New STP Phase 2 Requirements: What Melbourne Employers Need to Know

What changed with STP Phase 2 compared to Phase 1?

STP Phase 1 reported gross salary or wages, PAYG withholding, and employer superannuation contributions as a single figure per employee per pay event. STP Phase 2 requires employers to disaggregate gross earnings into specific income types — ordinary earnings, overtime, bonus and commissions, directors' fees, allowances (broken into categories such as travel, tools, uniform, laundry, and meals), lump sum payments, and termination payments. The purpose is to allow the ATO and Services Australia to pre-fill personal tax returns with greater accuracy and to reduce the manual reconciliation burden at tax time. For Melbourne employers with diverse pay structures, the transition to Phase 2 requires payroll configuration changes that are not always handled automatically by software upgrades.

What is income type disaggregation and why does it matter?

Income type disaggregation means each earning category must be reported with its own ATO-defined income type code. Salary and wages use code SAW; closely held payee amounts use SHP; working holiday maker income uses WHM; labour hire income uses LAB; non-employee income uses IAA; and voluntary agreement income uses VOL. Misclassifying income types — for example, reporting working holiday maker income under the standard SAW code — can result in incorrect tax withholding rates being applied and employee tax return discrepancies that trigger ATO correspondence. Melbourne businesses in hospitality and agriculture are particularly exposed to working holiday maker misclassification given the volume of backpacker workers in those sectors.

What are the country code reporting requirements?

STP Phase 2 requires employers to report the country of residence for working holiday makers and foreign residents. This is reported using ISO 3166-1 alpha-3 country codes (for example, GBR for United Kingdom, DEU for Germany, JPN for Japan). The country code must be included in every pay event for affected employees, not just at commencement. Employers who have overseas-based employees working for Australian entities under tax treaties also need to ensure their payroll software is configured to report country codes correctly, as the ATO uses this data to cross-reference treaty withholding rate applications.

How have TFN declaration processes changed under STP Phase 2?

Under STP Phase 2, employers are no longer required to send paper TFN declaration forms to the ATO. Instead, the TFN declaration data must be reported through your STP-enabled payroll software within 14 days of receiving a TFN declaration from a new employee. The ATO receives this data digitally through the STP pay event or a separate TFN declaration report, depending on your software. Importantly, employers must still collect a valid TFN declaration from each new employee on or before their first pay — the reporting mechanism has changed, not the obligation. Failure to withhold at the correct rate (or applying the no-TFN withholding rate of 47% where appropriate) remains the employer's responsibility regardless of whether the STP report has been submitted.

What are the practical transition steps for Melbourne employers?

If you have not already confirmed your payroll software's STP Phase 2 compliance, contact your software provider or payroll administrator immediately. Most major platforms including Xero, MYOB, KeyPay, and Employment Hero completed ATO-approved Phase 2 deferral periods by 2023-24, but individual employer configurations may not have been updated. The key transition steps are: audit your current earning categories against STP Phase 2 income type codes; review employee profiles to confirm country codes are populated where required; test a pay event through your software's STP Phase 2 reporting pathway; and confirm with your payroll provider that TFN declarations are being reported digitally rather than on paper. If you manage payroll manually or with a spreadsheet, you will need to migrate to STP-enabled software — there is no manual STP Phase 2 reporting pathway for ongoing obligations.