Single Touch Payroll Phase 2:

Pay Items
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Single Touch Payroll Phase 2 changes will be rolled out across the Xero platform in three stages. This
information pack covers stage two, transitioning your existing pay items, and will help you prepare your
payroll data in Xero to meet the new reporting requirements for STP Phase 2. It covers what you need to
know, what you need to update and answers common questions to help you get ready.

About Single Touch Payroll

Single Touch Payroll or STP is an Australian government initiative to reduce the compliance burden on
businesses who report pay details to multiple government agencies. Businesses can report pay details
directly to the ATO using STP enabled software. Xero has secured a deferral on the compliance date with
the ATO until 31 March 2023 for all Xero customers lodging STP through Xero Payroll.

STP Phase 2
STP Phase 2 makes data available to additional government agencies. The information required as part of
your STP submission will be more granular and cross functional across the government agencies, with the
intention of reducing the amount of separate reporting that needs to be completed.

Changes to Xero for STP Phase 2

We’re making changes to Xero Payroll to help you meet these new reporting requirements. These changes
will be rolled out across the Xero platform in three stages throughout the year, with stage one and two
changes already available in Xero Payroll:
• Stage one: This stage of the transition to STP Phase 2 is live now, you must update your existing
payroll employee profiles first to meet the new Phase 2 filing criteria.
• Stage two: New earnings categories are available in Xero Payroll so you can identify and update pay
items with the new earnings categories for STP Phase 2.
• Stage three: Paid leave will be broken down
into additional subcategories. We’ll let you
know when this stage is available in Xero
Payroll.
Ok

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Pay Items
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Stage two: replace your pay items

What you need to know
STP Phase 2 requires you to report the individual components that make up an employee’s pay, rather
than reporting just a single gross amount. You will now report on the following individual components:
• Gross • Allowances • Lump sum payments
• Bonuses and commissions • Salary sacrifice • Paid parental leave
• Directors’ Fees • Overtime • Workers’ compensation

Disaggregating Gross
Phase 1 Phase 2
STP Phase 1 - you report an aggregated STP Phase 2 - moves to a model of reporting
total of YTD gross income amounts. disaggregated gross income, aligned to the way
different payment types are categorised.

$ Directors’
Gross Worker’s
compensation
Fees
Allowances
payment
Paid leave
Overtime
Bonuses
Commissions Bonuses and Salary
Commissions Gross sacrifice
Directors’ Fees Allowances
Lump Sum W
Salary sacrifice
Lump sum
Overtime Paid leave
payments
Overtime

Xero has built a transition tool that will assist you with seamlessly replacing your existing pay items with
new pay items to meet STP Phase 2 reporting requirements.
We’ve been rolling-out changes to Xero Payroll for a while in preparation for STP Phase 2, it’s likely some
of your pay items may already have the correct reporting category assigned. If so, these pay items do not
need to be replaced.
We recommend reviewing your pay items carefully to ensure they have the appropriate earnings categories
assigned. If you have all purpose allowances to be updated, check out this Xero Central link.
Important: You need to update your existing employee profiles (Stage one) before you update pay items
(Stage two).

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Stage two checklist

Remove draft pay runs as you won’t be able to replace
TIP a pay item if it’s included in a draft pay run.

TASK COMPLETE N/A

UPDATE PAY ITEMS

Click Payroll, Single Touch Payroll, then STP Phase 2 to access the STP portal. You’ll see an
overview of the key steps to updating your payroll data to be STP Phase 2 compliant.

Under ‘Step 2. Replace pay items’, click Replace pay items.

Important: You must update all employee profiles first (step 1), and mark that step as
complete before commencing with Step 2.

In the Pay items tab, review the Earnings Category column to check each pay item (Earnings
Name column) has the correct earnings category assigned to it based on the new STP Phase 2
requirements e.g Ordinary hours has a category of Ordinary Time Earnings.
To replace a pay item, click the overflow menu (three dots) and select Replace to start
the transition tool. Update each pay item one at a time to assign the appropriate earnings
categories.
The following types of income need to be replaced with the appropriate earnings categories for
STP Phase 2:
• Allowances
• Bonuses and commissions
• Directors’ fees
• Paid parental leave
• Overtime
• Lump sum W and E payments
• Workers’ Compensation payments
Note: You can’t replace a pay item if it is included in a draft pay run.
From the drop down menu, select the appropriate earnings category for the selected pay item.
Then, select Next.

Any pay templates that use the replaced pay item needs to be updated. Select the tick boxes
next to any employees that use these pay templates so Xero can automatically update these
with the new pay item. Select Next.

Review the updates and click Confirm to replace the pay item and update the pay templates.

Click Pay item settings to go back to the Pay items tab and follow the same until all relevant
pay items have been replaced and the correct earnings categories assigned.

Once you’ve updated all existing pay items, go to Payroll, Single Touch Payroll, then STP
Phase 2 to access the STP portal. Under Step 2 Replace pay items select Mark as done.

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FAQS

STP Phase 2
When do I need to be STP Phase 2 compliant?
Xero has secured a deferral on the compliance date with the ATO until 31 March 2023 for all Xero
customers lodging STP through Xero Payroll. Changes will be rolled out across the Xero platform in three
stages throughout the year to help you meet this deadline.

What isn’t changing to the way I report in STP Phase 2?

While you will need to report additional information in your STP report, there are many things that aren’t
changing, such as:
• The way you lodge your STP report.
• When STP reports are due. They are still due on or before pay day unless you are eligible for a
reporting concession.
• The types of payments that are in-scope for STP reporting.
• Taxation and superannuation obligations.
• End of year finalisation requirements.

Who has to comply with STP Phase 2?

All Australian businesses making payroll payments will need to report on the additional data required for
STP Phase 2.

Can I start submitting tax number declaration forms through Xero?

When Xero Payroll is STP Phase 2 ready, STP filings will act as the ‘notification’ of the TFN declaration to
the ATO. Until that time you will need to continue transmitting the declaration to the ATO. Your obligation
to retain and secure a signed TFN declaration on file does not change.

I only recently converted to Xero – can I still

receive the deferral?
Yes, all customers reporting STP through Xero Payroll are
eligible for the deferral date of 31 March 2023.

Is there an ATO guide for employers?

Yes, the ATO has detailed information on STP Phase 2
changes here.

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Where can I find ATO deferral evidence?

You can download the deferral evidence letter from the Single Touch
Payroll page in Xero
1. From the Payroll menu, select Single Touch Payroll
2. Select the STP Phase 2 tab
3. Click Read the ATO deferral to download a copy of the letter

Is there a way to update my payroll data in bulk?

Due to the complexity of STP Phase 2, Xero hasn’t been able to build an option to update payroll data in
bulk. We’ve focused on changes that make your STP Phase 2 transition as easy as possible, from updating
employee records, applying the correct earnings categories to pay items and breaking down leave types.

Will this change how I report STP data to the ATO right now?
Not yet – all Xero Payroll customers will continue to report STP Phase 1 for the time being. The roll out
of STP Phase 2 pay items and updates to the employee setup process in Xero Payroll will not affect
reporting or any YTD values sent to the ATO.
Xero Payroll will continue to report employees’ pay as a gross amount until you have completed all three
stages of the STP Phase 2 transition.

I’ve noticed some other new additions in payroll relating to Phase 2 – can I
use them now?
Not yet – all Xero Payroll customers will continue to report STP Phase 1 for the time being. The roll out
of STP Phase 2 pay items and updates to the employee setup process in Xero Payroll will not affect
reporting or any YTD values sent to the ATO.
Xero Payroll will continue to report employees’ pay as a gross amount until you have completed all three
stages of the STP Phase 2 transition.
• Bonuses and commissions: Previously these were reported as part of gross payments, but will need to
be reported separately for STP Phase 2.
• Directors’ Fees: These must now be reported separately for STP Phase 2.
• New allowance types: Allowances for task, tools or qualifications must be reported under new labels
in STP Phase 2.
• Lump sum W (return to work) payments: A return-to-work amount is paid to encourage an employee
to return to work – this was previously reported as part of gross payments.
• Lump sum E payments: A lump sum payment for back pay from previous income years.
You can now add a reason for termination to an employee’s record, removing the need for an employment
separation certificate to be issued.

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As leave needs to be reported separately, can I enter leave opening balances

into Xero with STP Phase 2?
Yes, we’ll make changes to allow leave opening balances to be added to the employee opening balances
page.

What impact will switching from STP Phase 1 to STP Phase 2 reporting in the
middle of the financial year have on aggregated and disaggregated earnings
amounts?
As Xero’s payroll users will be moving to STP Phase 2 reporting within a financial year, there will be both
aggregated and disaggregated earnings information. The ATO will not need you to do anything to finalise
the aggregated amounts or retrospectively change the YTD totals for gross or disaggregated earnings.

Where can I find more information?

• Visit the STP2 Portal in Xero Payroll
• Learn more at Xero Central
• Learn more at the ATO

Pay items
When do I have to move my existing pay items to be STP Phase 2 compliant?
We recommend updating and replacing your pay items in Xero Payroll as soon as practicable. To make
the process as simple as possible, use Xero’s pay item transition tool to help you migrate old pay items to
the new STP Phase 2 earnings categories which will automatically update the appropriate employee pay
templates.

I can’t see the Replace option in pay item settings?

You need to complete Stage 1 - updating your existing employee
profiles, once you’ve marked that step as complete in the STP2
Portal the Replace option will become available to you in pay
item settings.

Will I have an audit trail of the pay item

updates?
Yes, when you confirm your pay item updates using the
transition tool, you can download a summary of these updates
as a CSV file.

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What happens to pay items I replace with new STP defined items?
Each existing pay item will be marked as inactive and a new pay item (with the appropriate earnings
category) will automatically update the affected employees’ pay templates. Existing YTD figures for
inactive pay items will now show under ‘Other previous earnings’ on your employees’ payslips.

Does the pay item transition tool automatically update pay items in draft or
unprocessed timesheets?
The transition tool won’t automatically update draft or unprocessed timesheets with the new pay items.
You’ll need to manually replace inactive pay items with the new pay items in each draft or unprocessed
timesheets, or timesheet template.

What allowance types can I now report through STP Phase 2?

The allowance types which will be reported through STP Phase 2 are:
• Car • Laundry • Task
• Transport • Meals • Qualifications allowance
• Travel • Tools • Other (Allowance types not listed)
For more information on defined allowances in Xero Payroll, click here.

Now that allowances and ordinary earnings are reported separately, does
this change how I allocate annual leave and leave loading?
There is no change to your existing leave allocation processes in Xero Payroll. We will be releasing
changes to annual leave and leave loading in the FY23 financial year, and will share more details about
the new process then.

Notes

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