STP Phase 2 Requirements Explained — What Australian Employers Need in 2026

STP Phase 1 vs Phase 2 — the practical difference

Phase 1 asked you to report total gross wages as a single number per pay run. Phase 2 asks you to break that total down into its components. It's the difference between "I paid Jane $1,500" and "I paid Jane $1,200 base salary + $200 overtime + $100 tool allowance."

Why? The ATO wants enough detail to:

• Pre-fill more of your employees' tax returns automatically
• Share income data with Services Australia (Centrelink) to reduce double-reporting
• Enforce targeted rules (e.g. only certain allowances are tax-free)

The Phase 2 disaggregated income components

Every pay run must report each of these separately where applicable:

• Gross payments (base salary/wages — not holiday, not leave)
• Paid leave (cash-out, unused, ancillary/defence, other paid)
• Allowances — itemised by type (car, travel, tool, uniform, meal, other)
• Overtime
• Bonuses and commissions
• Directors' fees
• Back pay (lump sum payments related to prior periods)
• Return to work payments

If your payroll software is reporting a single "gross" number in 2026, it's wrong.

Tax treatment codes

Phase 2 introduced a 6-character tax treatment code per employee that replaces the old tax scale number. The code encodes:

• Residency (resident, working holiday maker, foreign resident, seasonal worker)
• Tax-free threshold claimed
• Medicare levy exemption / surcharge
• Study loan obligations (HELP, SFSS, TSL)
• Tax offset entitlements

Example: RTSLSL = Resident, Tax-free threshold, Study and training support loan, regular. A previous Scale 2 employee with a HELP debt would now be RTSLSR (R suffix = regular weekly/fortnightly/monthly).

Things software commonly gets wrong

1. Year-to-date reporting fails at mid-year changes

If an employee gets a pay rise mid-year, YTD totals must still reflect the full year. Some software recalculates from the rate change forward, producing incorrect YTD sums. Check that your software treats YTD as a cumulative total, not a rate × period calculation.

2. Allowances lumped into "other"

Phase 2 wants specific allowance types. "Other allowances" is a catch-all that signals to the ATO your software doesn't know what it's reporting. Use specific types (travel, tool, etc.) wherever possible.

3. Salary sacrifice reported net instead of gross

If an employee salary-sacrifices $200/week into super, you report the full gross ($1,200) AND the salary sacrifice component ($200) separately. Reporting $1,000 net breaks the year-end reconciliation.

4. Lump sums not categorised

Back pay, lump sum A (redundancy), lump sum B (long-service), lump sum D (ETP tax-free) each have specific reporting codes. A general "bonus" line is insufficient.

What your software needs to expose

Before you trust your payroll system for Phase 2, confirm it:

1. Reports each income component separately per pay run
2. Generates the 6-character tax treatment code per employee
3. Tracks YTD per component, not just total gross
4. Handles common allowance types with correct tax treatment
5. Handles salary sacrifice gross + reduction components
6. Exports structured STP data (usually JSON) that a registered DSP can submit

DSPs and the last-mile problem

The ATO doesn't accept payroll submissions directly from just any software. Submissions go through a Digital Service Provider (DSP) — a registered intermediary that has been assessed by the ATO. Your payroll software produces the structured STP data; the DSP submits it on your behalf.

Your accountant is often a DSP or has a DSP relationship. Alternatively, cloud payroll services (Xero Payroll, MYOB, QuickBooks, BBN Accounting) can function as DSPs or have partnerships. Check that your submission path is registered before the end of a quarter, not the day before the deadline.

Common Phase 2 audit findings

From practical experience with ATO audits of Phase 2 submissions:

• Allowances under-reported (using "other" instead of specific types)
• Employee TFN missing (reported as 111-111-111, the "no TFN" placeholder, when the employee has actually provided one)
• Director's fees reported as regular wages (wrong tax treatment)
• YTD totals not matching year-end summaries
• Tax withheld doesn't match the tax treatment code formula (usually a data entry issue)

How to audit your own Phase 2 submissions

After every pay run, export the STP submission data and spot-check:

1. Does each employee's gross match your payroll summary? Same number, different label = fine; different number = bug.
2. Are allowances itemised or bundled?
3. Is the tax treatment code correct for each employee (especially HELP debt holders)?
4. YTD totals: sum your prior submissions — do they match the current YTD field?

A 5-minute check after each pay run catches 95% of issues before they become an end-of-year reconciliation nightmare.

BBN Accounting's approach

BBN Accounting implements STP Phase 2 natively:

• Per-employee tax treatment code generation
• Disaggregated income reporting (base, overtime, bonuses, director fees, allowances, salary sacrifice)
• YTD aggregation as a cumulative total, not a recalculated rate
• Structured JSON export for DSP submission
• Spot-check reports after each pay run
• Encrypted TFN storage (AES-128-CBC + HMAC-SHA256) — critical given Phase 2 transmits TFN more often than Phase 1

See BBN Accounting · Xero comparison

References

• ATO — STP Phase 2 overview (official)
• ATO — reporting the amounts you have paid