Single Touch Payroll Phase 2 in Australia: A Technical Compliance Guide for SMEs in 2026

Quick Answer: Single Touch Payroll Phase 2 is now the permanent reporting standard for all Australian employers. There are no further extensions or transition deferrals. Every pay run must include detailed income classification, tax treatment codes, and disaggregated payment information reported directly to the ATO in real time. Most Australian SMEs updated their payroll software when Phase 2 launched and assumed the software handled everything. In many cases it didn't — because the underlying payroll configuration was never updated to match the new reporting logic. This guide covers every mandatory field, every common misconfiguration, and exactly what changes from 1 July 2026 when Payday Super makes STP Phase 2 accuracy the direct trigger for super compliance monitoring.

What STP Phase 2 actually is — and why it's different from Phase 1

Single Touch Payroll Phase 2 is the ATO's expanded payroll reporting framework. It builds on STP Phase 1 by requiring employers to report more detailed employment and tax information through STP-enabled software, including disaggregated gross, income types, country codes and certain other payroll components. 

Where Phase 1 reported a single gross income figure and a PAYG withholding amount, Phase 2 requires separate reporting of salary and wages by income type, allowances by type, deductions, salary sacrifice amounts, and lump sum payments. 

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. This is why getting the reporting right matters beyond just ATO compliance — errors in your STP data flow directly into your employees' Centrelink entitlements, Family Tax Benefit assessments, and child support calculations. 

Getting STP reporting wrong has direct consequences for your employees and your business. Incorrect reporting means employees' income statements in myGov are inaccurate, which can affect their tax returns, Centrelink entitlements, Family Tax Benefit assessments, and child support calculations. For employers, reporting errors trigger ATO "Action Required" notifications, potential penalties, and in serious cases, audits. 

The most important technical change: disaggregated earnings reporting

The single most significant structural change in STP Phase 2 is the disaggregation of gross income — the requirement to break down the total gross payment into its component parts rather than reporting a single gross figure. Disaggregated components include gross salary and wages, paid leave, overtime, bonuses and commissions, directors' fees, and allowances — each reported separately against the correct STP income type code.

STP Phase 2 expands the data you report to the ATO, effectively turning payroll into a transparent compliance engine. Australian payroll compliance now requires you to disaggregate gross income into granular components, allowing government agencies to streamline social security administration and verify payments instantly. 

Why this matters practically: if your payroll system is still bundling overtime, allowances, and salary into a single gross figure — even if the total is correct — your STP Phase 2 reporting is non-compliant. The ATO doesn't just want the right number. It wants the right number broken into the right components, coded against the right income types, every single pay run.

Under STP Phase 2, allowances must be reported individually by type — not lumped into gross income or reported as a single allowance total. Each allowance type has a specific STP code, and the tax and super treatment of each differs. Incorrect allowance coding is one of the most common Phase 2 misconfiguration errors in Australian payroll systems.

Mandatory STP Phase 2 fields: what every Australian SME must report

STP Phase 2 requires employers to break down their payroll data into granular categories. Your payroll software must correctly categorise every payment you make, including: Employment Category (full-time, part-time, casual, labour hire); Income Type (salary/wage, closely held payee, working holiday maker, seasonal worker); Tax Treatment (TFN provided vs not provided, Medicare levy surcharge); Disaggregation of Gross (separate out allowances, overtime, bonuses, commissions); and Sacrifice Type (salary sacrifice super vs other fringe benefits). 

These aren't optional fields. They are mandatory on every pay event, and incorrect mapping in any one of these categories creates a compliance gap that compounds across every subsequent pay run.

Employment basis codes determine how an employee's entitlements are calculated. A casual employee coded as part-time receives incorrect income statement data in myGov. A labour hire worker coded as direct hire creates a tax treatment mismatch. These errors don't announce themselves — they accumulate quietly until the ATO flags a discrepancy or an employee queries their income statement.

Income type codes determine the tax treatment applied to each payment. Payments coded SAW are generally the basis for the 12% SG calculation. If an earnings component is incorrectly coded — for example, a regular salary payment coded as OSP rather than SAW — the ATO's automated super verification system may flag a discrepancy between reported earnings and super contributions received. 

Alt text: Infographic explaining STP Phase 2 and Payday Super from 1 July 2026 — showing how STP reports OTE and super liability, ATO matches against SuperStream receipts, and the compliance risk difference between quarterly super and Payday Super for Australian SMEs 

Salary sacrifice under STP Phase 2: what changed and why it matters

Salary sacrifice is one of the most commonly misconfigured areas in STP Phase 2 — particularly for SMEs that set up salary sacrifice arrangements informally and never updated their payroll configuration when Phase 2 launched.

The ATO defines an effective salary sacrifice agreement when the employee must agree to permanently forgo the sacrificed salary for the period of the arrangement. Some of the non-cash benefits that can be part of a salary sacrifice agreement include superannuation and other fringe benefits. Employers should discuss with their tax advisors before agreeing with their employees to salary sacrifice certain non-cash benefits, as these payments may attract Fringe Benefits Tax as an extra cost for the employer. 

Under STP Phase 2, you need to report the salary sacrifice amounts and separately include the pre-sacrificed income amounts as follows: Superannuation (S) for superannuation to a complying fund or retirement savings account (RSA), and Other Employee Benefits (O) for benefits other than super. 

As these amounts are deducted from the employee's gross earnings, they are not relevant to the ATO when determining an individual's assessable income. However, Services Australia takes into account salary sacrificed amounts when assessing an individual's eligibility to access social security programs. Therefore, STP Phase 2 modifies the reporting requirements of these amounts. 

The practical implication: if your payroll system is reducing the gross figure by the salary sacrifice amount before reporting to the ATO — which is how many Phase 1 systems worked — your Phase 2 reporting is incorrect. The pre-sacrifice amount must be reported separately, with the sacrifice amount identified by type. This is a configuration change, not just a software update.

Child support garnishee reporting under STP Phase 2

Child support is one of the least-discussed but most technically specific areas of STP Phase 2 compliance. For any employer with a child support garnishee notice in place, the reporting obligations changed with Phase 2.

Child Support Garnishee (G) amounts are those withheld under Section 72A Notice of the Child Support Registration and Collection Act. These amounts are not subject to preserved earnings and can be either the same periodical values or one-off payments. Employers can identify the correct type of child deduction by reviewing the Child Support Notice issued by Child Services Australia. 

STP Phase 2 will only impact the final stage of the Child Support Deduction process: the issuing of the payment remittance. The way STP reports to Child Services Australia is the same as the reporting process for Services Australia. First, the STP pay event is sent to the ATO, and then the ATO reports to Child Services Australia only the employee data that is required to pay child support.

For employers: the key requirement is ensuring the child support deduction type is correctly identified in your payroll system — garnishee (G) versus voluntary deduction — and that the amounts are reported in the correct STP field. Misclassification means the ATO's data passed to Child Services Australia is incorrect, which creates compliance exposure for the employer and payment errors for the employee and their dependants.

STP Phase 2 and Payday Super: why accuracy becomes critical from 1 July 2026

From 1 July 2026, STP will incorporate reporting of both ordinary time earnings (OTE) and total super liability for each employee on every pay run. This is how the ATO will monitor Payday Super compliance. 

From 1 July 2026, your STP report will include both OTE amounts and super liability for each employee. The ATO will match this reported liability against actual super receipts confirmed by super funds via SuperStream. If there is a mismatch — either you reported super was due but it was not received, or the amounts do not align — the ATO will flag it for review or issue an SGC assessment. 

This is the critical connection most Australian SMEs haven't understood yet. Under quarterly super, an STP Phase 2 misconfiguration was a compliance problem but not an immediate financial one. The ATO saw incorrect income type disaggregation in the STP data but could not directly cross-reference it against super payment timing — because payment timing under quarterly reporting was verified only four times per year. Under Payday Super from 1 July 2026, that changes completely. The ATO uses STP Phase 2 data to monitor super payments in near real-time. 

The OTE status of allowances is the critical super compliance dimension. An allowance coded OD (Other) that is genuinely a qualification allowance (QN, OTE-inclusive) means the SG base is understated for that employee on every pay event it occurs. Multiplied across 52 weekly pay runs under Payday Super, the cumulative shortfall and resulting SGC exposure is material. 

Alt text: Infographic showing the 5 mandatory STP Phase 2 fields every Australian SME must report — Employment Category, Income Type, Tax Treatment, Disaggregation of Gross, and Sacrifice Type — with a warning that incorrect mapping creates compliance risk and ATO penalties 

STP Phase 2 for micro employers: what the rules say

STP Phase 2 applies to all Australian employers — including micro employers with fewer than five employees. The ATO has not provided any exemption from Phase 2 reporting requirements based on employer size.

What does exist for micro employers is a quarterly reporting option — the ability to report STP data quarterly rather than on each pay event — but this applies only to employers who meet the ATO's micro employer definition and have been granted this concession. It is not automatic, and it does not exempt the employer from the disaggregated reporting requirements of Phase 2. The same mandatory fields, the same income type codes, and the same allowance reporting requirements apply regardless of whether the report is lodged weekly or quarterly.

If you are still using a manual spreadsheet for payroll in 2026, you are likely failing the STP Phase 2 reporting requirements. The ATO requires data to be sent through a digital service provider. For micro employers still running payroll in Excel, the transition to STP payroll software Australia compliant systems is not optional — it's a prerequisite for any compliant reporting. 

The most common STP Phase 2 errors Australian SMEs are making right now

The biggest risk is incorrect payroll mapping: disaggregated gross, allowances, overtime, deductions and child support items must all be reported in the correct STP categories. 

Based on the current compliance landscape, here are the four errors appearing most frequently in Australian SME payroll:

Allowances bundled into gross rather than reported separately. Under Phase 1, lumping a car allowance, tool allowance, and travel allowance into a single gross figure was common. Under Phase 2, each allowance must be coded separately. If your payroll software was updated but your payroll configuration wasn't, this error is almost certainly present.

Salary sacrifice amounts reducing gross before reporting. The pre-sacrifice gross must be reported separately from the sacrifice amount. Many systems configured under Phase 1 logic are still net-reporting the sacrifice, which understates both the gross and the employer's PAYG withholding obligation as visible to the ATO.

Incorrect employment basis codes for casual and labour hire workers. Casual employees rotate between income types and employment categories in ways that permanent employees don't. If your casual payroll hasn't been reviewed since Phase 2 launched, the employment basis codes may not reflect the current workforce correctly.

Termination payments coded under the wrong lump sum type. Lump Sum A, B, D, and E each have different tax treatment. Incorrect coding of a termination payment creates an income statement error for the employee and a potential PAYG withholding discrepancy for the employer.

What good STP Phase 2 compliance looks like — a practical checklist

Run a test reconciliation comparing your STP reported totals to your payroll system totals to identify discrepancies. Confirm your payroll software is updated to handle Payday Super reporting requirements from 1 July. Transition away from the SBSCH to a commercial clearing house before 1 July. Verify employee details including TFNs, super fund details, and employment basis codes are accurate and up to date. Test your super payment process to confirm contributions reach funds within the seven business day window under your normal pay cycle. 

Beyond the technical checklist:

• Employers must finalise by 14 July each year, so employees can access their finalised income information to complete their tax returns. This deadline is fixed — late finalisation affects every employee's ability to lodge their individual tax return on time.

• Every new employee onboarded after Phase 2 requires a full Phase 2 compliant setup from day one — employment category, income type, tax treatment, and super fund details — before the first pay event is lodged.

• Any change to a salary sacrifice arrangement, child support garnishee notice, or employment category during the year requires a payroll configuration update before the next pay run, not at year-end.

How Growwth Partners approaches STP Phase 2 compliance for Australian SMEs

Payroll compliance in Australia has moved from an annual exercise to a per-pay-run obligation. Australian payroll compliance isn't about balancing the books once a year anymore — it's about being accurate every single pay run. 

At Growwth Partners, our payroll services for Australian SMEs cover the full STP Phase 2 compliance stack — payroll configuration audit, income type mapping, salary sacrifice setup, child support garnishee reporting, and end-of-year finalisation by the 14 July deadline.

For SMEs where payroll intersects with tax obligations — PAYG withholding, FBT on salary sacrifice arrangements, SG liability under Payday Super — our taxation services and accounting services work together as a coordinated compliance function, not three separate engagements that don't talk to each other.

If you want to understand what STP Phase 2 compliance has saved Australian SMEs in avoided penalties and administrative cost, our case study on payroll services saving a small business $10K annually walks through a real example.

Conclusion

STP Phase 2 is not a one-time transition. It is the permanent reporting standard for every Australian employer, on every pay run, indefinitely — and from 1 July 2026, it becomes the real-time monitoring mechanism for Payday Super compliance as well.

The SMEs that are exposed are not the ones that never heard of Phase 2. They're the ones that updated their software in 2022, assumed the configuration was correct, and haven't reviewed the payroll mapping since. If your allowances are bundled, your salary sacrifice is net-reported, or your employment basis codes haven't been audited against your current workforce, the compliance gap is already accumulating — one pay run at a time.

Growwth Partners runs payroll compliance engagements for Australian SMEs — STP Phase 2 configuration audits, Payday Super readiness, and ongoing managed payroll services, senior-only delivery, and a free 30-minute strategy call. [Book the call →]