Running accurate STP Phase 2 payroll Australia wide requires much more than entering hours worked and clicking pay. Since the Australian Taxation Office expanded Single Touch Payroll into Phase 2, every pay event you submit transmits granular, itemised data directly to both the ATO and Services Australia. Consequently, misconfigured pay items in Xero or MYOB are visible to regulators immediately.
For employers managing staff under modern awards—especially in construction, trades, hospitality, retail, healthcare, and professional services—getting overtime, allowances, and Ordinary Time Earnings (OTE) right protects your business from both Fair Work underpayment claims and Superannuation Guarantee audits. In this guide, our Australian payroll bookkeeping specialists explain how to configure your payroll cleanly.
STP Phase 2 Payroll Australia: What Changed With Disaggregation of Gross Under STP Phase 2?
Under the original STP system, employers simply reported a single combined “Gross Payments” figure to the ATO. However, because different payment types are taxed and assessed for superannuation differently, the ATO’s STP Phase 2 reporting guidelines introduced mandatory disaggregation of gross.
Now, your payroll software must separately itemise:
- Gross Ordinary Earnings: Standard base hours worked.
- Paid Leave: Annual leave, personal/carer’s leave, long service leave, and workers’ compensation absences.
- Overtime: Hours worked outside ordinary span of hours paid at penalty rates.
- Allowances: Categorised into specific ATO allowance codes (Tool, Travel, Motor Vehicle/Cents per km, Laundry, Overtime Meal, Qualification, Task, and Other).
- Bonuses and Commissions: Performance payments reported in their own distinct field.
- Directors’ Fees and Lump Sum Payments: Unused leave on termination, redundancy, and back-pay.
Overtime vs Ordinary Hours: The Superannuation Trap
One of the most common mistakes in STP Phase 2 payroll Australia involves mixing up casual loading or weekend shift penalties with true overtime. Under Superannuation Guarantee Ruling SGR 2009/2:
- Genuine Overtime is NOT Ordinary Time Earnings (OTE): Therefore, true overtime worked beyond an employee’s ordinary hours under their Fair Work award or employment contract generally does not attract the 12% Superannuation Guarantee.
- Shift Loadings and Weekend Penalties within Ordinary Hours ARE OTE: If a hospitality or retail worker works their standard rostered 25 hours on a Saturday and Sunday, those penalty rates form part of their ordinary hours and must attract superannuation.
Why Correct Xero Pay Items Matter for Payday Super
If you accidentally use a standard “Ordinary Hours” pay item and manually multiply the hourly rate by 1.5x for overtime, Xero will calculate 12% super on the overtime AND report it to the ATO as ordinary earnings instead of Overtime. Always create dedicated, properly mapped Overtime pay items.
How to Classify Common Employee Allowances
Allowances are the #1 source of confusion during payroll audits. Whether an allowance requires PAYG withholding and Superannuation Guarantee depends on whether the employee is expected to spend the full amount on deductible work expenses:
| Allowance Type | STP Phase 2 Code | Super Guarantee (OTE)? | Typical Bookkeeping Rule |
|---|---|---|---|
| Site / Leading Hand / First Aid | Task / Qualification (KN / QN) | Yes (12% Super applies) | Paid unconditionally as part of ordinary work; treated as OTE. |
| General Tool Allowance (Tradies) | Tool Allowance (TL) | Usually Yes (OTE) | Unless purely a reimbursement for exact receipts, unconditional tool allowances attract super. |
| Cents per Kilometre (Up to ATO limit) | Cents per km (CD) | No (Up to 5,000 business km) | Expected to be fully expended on vehicle running costs; exempt from super up to ATO threshold. |
| Award Overtime Meal Allowance | Overtime Meal (MD) | No | Paid strictly to buy food during overtime shifts; not part of OTE. |
3 Steps to Audit Your Payroll Setup Today
- Review every active Pay Item in Xero or MYOB: Verify the assigned ATO Reporting Category and check whether “Exempt from Superannuation Guarantee” is ticked accurately for each item.
- Check Employee Tax Treatment Codes: Ensure working holiday makers, seniors, and employees with study & training support loans (STSL/HECS) have the correct 6-character STP Phase 2 tax code.
- Reconcile STP YTD to Your Profit & Loss Monthly: Never wait until 14 July to discover that your Xero Filing Summary does not match your General Ledger wages account.
Practical Example: Setting Up a Construction & Trades Payroll Run
Imagine employing four qualified technicians who receive base hourly rates, a weekly tool allowance, daily travel allowances, and regular Saturday overtime. Before STP Phase 2 payroll Australia rules took effect, many employers entered all of those items under general gross wages. Today, your Xero or MYOB payroll setup must map the base hours to Ordinary Time Earnings (OTE), the tool allowance to Allowance Type TL, the travel allowance to Allowance Type TD or CD, and Saturday penalty hours outside ordinary span to Overtime (exempt from SG). Getting this mapping right once means every future weekly pay run calculates PAYG withholding, 12% Payday Super, and STP Phase 2 categories automatically.
Frequently Asked Questions: STP Phase 2 & Allowances
- What happens if I misclassify an allowance in STP Phase 2? You can submit an Update Event or adjust the year-to-date mapping in your next pay run in Xero or MYOB so the employee’s myGov Income Statement reflects the corrected figures immediately.
- Does paid annual leave attract Superannuation Guarantee? Yes. Paid annual leave, personal/carer’s leave, and public holidays not worked are all part of Ordinary Time Earnings and require 12% superannuation.
- Are reimbursements reported through Single Touch Payroll? Genuine dollar-for-dollar expense reimbursements backed by a receipt are coded through accounts payable or expense claims—not through STP payroll.
Outsource Your Payroll & STP Phase 2 to P&L Books
Getting STP Phase 2 payroll Australia right gives your staff complete confidence and shields your business from unexpected ATO penalties. At P&L Books, our Australian remote bookkeepers handle weekly and fortnightly payroll, award pay item setup, Payday Super clearing, and quarterly BAS from $65/hr, $74.75/week, or $299/month.
Have questions about payroll setup or need a full Xero payroll audit? Get a free quote from P&L Books or call our team on 1300 790 113.