Start using Xero for free Sign up now

You're on our website.

Why now is the time to transition to STP Phase 2 in Xero

Author Profile Picture

Will Buckley

Jan 23, 2023

This article was published on Monday 23 January. To view Xero’s most recent STP Phase 2 update, head to our latest blog from February.

By now, you’ll be familiar with Single Touch Payroll Phase 2. This will see your business build on its existing STP reporting to share more information with the ATO and additional government agencies whenever you process a pay run. With Xero’s deferral soon coming to an end, mandatory Phase 2 reporting is set to commence from 31 March 2023. This means that all Xero Payroll users must transition to the Phase 2 reporting standard. 

With the deadline fast approaching, time is of the essence – which is why we strongly recommend you make your transition today. The good news is, you’re now able to transition all payroll data and opt-in to STP Phase 2 with just a few steps. In fact, from late January, we will start gradually enabling customers who have completed the transition to file their pay runs using STP 2 (see below for more details).

Not sure where to start? Don’t worry – we’ve answered your top questions below. What’s more, your advisor is always there for support, so be sure to reach out if you need further guidance.

First things first, what happens if I don’t transition in time?

To meet your reporting obligations, if you don’t transition by the March 31 deadline, your ability to file STP may be affected until you have completed your STP 2 setup. If you’re unsure about your transition status or what actions you need to take, speak to your advisor. Failure to comply with these transition requirements may result in scrutiny from the ATO and potential penalties.

But can’t I just transition next month?

STP can be a technical process – and the larger and more complex your business is, the larger and more complex the task ahead will be. All of which is even more of a reason to get ahead now.

I’m seeing some warnings in Xero Payroll – what are these about?

In instances where your current payroll data doesn’t meet the new Phase 2 reporting requirements, you’ll be alerted by warning banners within pay runs or employee payslips. We encourage all customers to take early action on addressing these warnings by updating your data and opting-in to STP Phase 2 as early as possible. 

Why is Xero making so much noise about this?

With the deadline rapidly approaching, our data suggests many employers are leaving things until the last minute and that could put them at risk from additional scrutiny from the ATO. We’ve been increasing our communications because our priority is to ensure that all of our customers make the transition ahead of time. 

How do I complete each step of my transition to STP Phase 2 in Xero?

To start your transition today, head on over to the STP Phase 2 Portal in Xero Payroll to progress through each of the following steps: 

Step one

The first part of this process is transitioning your existing employee profiles to be STP Phase 2 compliant. This means providing new details, like whether they’re an employee or contractor. Step one also includes providing additional information when onboarding new employees to Xero Payroll. More information can be found here.

Step two

You’ll need to identify and update certain pay items with the new earnings categories defined by the ATO for STP Phase 2 reporting. This is because gross amounts for each income type will now need to be reported as a separate itemised amount, like overtime or allowances. Head to Xero Central for more details, including a breakdown of the different earnings categories.

Step three

This step will break down paid leave into additional subcategories. We’ll support you with a guided experience in payroll so you can easily update existing paid leave types to meet the new ATO reporting requirements. You may also find that some of your leave pay items already have the correct reporting category assigned. Visit Xero Central to learn more about this stage.  


Don’t forget to mark each step as complete in the STP Phase 2 Portal before moving forward. This ensures your payroll data is accurate and could help reduce filing errors later down the line.

Step four: Switching to Phase 2 reporting

Once your payroll data is updated and you’ve marked each step as complete in the STP2 Portal, you’ll be able to opt-in to Phase 2 reporting. In partnership with the ATO, we’re rolling-out this capability carefully to customers across late Jan to late Feb. Payroll admins will be notified in Xero when it’s time to switch.

When should I get started?

Now is the time to transition so that you meet your reporting requirements. The sooner you can tick this off your to-do list, the more prepared you’ll be.

Remember, all employing Australian businesses must become STP Phase 2 compliant. So if you’re working with your advisor to make the transition, keep in mind they’re likely helping many others do the same. Stay patient as they work through the process, and in the meantime, check out our Resource Hub or Xero Central for more information.  

Where can I find more information on STP Phase 2?

To help you navigate the transition to STP Phase 2 in Xero, we’ve gone ahead and created a comprehensive guide. This has what you need to know (and do) to make the move, from step-by-step instructions to detailed explainers on leave, earnings and reporting categories. 

Looking for more information? Head to Xero Central or refer to the ATO’s employer reporting guidelines. And don’t forget to reach out to your advisor for additional support. 

Share this article


Related topics:

Start using Xero for free

Find out why 4.2 million subscribers locally and across the world trust Xero with their numbers.

Try Xero for free

Related articles: