Payroll

STP Phase 2 Australia: Small Business Guide (2026)

15 June 2026 · 9 min read

Quick Answer

STP Phase 2 requires Australian employers to report more detailed payroll data to the ATO each pay run — including income types, disaggregated gross pay, and child support. Most employers were required to transition by 1 March 2023, but compliance gaps remain. With Payday Super arriving 1 July 2026, your STP reporting must be airtight or you risk cascading penalties.

Single Touch Payroll Phase 2 (STP Phase 2) is not a new idea — the ATO began rolling it out in January 2022. But walk into almost any small business running payroll in Australia today and you'll find at least one STP Phase 2 reporting field that is wrong, missing, or misunderstood. That gap is about to become expensive.

From 1 July 2026 — 16 days away as of this writing — Payday Super takes effect. Every employer must pay superannuation on the same day as wages, and that super payment must reconcile with your STP data. If your STP Phase 2 reporting has errors in income type codes, disaggregated gross, or employment basis fields, your super data will not match, and the ATO will notice. The ATO's own guidance states that STP data is the primary mechanism for verifying Payday Super compliance.

This guide covers every STP Phase 2 requirement that matters for sole traders, micro-employers, and small businesses in Australia. We explain what changed from Phase 1, which fields trip up small business owners most often, what the penalties look like, and how to audit your own setup before the 1 July 2026 deadline hits.

What Is STP Phase 2 and How Is It Different from Phase 1?

Single Touch Payroll was introduced in Australia in 2018 for large employers and extended to all employers (including those with one employee) from 1 July 2019. That was Phase 1. It required employers to report gross wages, tax withheld, and superannuation to the ATO digitally, every pay run, through STP-enabled payroll software.

STP Phase 2 expanded the data set significantly. Instead of reporting a single gross figure, employers must now disaggregate pay into specific income components — gross salary, allowances, overtime, bonuses, directors' fees, lump sum payments, and more — each reported as a separate line item. The ATO uses this disaggregated data to pre-fill tax returns, verify super obligations, assess welfare entitlements through Services Australia, and now, from 1 July 2026, verify Payday Super compliance in near real time.

The mandatory start date for Phase 2 was 1 January 2022 for most large employers, with most payroll software providers receiving deferrals that pushed the practical deadline for small business to 1 March 2023. If you are still running payroll and have not confirmed your software is Phase 2-compliant, you are already out of compliance. The ATO has been running a soft enforcement posture on late transitioners, but that posture changes once Payday Super is live.

ATO reference: STP Phase 2 employer reporting guidelines — ato.gov.au/stp-phase-2. The ATO has confirmed that STP data will be the primary verification mechanism for Payday Super from 1 July 2026.

Phase 1 vs Phase 2 — what changed:

Phase 1: Report gross wages, PAYG withholding, and super per pay run
Phase 2: Disaggregate gross into specific income types per ATO tax treatment codes
Phase 2: Report employment basis (full-time, part-time, casual, labour hire)
Phase 2: Report child support deductions and garnishees directly to the ATO
Phase 2: Report income stream collections (salary sacrifice, reportable fringe benefits)

The 6 STP Phase 2 Fields That Small Businesses Get Wrong

The most common STP Phase 2 errors in small business payroll fall into six categories. Each one has a downstream effect — wrong tax pre-fill for your employees, incorrect super calculations, or a mismatch flag from the ATO when Payday Super data is cross-checked.

The first is income type codes. STP Phase 2 introduced a set of income type identifiers: SAL (salary and wages), CLO (closely held payee), VOL (voluntary agreement), LAB (labour hire), SWP (salary sacrifice), and others. Most small business software defaults to SAL, which is correct for regular employees — but if you pay a family member through your business, a contractor under a voluntary PAYG agreement, or a labour hire worker, the code must be changed manually. Reporting SAL for a closely held payee is an error that the ATO specifically audits.

The second common error is disaggregated gross. Under Phase 1, you reported one gross figure. Under Phase 2, you must split that gross into: ordinary time earnings, overtime, bonuses and commissions, directors' fees, and allowances (each allowance type coded separately — travel, tools, meals, laundry, and so on). If your payroll software is lumping all allowances into one line, or rolling overtime into ordinary time earnings, your data is non-compliant. The third error involves employment basis. You must declare whether each employee is full-time, part-time, casual, or on a labour hire arrangement. This field directly affects how Services Australia assesses welfare payments, so the ATO takes incorrect classifications seriously.

If you pay a family member or business partner through payroll, the CLO (closely held payee) income type is mandatory. Reporting them as SAL is a misclassification the ATO flags during review.

The 6 fields most likely to have errors in your STP Phase 2 data:

Income type codes: SAL, CLO, VOL, LAB — must match the actual payee relationship
Disaggregated gross: overtime, bonuses, allowances must each be separate line items
Employment basis: full-time, part-time, casual, labour hire — one per employee
Allowance type codes: travel (CD), tools (TD), meals (MD), laundry (LD) — each separate
Child support: if a garnishee order exists, it must be reported via STP, not just processed
Salary sacrifice: pre-tax super contributions must appear as a separate STP income stream

Who Must Comply and What Are the Deadlines?

Every employer with an Australian Business Number (ABN) who pays salary, wages, or super to at least one person must comply with STP Phase 2. This includes sole traders with employees, companies, trusts, and partnerships. It also includes micro-employers — those with 1 to 4 employees — who were previously allowed to report quarterly rather than per pay run. As of 1 July 2023, the quarterly reporting concession for micro-employers ended for most payroll software users. If your software submits per pay run, you must submit per pay run.

The original STP Phase 2 mandatory start date was 1 January 2022 for large employers (20 or more employees) and 1 March 2023 for all other employers. Most payroll software providers — Xero, MYOB, QuickBooks, KeyPay — received individual deferrals from the ATO, which is why many small businesses were still transitioning through mid-2023. If your software provider told you they received a deferral on your behalf, that deferral has now expired. You are expected to be fully Phase 2-compliant today.

With 16 days until 1 July 2026 and Payday Super going live, the timing is critical. The ATO has confirmed it will use STP Phase 2 data to verify that super is paid on the correct day, to the correct fund, for the correct amount. Any STP data errors — particularly in income type or disaggregated gross — will create reconciliation failures that trigger ATO reviews. Now is the time to run a compliance audit, not after the first Payday Super lodgment fails.

ATO deadline reference: STP Phase 2 transition was required by 1 March 2023 for small employers. Deferrals granted to software providers have expired. If you are not yet reporting Phase 2 data, contact the ATO or your software provider immediately — ato.gov.au/stp.

STP Phase 2 and Payday Super: Why These Two Connect Directly

Payday Super — effective 1 July 2026 — requires employers to pay superannuation on or before the same day as wages, instead of the current quarterly cycle. The ATO will enforce this using real-time data matching between your STP payroll submissions and the super clearing house or fund receipt timestamps. For that matching to work, your STP Phase 2 data must be accurate.

Here is the specific connection: the ordinary time earnings (OTE) figure you report in STP Phase 2 is the figure the ATO uses to calculate your minimum super guarantee obligation. Under the current 12% SG rate (in place since 1 July 2025), your employer super contribution must equal at least 12% of each employee's OTE. If your STP data is lumping overtime into OTE, you are over-reporting the super base and potentially over-contributing — or if you are under-reporting OTE by missing allowances that count as OTE under the Superannuation Guarantee (Administration) Act 1992, you are under-contributing and exposed to the Superannuation Guarantee Charge (SGC).

The SGC is not just the missed super amount. It includes an administration charge of $20 per employee per quarter, nominal interest at 10% per annum on the shortfall, and it is not tax-deductible — unlike on-time super contributions. A small reporting error in STP Phase 2 that causes a consistent super shortfall across 12 months can result in a SGC liability that far exceeds the original error. Get your OTE classification right before 1 July 2026.

Fair Work and ATO reference: Ordinary time earnings under SG legislation excludes overtime but includes most allowances, shift loadings, and leave payments. Confirm your OTE classification with your accountant or the ATO's OTE checklist before 1 July 2026.

Key numbers connecting STP Phase 2 to Payday Super:

SG rate from 1 July 2025: 12% of ordinary time earnings (OTE)
Payday Super from 1 July 2026: super must clear on the same day as wages
ATO will cross-reference STP Phase 2 OTE data with super fund receipts
SGC penalty for shortfalls: missed amount + $20 admin fee + 10% interest, non-deductible
Allowances that count as OTE: most allowances except those for expenses incurred

How to Audit Your STP Phase 2 Setup in Under an Hour

You do not need an accountant to run a basic STP Phase 2 compliance check. Log in to your payroll software and navigate to your STP or payroll reporting settings. The first thing to verify is your software's Phase 2 status — look for a label that says 'STP Phase 2 enabled' or equivalent. If it says Phase 1, or if you cannot find the label, contact your software provider today.

Next, pull up one recent pay run and check the data fields being submitted. You should see separate lines for ordinary time earnings, any overtime paid, and any allowances — not a single gross figure. Click into each employee record and confirm their income type code is set correctly (SAL for standard employees, CLO for closely held payees). Check that employment basis is set to full-time, part-time, or casual as appropriate. If any of these fields are blank or defaulting incorrectly, fix them before your next pay run submission.

Finally, run a year-to-date STP summary report and cross-check the total ordinary time earnings figure against your super contribution records. Multiply total OTE by 12% and compare it to what you have actually paid into the super fund. If the numbers do not match within a rounding margin, you either have an OTE classification error or a missed contribution. Both need to be resolved before 1 July 2026 — after that date, the ATO's Payday Super monitoring system will flag any mismatch in near real time.

Deadline: Any super shortfall identified in your audit should be paid before 30 June 2026 to remain tax-deductible. After 1 July 2026, late payments become SGC liabilities — non-deductible and subject to the 10% nominal interest charge.

6-step STP Phase 2 audit checklist:

Step 1: Confirm your software shows 'STP Phase 2 enabled' in reporting settings
Step 2: Open a recent pay run — verify disaggregated gross lines are present
Step 3: Check income type codes for every employee (SAL, CLO, VOL, LAB)
Step 4: Verify employment basis is set correctly for each employee
Step 5: Run YTD report — multiply total OTE by 12% and compare to super paid
Step 6: If numbers do not match, lodge a super catch-up payment before 30 June 2026

STP Phase 2 for Sole Traders and Micro-Employers: What Is Different

If you are a sole trader with no employees, STP does not apply to you — sole traders cannot pay themselves a salary through payroll, and owner drawings are not reportable under STP. However, if you have even one employee — including a casual worker or a family member — STP Phase 2 applies in full from the first pay run.

Micro-employers (1 to 4 employees) previously had a concession that allowed quarterly STP reporting rather than per-pay-run reporting. The ATO offered this to reduce the administrative burden on very small operations. As of 1 July 2023, this quarterly reporting concession is only available if your payroll software cannot support per-pay-run STP reporting — which effectively means it applies to manual STP reporters only. If you use any mainstream payroll software, you are expected to report each pay run as it happens.

For closely held payees — a family member employed in a family business, or a director who is also a shareholder — there is still a separate reporting concession that allows up to quarterly reporting. But you must use the CLO income type code, and you must still meet super guarantee obligations on time. Under Payday Super from 1 July 2026, even closely held payee super must clear on payday. The concession is for STP reporting frequency only, not for super payment timing.

ATO definition: A closely held payee is an individual directly related to the entity from which they receive payments — for example, a family member of a family business, or a director-shareholder. They require the CLO income type code in STP Phase 2 and have specific reporting concessions. See ato.gov.au/closely-held-payees.

SAB Account AI handles STP Phase 2 reporting, disaggregated gross calculations, and Payday Super-ready payroll in one place — built for Australian small businesses and sole traders.

SAB Account AI — ATO-compliant invoicing and payslips for Australian small businesses. From $9/mo.

Start free trial

Frequently asked questions

Is STP Phase 2 mandatory for all Australian employers in 2026?

Yes. STP Phase 2 has been mandatory for all employers since 1 March 2023. If you have even one employee and use payroll software, you must be submitting disaggregated Phase 2 data every pay run. Contact your software provider or the ATO if you are unsure whether your current setup is Phase 2-compliant.

What happens if I have not yet transitioned to STP Phase 2?

You are currently non-compliant and the ATO can issue failure-to-lodge penalties, which start at one penalty unit ($313 as of 2026) per 28-day period for small businesses. More importantly, with Payday Super starting 1 July 2026, non-compliant STP data will cause immediate mismatches in super verification. Contact your payroll software provider today to confirm Phase 2 status and lodge any outstanding corrections.

What is the difference between gross wages and ordinary time earnings (OTE) in STP Phase 2?

Gross wages is the total amount paid to an employee before tax. Ordinary time earnings (OTE) is the subset of gross wages used to calculate the super guarantee — it includes base salary, most allowances, leave pay, and shift loadings, but excludes overtime payments. Getting this distinction wrong in your STP Phase 2 data leads to incorrect super calculations, which creates either an over-contribution or a SGC liability.

Do I need to report allowances separately in STP Phase 2?

Yes. STP Phase 2 requires each allowance type to be reported as a separate coded line item — travel (CD), tools (TD), meals (MD), laundry (LD), and others. You cannot lump all allowances into one figure as was acceptable under Phase 1. The ATO uses these separate allowance codes to pre-fill employee tax returns accurately.

How does STP Phase 2 connect to the 1 July 2026 Payday Super deadline?

Payday Super requires employers to pay super on the same day as wages from 1 July 2026, and the ATO will verify compliance by matching your STP Phase 2 OTE data against super fund receipt timestamps. If your STP data has incorrect OTE figures or income type codes, the ATO's automated matching will flag a discrepancy, triggering a review. Getting STP Phase 2 correct now is a prerequisite for Payday Super compliance.