Deep dive: Single Touch Payroll Phase 2: The importance of accurate payroll system mapping

Deep Dive - Single Touch Payroll Phase 2: The importance of accurate payroll system mapping

by Shane Pinto

22 August 2022

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As Single Touch Payroll Phase 2 (STP2) deferrals approach expiry, organisations are reviewing the key processes that will have an impact on their STP2 implementation project.

From our discussions and feedback with organisational stakeholders (such as Payroll, HR, Tax and Finance), most are aware that STP2 implementation requires a pay code mapping exercise, but are not always clear on what the focus should be and why accurate mapping is so important.

Key STP2 changes - Disaggregation of “gross”

To properly appreciate the importance of accurate pay code mapping, it is useful to reflect on changes to STP2 reporting; one of the key developments in STP2 is more granular income reporting, referred to as the disaggregation of “gross”. This will not only have an impact on what is reported to the ATO, it will also change what employees see in the end of year Income Statement and what other Government agencies (such as, Services Australia) have access to.

Prior to STP2, most pay items were grouped together and reported as “gross”, notwithstanding that some of these have distinct profiles. In STP2, there are now 36 separate reporting labels, where each label has a specific taxation and superannuation profile. Further, they are also given a specific profile from Services Australia, to assist in determining an individual’s eligibility to income-tested government payments and benefits.

Therefore payroll system pay codes reporting to those labels must align to that profile to ensure uniformity. For example, for superannuation purposes, the “Other Paid Leave” and “Cash Out of Leave in Service” labels are classified as Ordinary Time Earnings (OTE) and superable, while all other leave type labels are classified as not OTE; for Services Australia purposes, “Allowance” labels are classified as either “expense allowances” or “employment income”, with the latter utilised to pre-fill income reporting statements; etc.

Pay code mapping for STP2 - What should be reviewed?

STP2 relies on a new set of data points that have completely different tax, superannuation and Services Australia profiles, each of which can have an impact on employees. This means that care needs to be taken when payroll system pay codes are assigned to a STP2 label, given this impact and the organisation’s compliance and risk profile with the regulator.

Below we have set out a methodology to enable a successful transition into STP2:

• Mapping from industrial instruments

The number of differing entitlements within an industrial instrument can mean that, at a pay code level, the nature of a transaction may not be readily apparent. Therefore, a review of the underlying industrial instrument to ascertain the nature and purpose of each payment type (e.g. core payment, overtime, penalty, allowance) is fundamental. This analysis then will provide an understanding of the codification in the payroll system.

For example, at a payroll system level, is pay code “1234: Electric Allowance” paid for relevant electrical work (likely reported as a “Task Allowance” in STP2) or is it paid for obtaining or maintaining an electrical licence (likely a “Qualification and Certification Allowance” in STP2). Relevantly, Services Australia treats a “Task Allowance” as “employment income”, but not so a “Qualification and Certification Allowance”.

• Pay code configuration for pay-as-you-go withholding and superannuation guarantee (SG)

As noted, the STP2 labels each have a particular tax and superannuation profile and therefore it is paramount that the payroll system configuration aligns to STP2 reporting. 

For example, if an employer mistakenly configures a non-superable pay code to a superable STP2 label, this mismatch could show as an SG shortfall. 

Relevantly, employers should expect there to be more ATO oversight and scrutiny on SG compliance utilising STP2 reporting, which further stresses the importance of reviewing payroll system configuration and ensuring alignment in STP2 reporting (see PwC Article: What’s emerging? Auditor-General report on SG administration - ATO response and what employers should expect).

• STP2 label mapping

Once entitlements have been mapped from industrial instruments and pay codes have been reviewed for tax and SG coding purposes, organisations will need to allocate their pay codes into the correct STP2 labels. 

Given the limited number of labels to cover all pay codes, this will require a deep understanding of both an employer’s business and ATO’s expectations. Allowances (which now comprise 14 separate reporting labels in STP2) have been identified by the ATO as one of the areas of greatest error.

Finally, a significant area of complexity arises where a payroll system rolls-up a number of payments into an “all-purpose” single amount. The ATO has confirmed that the underlying payments that are rolled-up must be separated for STP2 reporting. This complexity increases where payments are rolled-up across several industrial instruments. In such instances, employers may need to consider the impact on the STP2 implementation timeline, including the necessity of seeking a deferral as early as practicable. 

Having a clearly defined implementation plan surrounding pay code mapping should be a key focus of employers’ STP2 implementation projects. The effort, resourcing and time for this exercise should not be underestimated and, even if there is time to run before a deferral expires, it is important that organisations are clear on their execution of this key aspect to implementation. 

For any questions, please contact your PwC Employment Taxes or Payroll Advisory specialist.