1. Introduction: Why STP Phase 2 Matters Now More Than Ever
Single Touch Payroll (STP) Phase 2 isn’t just an upgrade, it’s a game-changer for Australian employers. Since 1 January 2022, it’s been mandatory for all businesses to report more detailed payroll information to the Australian Taxation Office (ATO) every pay cycle. However, as 2025 rolls in, compliance expectations are higher than ever.
Forget ticking boxes, you’re feeding the ATO, Services Australia, and the Australian Bureau of Statistics (ABS) with integrated data streams. Miss one field? You could trigger audits, delay employee tax returns, or misreport superannuation.
This guide will break it all down for you, what’s changed, how to comply, and how BetterPayroll automates it all with smart, real-time tools. Whether you’re a small café in Brisbane or a national firm with staff in every state, this is your ultimate 2025 roadmap to STP Phase 2 compliance.
2. Expanded Reporting Requirements: What’s New in Phase 2
Under STP Phase 2, employers must disaggregate payments and provide deeper insights into each employee’s income, employment type, and payment categories. It’s not just about total wages anymore.
Here’s What You Now Need to Report:
- Income Types
You must separate salary, bonuses, commissions, allowances (like car or meal), and even parental leave. Why? So, each can be taxed appropriately, some attract PAYG, others don’t. - Employment Details
The ATO now wants to know your employees:- Employment type (Full-time, part-time, casual)
- TFN declaration status
- Termination reason and final date (e.g., redundancy, resignation, dismissal)
- Child Support and Garnishees (Optional)
Reporting court-ordered deductions is now integrated. While optional, this streamlines reporting to Services Australia and reduces admin follow-up.
Why It Matters
If you mislabel an income type, say, reporting a bonus as regular pay, you could be withholding the wrong tax amount. This may lead to employee underpayments or ATO discrepancies.
BetterPayroll Solution: Income types are auto-categorized, and termination codes are pre-filled. You just confirm the entries, zero manual guesswork.
3. ABS Data Integration: Payroll Meets National Economics
Surprise: The ATO isn’t the only agency using your STP data. The Australian Bureau of Statistics (ABS) now leverages this payroll info to create real-time economic snapshots.
What Is ABS Using STP For?
- Weekly Payroll Indexes: Track job creation, wages, and turnover nationally and by industry.
- Sectoral Trends: Gauge the health of industries like construction, mining, or hospitality.
But not everyone’s data is included.
Exclusions:
- Defence roles
- Owner-Managers of Unincorporated Enterprises (OMUEs)
Warning for Employers
If you misclassify your employees as OMUEs, not only do you skew national data, but you may also be flagged for audit. It’s a subtle but costly mistake.
BetterPayroll Fix: Proper classification tools and smart prompts ensure employees are assigned the correct structure. The system blocks incomplete or invalid setups before submission.
4. Critical Compliance Scenarios Many Ignore
Most payroll platforms barely scratch the surface. Here’s where STP Phase 2 gets tricky, and where many leave you guessing.
1. Remote Workers & Multi-State Teams
- If an employee lives in QLD but is employed by a Melbourne business and works remotely, you must follow QLD payroll and tax rules, not VIC.
- Why? STP must reflect where the work is performed, not where your head office is based.
BetterPayroll Solution: Integrated geotagged timesheets automatically assign payroll codes based on actual work location, ensuring full-state compliance.
2. Microbusiness Exemptions
Running a tiny business with just a few employees? You may qualify for:
- Low-cost STP software (<$10/month)
- Deferrals if moving from manual records
- Exemptions in areas with no reliable internet
But applying for these isn’t intuitive.
BetterPayroll Hack: If you’re eligible, their $8/month microbusiness plan delivers full STP Phase 2 compliance, including super automation and mobile app support.
3. Closely Held Payees
These are your:
- Family members
- Business directors
- Trust beneficiaries
You only need to report taxable payments, not dividends or loans.
Common Mistake: Businesses over-report, wasting hours on entries that don’t need STP declaration.
BetterPayroll Advantage: You can tag payees as “closely held” and set up reporting only when required. The system then auto-hides non-STP-relevant transactions.
5. Advanced Automation with BetterPayroll
Automation isn’t just about saving time, it’s your safety net from ATO errors, audit flags, and data entry fatigue. Here’s how BetterPayroll automates your STP Phase 2 obligations:
1. Real-Time Compliance Alerts
- Flag mismatches between GST credits and reported income
- Reminds you of BAS deadlines so you never miss them (and get hit with $222/month penalties)
2. Seamless Software Integrations
- ATO Portal Sync: Reports are sent automatically with every pay run
- Super Funds (via BEAM): Auto-track payments and contributions
- Accounting Tools (BetterPayroll): Reconciles reports in real time, no need for double data entry
3. Employee Self-Service Portals
Your team doesn’t need to call HR for payslips or summaries anymore. They can:
- Download payslips, summaries, and leave balances
- View income statements directly from myGov marked “Tax Ready” post-finalization
BetterPayroll Bonus: The mobile portal can be white-labeled with your brand, making your payroll look premium and polished.
6. STP Phase 2 Penalties: What Non-Compliance Really Costs in 2025
Under STP Phase 2, the Australian Taxation Office (ATO) has ramped up enforcement, and penalties for late or incorrect payroll reporting can be harsh. Suppose you miss or delay your STP submissions. In that case, you’ll face a fine of $210 for every 28 days overdue, with caps based on business size, up to $1,050 for small businesses, $2,100 for medium entities, and a staggering $5,250 for large businesses. That’s per lodgement, not annually. But it doesn’t stop there, if you fail to lodge your Superannuation Guarantee (SG) Charge Statement within a month of a missed super payment, you risk a Part 7 penalty of up to 200% of the unpaid amount, plus 10% interest and a $20 administration fee per employee per quarter. Unlike regular business expenses, these penalties are non-deductible and can escalate into director penalty notices if ignored. The ATO’s early leniency for Phase 2 transition errors has ended, and enforcement is now stricter than ever. To stay penalty-free, businesses must use STP-compliant payroll software that ensures accurate reporting of disaggregated income types, employment status, tax codes, and super payments, all automated and filed on time.
STP Phase 2 Penalties Overview
| Non-Compliance Type | Penalty |
| Late STP Submission | $210 per 28 days overdue |
| Max Penalty (Small Business) | $1,050 per lodgement |
| Max Penalty (Medium Entity) | $2,100 per lodgement |
| Max Penalty (Large Entity) | $5,250 per lodgement |
| SG Statement Late Lodgement | Up to 200% of SG liability |
| SG Interest | 10% annually on unpaid super |
| Admin Fee | $20 per employee per quarter |
| Tax Deductibility | Penalties are not tax-deductible |
| Director Penalty Notice | Possible for unresolved SG underpayments |
7. Conclusion: What’s Next for Your Payroll Team in 2025?
STP Phase 2 isn’t just a box-ticking exercise, it’s a compliance evolution that connects your payroll data to national systems tracking tax, welfare, and the economy. That means mistakes aren’t private anymore; they show up in ATO systems, Services Australia reports, and ABS dashboards.
If you’ve been relying on outdated tools, manual spreadsheets, or other basic software, 2025 is your call to upgrade. With BetterPayroll, you get:
- Automated categorization of income
- Real-time ATO syncs
- Geolocation-based payroll for multi-state compliance
- Smart alerts to avoid penalties
- Custom tools for closely held payees and microbusiness exemptions
STP Phase 2 might feel complex, but with the right system in place, it’s just another task your payroll team crushes every week, without stress, without errors, and audits.
FAQs
1. Is STP Phase 2 reporting optional?
No. As of 1 January 2022, it’s mandatory for all employers in Australia. Non-compliance may result in ATO warnings or financial penalties.
2. What happens if I mislabel income types?
Misclassifying bonuses, commissions, or leave payments can lead to:
- Under-withheld tax
- Incorrect super contributions
- Discrepancies in employee income reports
BetterPayroll prevents this with built-in categorization tools.
3. Can I use Excel spreadsheets to submit STP data?
No. The ATO requires STP-enabled software for submission. Manual records are non-compliant unless you’re approved for a microbusiness exemption.
4. What’s the deadline to finalize the STP for EOFY?
You must finalize all STP reports by July 14 of each financial year, marking them as “Tax Ready” in myGov so employees can lodge returns.
5. How much does STP compliance cost for a microbusiness?
With BetterPayroll’s $8/month plan, even sole traders or businesses with <4 employees can remain fully compliant, cheaper than most cloud software on the market.