How Xero is Making You STP Phase 2 Compliant

What is STP Phase 2?

Single Touch Payroll (STP) is the way you report your employees' tax and super information to the ATO. STP Phase 2 is the expansion of STP and is designed to reduce the reporting burden for employers who need to report information about their employees to multiple government agencies. It’s also meant to help your employees, get the right payment at the right time.

The mandatory start date for Phase 2 reporting is 1 January 2022 but all Xero users have had a deferral in Phase 2 reporting which means they’ve had more time to complete the transition and have until March 2023 to be fully compliant.

You should all be familiar with the new STP reporting methods which we’ve discussed in previous articles. The changes to Single Touch Payroll Phase 2 have been rolled out over 3 stages. By now, most of you would have completed sstages1 and 2.

  • Stage one: The first part of this process, transitioning your new and existing employee profiles to be STP Phase 2 compliant. By using the employee transition tool, you were able to update existing employee records to capture relevant STP Phase 2 items – like whether they’re an employee or contractor. Now any new staff members recorded after this release will automatically be STP 2 compliant with all the required additional information.
  • Stage two: New earning categories added in Xero Payroll, like Directors’ fees, Bonuses, and Commissions to ensure all pay items are STP compliant.
  • Stage three: This is the final step in the STP Phase 2 transition currently being rolled out and breaks down paid leave into additional subcategories. With the leave transition tool, you can update existing leave categories to meet the new reporting requirements.

Previously, earnings were grouped to form part of the gross payments figure. Under STP Phase 2, the ATO requires paid leave to be reported as a separate figure to gross payments.

You need to assign a leave category to each of your active leave pay items in your organisation. The category determines how the payment is reported to the ATO through STP. If you are keen to dive into what is specifically required for this by the ATO, you can find that here. You will now need to categorise any existing paid leave types you have set up in your payroll system. The categories (or equivalent) available include:

Other paid leave (Type O)

  • Annual leave
  • Compassionate and bereavement leave
  • Family and domestic violence leave
  • Long service leave
  • Personal (sick/carer’s) leave
  • Rostered day off
  • Special paid leave
  • Study leave
  • Time off in lieu

Ancillary and defense leave (Type A)

  • Community service leave
  • Defence reserve leave
  • Jury duty leave

What you need to do:

If you haven’t already, head to the STP 2 Portal in Xero Payroll and progress through each stage of the transition process to get your payroll data ready for Phase 2 reporting.

  • Update employee records to meet the new STP Phase 2 filing requirements.
  • Update income pay items to the new STP Phase 2 filing requirements.
  • Categorise your existing paid leave types to the new filing requirements.

It’s important to mark each stage as complete in the STP 2 Portal before moving forward. This ensures your payroll data is accurate and could help reduce filing errors later in the financial year.

Ensure you have the relevant information in your payroll system. There may be some information required that you don’t currently store in your payroll system, such as employee start dates. If you keep this information in a different system or spreadsheet, it will need to be captured in your payroll and included in your STP Phase 2 report.

There are many useful resources you could refer to for help such as:

If you’re still feeling unsure or confused as to what is required or where to start, visit the Fair Work Ombudsman’s website to clarify award and payslip requirements you are unsure about or talk to your tax or Xero BAS professional, or payroll provider. Discuss your current payroll processes and see if they can help review your payroll and set it up for STP Phase 2 reporting. If you don’t have a tax or BAS agent, consider engaging one.

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