Single Touch Payroll: Preparing for the new Phase 2 reporting requirements
We have prepared this article to inform users of the changes being introduced in what will be reported to the ATO. Additionally. This will assist users when transitioning to Phase 2 reporting obligations.
What isn't changing?
Before we go into the detail of the additional information that you will need to report through Phase 2, few things have not been changed from STP 1:
- the method of lodgement regardless of whether you are lodging as employer, intermediary or a registered tax agent
- the due date for lodgement
- the types of payments that are needed
- tax withheld and super obligations
- end of year finalisation.
What is changing?
The biggest change of Phase 2 is the additional reporting requirements of employee and income data. The ATO's intent with capturing more information is to streamline employer and employee interactions with other government agencies such as Service Australia and reduce the administrative tasks associated with the hiring and termination of employees. The key changes are:
- Disaggregation of gross
- Employment and taxation
- Child support
- Income types
- Lump sum payments
Disaggregation of gross
The main purpose of Phase 2 changes is to extend the use of data to social services agencies such as Department of Social Services, Services Australia (Child Support and Centrelink) and Department of Veterans' Affairs.
The move to a disaggregation of gross model in Phase 2 is due to the different assessment of income required by those agencies to administer their programmes. Not all the payments that were included in Phase 1's aggregated gross are treated the same way for welfare benefits. Therefore, the disaggregation of gross will provide the granularity to support the accurate application of employment income across the relevant welfare payments and services it is responsible for administering. Additionally, unlike the period of time for which the ATO use the data (ie, for annual income tax returns), social services agencies have specific fortnightly instalment periods whereby their customers must declare their income and upon which periodic welfare payments are made. As such, this change in reporting should improve the accuracy of payments and ensure individuals receive the right payment at the right time.
The components of gross earnings that will be disaggregated (itemised separately) include:
- allowances
- bonuses and commissions;
- directors' fees;
- overtime;
- paid leave; and
- salary sacrifice.
In STP Phase 1, salary sacrifice amounts were not required to be reported. Rather, an employee's gross amount was reported as the post-sacrificed gross amount. STP Phase 2 set salary sacrifice reporting as mandatory and the gross amount reported should be the pre-sacrificed amount.
On the other hand, The reporting of Reportable Employer Super Contribution (RESC) is voluntary under STP, though if not reported through STP, must be reported via Payment Summaries/Payment Summary Annual Reports (PSAR). Where RESC is not able to be reported throughout the financial year, a payer can report this amount as part of the finalisation process for the payee.
To ensure gross earnings are itemised and reported in accordance with Phase 2 specifications, we introduced new pay type classifications to the pay category settings:
- Leave taken - record all leave taken by employees using an appropriate leave taken pay type
- Overtime payment - you must set which pay type is overtime and use these pay types when recording an overtime payment
- Workers Compensation - make sure to use the workers compensation when an employer directly pays an employee as a work compensation payment
- Allowances - all allowance types are added, you must ensure which allowance is pre-tax or post-tax and the super obligations too
- Child Support Deductions - use this deduction type only if there is a written notice from the Registrar to deduct a child support deduction amount
- Salary Sacrifice - two types, mandated and voluntary, both are pre-tax deductions
- Bonus, commissions and directors' fees - use the new Payments feature to record these type of payments, do not include these payment in the regular pay run
- Leave cash out - use the Payments feature to record all leave cashout while the employee in service
- Lump Sum E - use the payments feature to record any lump sum E payments
- Unused leave & ETP - use the new ETP-Leave feature to record any payment made after termination
Employment and taxation
Relates to the employment relationship between the employer and employee and the withholding rates applied to an employee. STP 2 requires the following information to be reported:
- Employee's commencement date
- Employee's cessation/termination date
- Employment basis - new mandatory requirement
- Cessation/termination reason - new mandatory requirement, an option has been added which you need to set when you flag an employment termination
- Tax Treatment - new mandatory requirement, click here to view a detailed article on this topic.
Please note:
- new employees will still need to complete a TFN declaration and the employer must retain this for their records. The employer does not need to lodge the TFN form if they lodge through STP 2.
- review any termination details that was previously set to ensure the termination reason is correclty set
Child support garnishees/deductions
STP Phase 2 reporting has introduced the ability to report child support garnishees and deductions. Reporting though STP will remove the need for employers to provide separate remittance advices to the Child Support Registrar. However, you must still pay the required amounts directly to them by the date specified in your notice.
Reporting child support through STP is voluntary. If you choose to not report through STP then you will still need to report directly to the Child Support Registrar on an ongoing basis.
If you decided to report child support through STP, all you need is to select the appropriate child support deduction when you process a pay run.
Where the Registrar has given written notice to a payer to deduct a specified amount from a payee, payers are obliged to withhold money from payees and pay it to the Registrar. Where there is no written notice from the registrar, the child support deduction should not be used, instead use the Non Reportable Deductions and add the required description.
Income Types
Another new requirement being introduced in Phase 2 is reporting an income type for each payment made to an employee and, in some cases, a country code alongside that income type.
The 3 main drivers of reporting income types and country codes are as follows:
- To identify amounts with specific tax consequences and/or mapping to a specific part of an individual's income tax return.
- To easily identify any payers choosing to claim an STP reporting concession, such as a reporting concession for closely held payees, to avoid unnecessarily communications by the ATO.
- Clarifies the employer's reporting obligations with respect to foreign tax and whether there are any applicable tax treaties in place with a foreign country.
Please note:
- For existing employees, you can adjust some of the income type settings under the employee's details such as Labour Hire or Closely Held Payee
- For new employees, make sure to choose the correct employee type when you create an employee record
Lump Sum Payments
There are some changes made to the lump sum payment reporting via STP Phase 2:
- Lump Sum E - STP Phase 1 did not support recording the financial year to which the lump sum payment related to. This meant that employers were still required to issue lump sum E letters to their employees specifying the financial year(s) the amount accrued. Phase 2 supports the reporting of the financial year for this type of lump sum payment.
- Lump Sum W - new lump sum created to cover payments made to to induce a person to resume work, for example, to end industrial action or to leave another employer. It does not matter how the payments are described or paid, or by whom they are paid
- Lump Sum D - represent the tax free components of the employment termination payment
- Other Lump Sum Payments - these type of lump sum payments will be automatically added based on the unused leave payment on termination.