIS provider or allied health clinic paying under the SCHADS Award, where a single pay run might include base rates, multiple allowances, weekend and public holiday penalty rates, sleepover payments and leave loading, correctly mapping every pay category to the right disaggregated component is a much bigger job, and one that's easy to get only partly right.

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Income Types and Cessation Reasons

Every amount paid to an employee also needs an income type assigned to it. According to the ATO, income types tell the ATO when an employee's income may be taxed differently, such as for working holiday makers, when a concessional reporting arrangement applies, such as for closely held payees, or when other factors influence how an amount should be treated. Most employees are reported under the standard salary and wages income type, but getting this wrong for a working holiday maker or a closely held payee, common in family-run medical practices, can lead to incorrect tax treatment.

STP Phase 2 also requires a cessation reason whenever an employee's employment ends, using one of the ATO's defined categories: voluntary cessation, ill health, contract cessation (including the natural end of casual or seasonal engagement), redundancy or transfer. Leaving this field blank, or leaving it out of the final pay event altogether, is flagged by the ATO as one of the most common employer errors.

Common Setup Mistakes

The ATO's own guidance on common STP Phase 2 reporting questions and mistakes lists several recurring issues employers run into, and these match what we consistently find when reviewing new client payroll files:

Missing cessation date and reason. Omitting this when an employee leaves is one of the most frequently cited errors in ATO guidance.
Pay categories wrongly marked "not reportable." Selecting this option, or "do not report to the ATO," for a category that should be disaggregated and reported.
Lost continuity of year-to-date amounts. When transitioning from STP Phase 1 to Phase 2 partway through a financial year, year-to-date totals need to carry across correctly rather than resetting.
Incorrect country codes. The ATO specifically warns against using "na" to mean not applicable where a genuine country code is required for a payment type.
Wrong income type for closely held payees or working holiday makers. This is especially relevant for family-run medical and allied health practices where a director or family member is paid outside a standard salary arrangement.
Allowances folded into gross instead of itemised. Under Phase 2, most allowances need their own reporting category rather than being absorbed into a general gross figure, particularly for SCHADS Award pay runs with numerous allowance types.

Getting Your STP Phase 2 Setup Right

Because STP Phase 2 reports flow to the ATO with every pay run, a mapping error doesn't stay hidden the way an old quarterly reporting mistake might. It shows up in year-to-date figures immediately and compounds every subsequent pay cycle until it's corrected. Working through the ATO's employer STP Phase 2 checklist against your actual pay categories, rather than assuming your payroll software configured everything correctly by default, is the most reliable way to catch a mapping error before it reaches finalisation.

For businesses running complex award structures like the SCHADS Award, or a mixed employee and contractor workforce like many medical practices, this is often best done as part of a broader payroll review rather than a one-off check, since pay categories tend to drift out of alignment as award rates update and new allowances are added.

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