Single Touch Payroll Phase 2 (STP2) expanded the original STP reporting framework by requiring employers to disaggregate payroll data into significantly more granular categories before it reaches the ATO. Where STP Phase 1 required a single gross wages figure, Phase 2 requires employers — and by extension their bookkeepers and payroll agents — to separately report every component of an employee's pay: ordinary time earnings, allowances, bonuses, directors' fees, salary sacrifice, and more.
The ATO's STP2 mandate has been in effect since 1 January 2022, with deferrals granted to some payroll software vendors through to late 2023. As of 2026, all employers should be reporting under Phase 2 rules. This guide explains what bookkeepers need to know to keep their clients compliant.
What changed with STP Phase 2
Disaggregated gross income
Under STP1, bookkeepers reported a single gross year-to-date earnings figure for each employee. STP2 requires that figure broken down into distinct income types. The key categories are:
- Salary and wages (SAW): Base ordinary time earnings
- Overtime (OTE): Hours outside ordinary rostered hours at penalty rates
- Allowances (ALW): Travel, tools, laundry, meals — each allowance type must be reported by ATO tax treatment code
- Directors' fees (DIR): Separately identified for compliance tracking
- Salary sacrifice (SS): Amounts sacrificed to superannuation or other benefits, reduced from gross accordingly
- Bonuses and commissions (BON): One-off performance payments
- Paid leave (LSN/PCF/PCC/LSL): Long service leave, personal leave, carer's leave — each requires its own ATO code
Payroll software that was STP1-compliant generates a single gross figure. STP2-compliant software maps each pay component to the correct ATO income type code before sending the report.
Employment basis codes
STP2 introduced employment basis codes to replace the older employment type field:
| Code | Meaning |
|---|---|
| F | Full-time |
| P | Part-time |
| C | Casual |
| L | Labour hire |
| V | Voluntary agreement |
Bookkeepers maintaining payroll for clients on legacy MYOB or Xero configurations may need to audit each employee's employment basis code to ensure it was correctly migrated.
Tax treatment codes
The STP1 PAYG withholding category has been replaced by a structured tax treatment code. The code is a string of six characters that encodes the employee's tax scale, residency status, HELP debt, and other withholding variables:
- Character 1: Tax scale (R = regular, A = actors/performers, C = closely held, S = seasonal, H = working holiday maker)
- Character 2: Residency (R = resident, N = non-resident)
- Characters 3–6: Boolean flags for HELP/VSL/SSL debt, SFSS, Medicare levy exemption, Medicare levy reduction
For most Australian employees, the code will begin with RRRNN or similar. Clients with international employees, working holiday makers, or labour-hire arrangements require careful coding.
Child support garnishees
STP2 requires child support deductions and garnishees to be reported separately through the payroll event. Previously, child support was handled entirely outside the STP framework. Bookkeepers managing payroll for employers who have received child support deduction notices must ensure their payroll software has been configured to capture these deductions.
Closely held payees
One of the most significant practical changes under STP2 is the treatment of closely held payees — employees who are related to the entity, such as family members employed in a family trust, company directors, or sole trader owners drawing wages.
Closely held payees may report on a quarterly basis rather than each pay event, using an annual closely held payee report or a quarterly update. However, the classification requires deliberate setup in the payroll software — if a closely held payee is incorrectly configured as an ordinary employee, the system will attempt to report on every pay run, which can cause issues.
To correctly classify a closely held payee:
- Confirm the employment relationship qualifies under the ATO's closely held definition
- Confirm the payroll software supports the closely held payee reporting pathway
- Set the employee record to quarterly reporting mode
- Lodge the closely held payee report by 14 July following the end of each financial year (or quarterly if using the quarterly method)
Failure to correctly classify closely held payees is a common audit trigger. For clients with family trust arrangements or director shareholders, review every payee before the end of the financial year.
Common STP2 compliance errors bookkeepers encounter
1. Allowances coded to gross salary
If your client's payroll operator is not disaggregating allowances — instead including travel allowances, tool allowances, or meal allowances in the gross salary figure — the STP2 report will be non-compliant. The ATO can cross-reference allowance amounts against individual income tax returns and identify anomalies.
Fix: Review the payroll software's pay component mapping. Each allowance type requires an ATO tax treatment code. Most modern payroll platforms have a per-allowance configuration panel; check that each recurring allowance has been mapped.
2. Salary sacrifice not reduced from ordinary time earnings
Under STP2, salary sacrificed to superannuation must be reported as a sacrifice amount AND must reduce the employee's reportable gross. A common misconfiguration is where the salary sacrifice is captured as a deduction but the gross salary is not adjusted, overstating the employee's income in ATO records.
Fix: Run a reconciliation between the payroll software's YTD gross figures and what will appear on each employee's payment summary equivalent (income statement). The gross salary shown in STP should match the employee's taxable income before income tax is applied.
3. Incorrect employment basis for casual employees
Casual employees frequently cycle between intermittent work periods. If a casual employee is coded as full-time (F) at setup and their status is not updated when they return from a break, the ATO's STP matching algorithms may flag inconsistencies.
Fix: Audit employment basis codes annually or when a client's workforce profile changes.
4. Missed cessation date on termination
When an employee ceases employment, the STP final event must include the cessation date and the cessation type code:
- V — Voluntary resignation
- I — Ill health
- D — Deceased
- R — Redundancy
- F — Dismissal
- P — Contract finished
- T — Transfer
A common error is sending the cessation event without the cessation type, or using the wrong type (voluntary vs redundancy has tax consequences for genuine redundancy payment thresholds).
Reconciling STP2 data before year-end
At 30 June, bookkeepers should perform a pre-finalisation STP reconciliation before submitting the STP income statement finalisation for each employee. Key checks:
Cross-check against the general ledger
The YTD payroll expense in the general ledger should equal the total of all STP-reported gross wages plus reportable fringe benefits plus reportable employer super. Differences indicate either payroll entries that bypassed STP or STP events that were not posted to the ledger.
Check PAYG withholding reconciliation
The total PAYG withholding reported through STP (year-to-date) should match the amount on the activity statements lodged during the year. The ATO's business portal allows agents to view the STP YTD figures. Compare these to the W2 figures on each BAS period.
Verify superannuation guarantee contributions
STP2 includes super guarantee amounts in each pay event report. The total reported super guarantee should match the clearing house records. Note that the reporting date for STP purposes is the pay event date, not the clearing house payment date — the two may fall in different BAS periods.
What happens if an STP2 report is wrong
The ATO's approach to STP errors is corrective rather than punitive for genuine mistakes reported promptly. Options available to bookkeepers:
Update events: If a previous pay run contained an error, submit an update event for the affected pay period. Update events replace the incorrect data.
Full file replacement: For systemic errors where multiple pay events are wrong (e.g., allowances miscoded across an entire quarter), a full file replacement event rewrites all YTD figures to the correct amounts.
Voluntary disclosure: If an error is identified after year-end income statement finalisation, the bookkeeper can submit a voluntary disclosure through the ATO's online services. This typically avoids penalties that would otherwise apply.
Penalties for STP non-compliance are issued per quarter, starting at one penalty unit ($330 in 2026) for small employers and scaling up based on employer size. Persistent non-reporters or deliberate lodgement failures attract higher penalty multiples.
STP2 and Reconlink's payroll integration
Reconlink does not process payroll directly — payroll is a separate function handled by STP-compliant payroll software such as KeyPay, Xero Payroll, or MYOB. Reconlink receives the payroll-related transactions from the client's bank feed and codes them against the appropriate account codes (4-2100 Wages, 2-1900 PAYG Withholding Payable, 2-2100 Superannuation Payable).
The most common payroll transactions bookkeepers reconcile through Reconlink are:
- Net pay disbursements (coded to 4-2100 Wages with N-T GST code)
- Super clearing house payments (coded to 2-2100 Superannuation Payable)
- ATO PAYG instalment payments (coded to 2-1900 PAYG Withholding Payable)
- State payroll tax payments (coded to 6-1100 Payroll Tax Expense)
For a complete guide to the bank reconciliation workflow that supports BAS lodgement, see What is bank reconciliation? A guide for Australian bookkeepers.
Frequently asked questions
Is STP2 mandatory for all employers?
Yes. All employers who report PAYG withholding are required to report through STP. Phase 2 disaggregated reporting has been mandatory since 2022, with the last deferrals expiring in late 2023. Micro-employers (1–4 employees) may use a simplified reporting method through a registered tax or BAS agent.
Do closely held payees still need to be reported through STP2?
Yes, but with different timing. Closely held payees can be reported quarterly rather than on each pay event. The quarterly update is lodged 14 days after each quarter end, and the annual finalisation is due 14 July.
What is the fine for not lodging STP2 correctly?
The ATO can impose one penalty unit ($330 in 2026) per quarter for small employers who fail to lodge. Larger employers face higher per-period penalties. The ATO typically issues a warning first for genuine first-time errors and works with registered agents to correct non-compliance before escalating to penalties.
Can I correct a mistake in a previous STP2 report?
Yes. Submit an update event for the affected pay period. The ATO's systems process update events to replace incorrect prior data. For systemic errors across multiple periods, a full file replacement is available.
This article was last reviewed on 27 May 2026 against current ATO STP Phase 2 guidance. Always confirm current rates, thresholds, and ATO system requirements at ato.gov.au. This is general guidance, not specific tax or legal advice.