STP Phase 2: What's Changed for Payroll in 2026

Single Touch Payroll (STP) Phase 2 is now fully mandatory for all Australian employers. It requires more granular reporting of employee income, tax, and super — every time you run payroll. If your software isn't set up correctly, you could be sending incorrect data to the ATO with every pay run.

1. What Changed in Phase 2?

Phase 2 expanded the data you report with each pay event. The key additions include:

• Income types: You must now classify each employee's income (e.g., Salary & Wages, Closely Held Payees, Working Holiday Makers, Labour Hire).
• Country codes: For working holiday makers, you must report their country of origin.
• Disaggregated gross amounts: Gross pay must be broken into components — base salary, overtime, bonuses, commissions, directors' fees, and paid leave (separately identified).
• Employment and cessation details: Start dates, cessation dates, and reason for cessation must be reported for each employee.
• Tax treatment codes: Replace the old tax file number declarations with codes that indicate the employee's tax status.

2. Why It Matters for Your Business

STP Phase 2 data feeds directly into:

• Centrelink and Services Australia — employee income is reported in real-time, affecting welfare payments.
• Child Support Agency — income data is used to calculate child support obligations.
• ATO compliance systems — discrepancies between your BAS and STP reports trigger automatic reviews.

Incorrect reporting doesn't just create ATO problems — it can affect your employees' personal finances.

3. Common STP Phase 2 Errors

• Wrong income type selected — closely held employees (directors, family members) must use a different income type than regular staff.
• Not disaggregating overtime and allowances — these must be reported separately, not lumped into gross wages.
• Missing cessation reason — when an employee leaves, you must report whether it was voluntary, redundancy, dismissal, or contract end.
• Incorrect tax treatment codes — using the wrong code can result in too much or too little tax being withheld.

4. Software Setup Checklist

Ensure your payroll software (Xero, MYOB, or KeyPay) is configured correctly:

1. Update to the latest version — all major providers have released STP Phase 2 updates.
2. Review each employee's income type — default is usually "Salary & Wages" but directors and working holiday makers need different types.
3. Map your pay items correctly — ensure overtime, allowances, bonuses, and leave are classified into the right STP categories.
4. Check tax treatment codes for each employee — these should match their tax file declaration.
5. Run a test pay — verify the STP report preview matches your expectations before finalising.

5. Closely Held Employees

If you pay yourself (as a director) or family members through the business, you're a "closely held payee." The rules are slightly relaxed — you can report quarterly instead of every pay run — but you must still use the correct income type code.