The Australian Tax Office (ATO) hosted a webinar earlier this year (April 2021), introducing details of the STP Phase 2 expansion to the Australian public. This session was aimed largely towards payroll professionals and accountants, and we’ve summarised the main points of interest below:

 

What is the STP Phase 2 Expansion?

The ATO has emphasised that this most recent update to Single Touch Payroll (STP 2.0) is to assist in reduced reporting requirements to different government agencies. Permitting all relevant information to be reported through the payroll system and allowing agencies to collect this information directly from the ATO.

One of the primary examples of this information sharing between agencies is with Services Australia, allowing Services Australia to confirm child support deductions without a separate report to be required.

 

What’s new in STP Phase 2?

 

Further definitions around allowances and other earnings

Previously in payment summaries and STP (Phase 1), most employee earnings were grouped into one ‘gross earnings’ bucket, including most allowances.

Moving forward with STP Phase 2 (STP 2.0), Single Touch Payroll lodgements will be required to separate all earnings into the following discrete payment types:

  • Salary sacrifice and deductions
  • Bonuses and commissions;
  • Allowances;
  • Other Payments (including termination and overtime payments);
  • Paid leave;
  • Directors’ Fees

 

Salary sacrifice and deductions

 

Salary Sacrifice

You must separately report salary sacrificed amounts.

When reporting salary sacrificed amounts, there are two new types to report:

  • superannuation (salary sacrifice type S) – for superannuation to a complying fund or retirement savings account (RSA)
  • other employee benefits (salary sacrifice type O) – for benefits other than super.
STP Phase 2 - Reporting Salary Sacrifice

 

If your employee has an effective salary sacrifice arrangement, you have previously reported post-sacrifice amounts to us. This changes as part of STP Phase 2. You now need to report the salary sacrifice amounts and separately report the pre-sacrificed income amounts in your STP report.

 

Salary Sacrifice superannuation (salary sacrifice type S)

STP Phase 2 - Salary Sacrifice Superannuation

Salary sacrifice other employee benefits (salary sacrifice type O)

STP Phase 2 - Salary Sacrifice Employee Benefits

Please be advised the reporting of deductions will not change. There are two deduction types you can report and this will continue to be the same under STP Phase 2:

  • union and professional association fees (deduction type F)
  • workplace giving (deduction type W)

 

Child Support Reporting

You may voluntarily choose to report your Child support deductions and Child support garnishees if your solution offers this functionality.

  • A child support deduction is a deduction from the employee’s pay made under a notice that is issued under section 45 of the Child Support (Registration and Collection) Act 1988. It requires an employer to deduct a fixed dollar amount each pay period and is subject to a protected earnings amount. You should report these amounts in your STP report as deduction type D.
  • A child support garnishee is a deduction from the employee’s pay made under a notice that is issued under section 72A of the Child Support (Registration and Collection) Act 1988. It requires an employer to deduct a percentage of the employee’s income, a lump sum, or a fixed amount each pay. You should report these amounts in your STP report as deduction type G.

Bonuses and Commissions

You may pay some employees bonus and commission payments to reward their performance, service, or for meeting a specific goal. These are typically paid as a lump sum.

Only pre-sacrifice amounts that are classified as  Ordinary Time Earnings should be included as bonuses and commissions.

If you are making a back payment or arrears payment, it may be included in bonuses and commissions.

The following table outlines some examples of what should and shouldn’t be included in bonuses and commission reporting.

 

STP Phase 2 - Bonuses and Commission

Allowances

In Phase 1 reporting, some allowances are reported separately, and some are reported as part of gross.

You will now need to report all allowances separately in your STP Phase 2 report across most income types, not just expense allowances that may have been deductible on your employee’s individual income tax return. This means that allowances previously reported as gross must now be separately itemised and reported.

Don’t report:

  • Reimbursements:
    • these are an amount that reimburses an expense that was (or will be) incurred by the employee in the course of their duties and can be verified by receipts
    • some reimbursements may be subject to FBT.
  • Fringe benefits:
    • these are not amounts that you are paying to your employee

 

Allowances that are to be reported.

  • Award transport payments (allowance type AD): This is a deductible expense allowance for the total rate specified in an industrial instrument to cover the cost of transport (excluding travel or cents per kilometre reported as other separately itemised allowances) for business purposes, as defined in section 900-220 of the Income Tax Assessment Act 1997.

 

  • Cents per km (allowance type CD): This is a deductible expense allowance that defines a set rate for each kilometre travelled for business purposes that represent the vehicle running costs, including registration, fuel, servicing, insurance and depreciation account. This should not include any cents per kilometre allowances that are paid for travel between an employee’s home and place of work unless it is a home-based business and the trip was for business purposes.

 

  • Laundry (allowance type LD): This is a deductible expense allowance for washing, drying and/or ironing uniforms required for business purposes. This allowance is typically paid as a regular rate for each week of work or services performed and cannot include dry cleaning expenses or reimbursements. Uniforms refer to the approved categories of clothing defined by the ATO.

 

  • Overtime meal (allowance type MD): This is a deductible expense allowance defined in an industrial instrument that is in excess of the ATO reasonable amount, paid to compensate the employee for meals consumed during meal breaks connected with overtime worked.

 

  • Qualifications/certificates (allowance type QN): This is a deductible expense allowance that is paid for maintaining a qualification that is evidenced by a certificate, licence or similar. For example, allowances to cover registration fees, insurance, licence fees, etc that are expected to be expended to maintain a requirement of the job.

 

  • Tasks (allowance type KN): This is a service allowance that is paid to an employee to compensate for specific tasks or activities performed that involve additional responsibilities, inconvenience, or efforts above the base rate of pay. For example, higher duties allowance, confined spaces allowance, dirty work, height money, first aid, etc.

 

  • Tool (allowance type TD): This is a deductible expense allowance to compensate an employee who is required to provide their own tools or equipment to perform work or services for the employer. For example, chef’s knives, divers’ tanks, trade tools, phone allowances.

 

  • Domestic and Overseas travel (RD): This is a deductible expense allowance that is in excess of the ATO reasonable allowances amount (for domestic or overseas travel), undertaken for business purposes, which are intended to compensate employees who are required to sleep away from home. It is not a reimbursement of actual expenses, but a reasonable estimate to cover costs including meals, accommodation, and incidental expenses.

 

  • Other allowances (allowance type OD): These are other allowances that are not otherwise separately itemised. These can either be deductible or non-deductible expenses. Anything you report as another allowance needs to have a description for the category of expense. These categories will help us assist each of your employees to complete their individual income tax returns.

 

The descriptions you can use are:

  • G1 (general)
  • H1 (home office)
  • ND (non-deductible)
  • T1 (transport/fares)
  • U1 (uniform)
  • V1 (private vehicle).

 

Other Payments (including termination and overtime payments)

  • Community Development Employment Projects (CDEP) payments: This relates to the wages of employees working under the CDEP scheme. The CDEP scheme has now ceased, but support arrangements are in place that requires those remaining members of the scheme to be supported for the duration of its operation. There should not, however, be any earnings reported under this payment classification in Phase 2 and will result in a validation error, preventing the lodgement of an STP event.

 

  • ETP (Death benefit) – Code B: This is a multiple payment for a death benefit ETP code N for the same deceased person, where the later payment is paid in a subsequent financial year from the original code N payment.

 

  • ETP (Death benefit) – Code D: This is a death benefit payment directly to a dependant of the deceased employee. A dependant may include a spouse of the deceased, a minor child, a person who had an interdependency relationship with the deceased or a person who was a dependant of the deceased just before the latter died.

 

  • ETP (Death benefit) – Code N: This is a death benefit payment directly to a non-dependant of the deceased employee. A non-dependant is a person who is not a dependant of the deceased and not a trustee of the deceased estate.

 

  • ETP (Death benefit) – Code T: This is a death benefit payment directly to a trustee of the deceased estate. This person may be an executor or administrator who has been granted probate or letters of administration by a court.

 

  • ETP (Life benefit) – Code O: This is a life benefit payment as a consequence of employment, paid for reasons other than those provided in “ETP (Life benefit) – Code R”. Examples include an ex-gratia payment, gratuity, or golden handshake, non-genuine redundancy payments, payments in lieu of notice and some types of unused leave, under specific circumstances. This is the non-excluded part of the ETP.

 

  • ETP (Life benefit) – Code R: This is a life benefit payment as a consequence of employment, paid only for reasons of genuine redundancy (ie, where the employer decides the job no longer exists), invalidity (the employee sustained a permanent disability), early retirement scheme (an ATO-approved plan that offers employees incentives to retire early or resign when the employer is rationalizing or reorganizing their business operations) or compensation for personal injury, unfair dismissal, harassment or discrimination. This is the excluded part of the ETP.

 

  • ETP (Multiple payments) – Code P: This is a multiple payment for life benefit ETP code O for the same termination of employment, where the later payment is paid in a subsequent financial year from the original code O payment. This is the non-excluded part of the ETP.

 

  • ETP (Multiple payments) – Code S: This is a multiple payment for life benefit ETP code R for the same termination of employment, where the later payment is paid in a subsequent financial year from the original code R payment. This is the excluded part of the ETP.

 

  • Lump-Sum D: This represents the tax-free amount of a genuine redundancy payment or early retirement scheme payment, up to the limit, based on the employee’s years of service.

 

  • Lump-Sum E: This represents the amount for back payment of remuneration that accrued, or was payable, more than 12 months before the date of payment and is greater than the lump sum E threshold amount, being $1,200.

 

  • Overtime: This represents a payment made to an employee that works extra time. It can include work done beyond their ordinary hours of work, outside the agreed number of hours or outside the spread of ordinary hours (the times of the day ordinary hours can be worked).

 

  • Return to work payment: This represents an amount paid to induce an employee to resume work, such as 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.

 

Paid Leave

You will now need to separately report the following leave payments made to your employees in your STP Phase 2 report:

  • Leave – ancillary and defence leave (Type A): Paid leave for absences such as for Australian Defence Force, emergency leave, eligible community service and jury service.

 

  • Leave – cash out of leave in service (Type C): Leave entitlement earnings that have been paid out in lieu of the employee taking the absence from work. This option represents Fair Work entitlements as defined in an award, enterprise agreement or contract of employment (for award and agreement free employees). When leave is cashed out, it reduces the balance of the entitlement, as occurs if the absence was taken, but on the date of payment rather than over the duration of the absence.

 

  • Leave – paid parental leave (Type P): Some employers offer paid parental leave and the Government Paid Parental Leave (GPPL) Scheme offers eligible employees, who are the primary carer of a newborn or adopted child, up to 18 weeks’ leave, paid at the national minimum wage. Generally, GPPL is paid by Services Australia to the employer to pay the employee, but both types of paid parental leave may be paid at the same time.

 

  • Leave – unused leave on termination (Type U): Any leave balances paid out on termination that are otherwise not deemed an ETP or lump sum payment.

 

  • Leave – worker’s compensation (Type W): Any workers’ compensation payments received by an injured employee for the hours not worked, or not attending work as required, or if the employement has been terminated.

 

  • Leave – other paid leave (Type O): All other paid absences not otherwise covered in the other leave payment classifications and regardless of rate of pay (full, half, reduced rate) must be reported under this payment classification. Examples include, but are not limited to: annual leave, leave loading, long service leave, personal leave, RDOs.

 

  • Lump Sum A (Type R): All unused annual leave or annual leave loading, and that component of long service leave that accrued from 16/08/1978, that is paid out on termination only for genuine redundancy, invalidity or early retirement scheme reasons. 

 

  • Lump Sum A (Type T): Unused annual leave or annual leave loading that accrued before 17/08/1993, and long service leave accrued between 16/08/1978 and 17/08/1993, that is paid out on termination for normal termination (that is, other than for a genuine redundancy, invalidity or early retirement scheme reason). 

 

  • Lump Sum B: Long service leave that accrued prior to 16/08/1978 that is paid out on termination, regardless of the reason for such termination. 

 

Directors’ Fee

If you pay directors’ fees you must separately include these in your STP Phase 2 report.

Directors’ fees include payments to:

  • the director of a company
  • a person who performs the duties of a director of the company
  • a member of the committee of management of the company, or as a person who performs the duties of such a member of the company is not incorporated.

 

Directors’ fees may include payment to cover traveling costs, costs associated with attending meetings, and other expenses incurred in the position of a company director.

Only pre-sacrifice amounts that are classified as Ordinary Time Earnings (OTE) should be included as directors’ fees.

 

The end of Tax File Declaration Lodgements

With STP (Phase 2), the ATO will also expect information on employee Tax Treatment at each pay run.

The ATO has said that this will mean they no longer expect employers to lodge Tax File Declarations (however the completion of a Tax File Declaration is still required by new employees).

 

Additional employment conditions

STP lodgements will now include information around your employee’s employment basis if they are full-time, part-time or casual. In addition, on cessation of employment, the reason for termination will also be included as part of the lodgement.

Income Types will be included with amounts paid to employees, which means it will allow the ATO to identify when an employee’s income may be taxed differently, if you have a concessional reporting arrangement, or if there are other factors influencing the amounts you are reporting.

 

Back payment reporting: Lump Sum E letters to your employees will not need to be provided, as you’ll have included the amount and the period it relates to.

 

Separation Certificates:  You may no longer be required to provide a separation certificate when your employees leave, as the date and reason for cessation of employment will be included in your STP report.

 

When is STP 2.0 (STP Phase 2) due to start?

The ATO has announced that STP Phase 2 reporting requirements will become mandatory on 1 January 2022 for all employers.

 

Would there be a deferral process?

The ATO approach to STP Phase 2 will be flexible and reasonable based on your business readiness/individual circumstances.

Payroll Providers who need more time to make the changes and update their solutions to support STP 2.0 can apply for a deferral for their customers. If your payroll software provider obtains a deferral, they will let you know.

 

What to do if your solution is ready by 1 January 2022?

  • If your solution is ready for 1 January 2022, you should start Phase 2 reporting;
  • If your solution is ready and you can start Phase 2 reporting before 1 March 2022, you’ll be considered to be reporting on time and you won’t need to apply for more time.

 

What if your company needs more time?

  • You can apply for more time past your Payroll Provider deferral if you need to;
  • You’ll be able to apply for a delayed transition from December 2021. More information will be available soon;
  • There won’t be penalties for genuine mistakes for the first year of STP Phase 2 reporting until 31 December 2022. This includes employers who have already started STP Phase 2 reporting.

 

About Employment Innovations

Employment Innovations is one of Australia’s leading providers of employment services designed to increase productivity and ensure compliance. Its services and solutions include all the tools that every Australian small to medium sized employer needs – including workplace advice, legal services, payroll solutions, migration, human resource management and HR software.

 

Disclaimer

The information provided in these blog articles is general in nature and is not intended to substitute for professional advice. If you are unsure about how this information applies to your specific situation we recommend you contact Employment Innovations for advice.

 

 

This article was originally published on 28 April 2021; updates have been made following the advice of State & Federal government authorities. Last updated on 10 November 2021.

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