The original Bookkeeping Centre in Rosebery used to say payroll was the place a tidy file could still go wrong. Single Touch Payroll Phase 2 made that sentence literal. The pay event is no longer a total. It is a set of income types, allowance types and tax treatments that have to match how the person was actually paid.

Phase 2 is mandatory. If your software still lets you lodge a pay event that looks like a Phase 1 lump, do not treat that as a blessing. Treat it as a file that will fail a reconciliation, a finalisation, or a Fair Work query the first time someone asks what the $4,200 “wages” line actually was.

This is a working list of the mistakes we still find in Australian files that “have STP switched on”. It is not a software manual. It is the conversation a Perth or Sydney bookkeeper should have with the pay file before the next event leaves the building.

What Phase 2 is actually asking for

Phase 2 asks you to disaggregate ordinary earnings from overtime, paid leave, unused leave on termination, bonuses and commissions, directors’ fees, and allowances. It also asks for tax treatment (resident, working holiday maker, foreign resident, and the rest the ATO currently lists) and for employment basis (full-time, part-time, casual, labour hire, and so on).

That is not decoration. The ATO uses it to pre-fill individual returns, to check Super Guarantee, and to compare what you told them with what the employee later claims. A miscode that “nets to the right net pay” can still be a wrong report.

The ledger has to follow. If you report overtime as overtime in STP and then dump the same dollars into a single “wages” expense, you have two stories. Keep ordinary time, overtime, allowances and termination leave in separate payroll accounts so the chart of accounts can defend the event. The payroll hub is the longer shelf for that cluster.

Income types that get collapsed into Gross

The most common Phase 2 error is still laziness dressed as simplicity. Everything hits Gross because Gross is the default pay item the file inherited from a conversion three years ago.

Overtime is not Gross. A bonus is not Gross. A director’s fee is not Gross. A commission paid on top of a retainer is not Gross. Paid annual leave is not Gross. Unused leave on termination is definitely not Gross.

Walk the pay-item list once a quarter. For each item, ask: what income type does this map to, and would I be willing to explain that mapping to the employee and to the ATO on the same afternoon? If the answer is “it is just wages”, you are still in Phase 1.

Backpay is a special case. A catch-up for last year’s underpayment is still earnings, but it is not this fortnight’s ordinary hours. Use the pay item and the notes your software provides for prior-period amounts, and keep a source document that says which period you were fixing. “I put it through as extra hours this week” is how a rate review later looks like overtime.

Allowances: the quiet Phase 2 graveyard

Allowances are where Phase 2 earns its reputation. The ATO wants a type, not a vibe. Cents-per-kilometre, laundry, overtime meal, travel, tools, tasks, qualifications and “other” are different things. Parking every extra dollar as “other taxable allowance” is a miscode even when the withholding looks plausible.

Do not invent the tax-free thresholds. The ATO publishes reasonable amounts and award-based treatments, and those pages move. If you pay a laundry or vehicle allowance, read the current ATO page and the award before you tick “tax-free”. A bookkeeper who guesses a cents-per-kilometre figure from memory is inventing a rate. We do not do that here.

Two practical habits save files:

• Name the pay item after the allowance the award or contract actually uses, not after “extra”.
• Keep a one-line legend in the payroll settings: what the item is, whether it is ordinary time earnings for super, and which STP allowance type it reports as.

If you cannot write that legend, you cannot defend the event. See ordinary time earnings before you assume an allowance is superable, and casual loading before you treat a loading as an allowance.

Unused leave on termination

When a permanent employee leaves, unused annual leave (and, where it applies, unused long-service or other leave the award or statute requires you to pay) is not a last ordinary pay. Phase 2 has a dedicated unused-leave-on-termination income type. Using Paid Leave or Gross is the mistake we still see in otherwise careful files.

The tax treatment of unused leave on termination is also not the same as ordinary weekly pay. Do not “just run it as a normal pay” because the employee wants the money tomorrow. Use the termination pay wizard your software provides, or build the pay with the termination income types explicitly selected. Then print the pay slip and the STP preview and read them aloud.

Lump sums and employment termination payments sit beside this, not inside it. An ETP is not unused annual leave. Lump sum A, B, D and E are not a place to hide a bonus you forgot to code. If the termination is messy — redundancy, genuine hardship, a deed — stop and get advice. The bookkeeper’s job is to refuse a blur, not to invent a category.

Directors, working holiday makers and the people who are not “staff”

Directors’ fees reported as ordinary Gross will pre-fill someone else’s return as wages. That is a gift to confusion. If the person is paid as a director, say so in the pay item and in the STP income type.

Working holiday makers and foreign residents have tax treatments that are not “resident with a tax-free threshold”. Get the declaration right at onboarding, and do not copy last year’s settings onto a new backpacker because the café is busy. Country of residence and the relevant tax treatment are Phase 2 fields, not optional colour.

Labour-hire and closely held payees have their own onboarding questions. A family company that pays a spouse “when we can” still has to decide whether that is wages, a director fee, or a distribution. STP will not make that decision for you. It will only repeat whatever you typed.

Employment basis, hours and the story the slip tells

Phase 2 also wants to know whether the person is full-time, part-time or casual, and it wants hours that can survive a glance. A casual coded as part-time so the leave screen “looks nicer” is a miscode. A part-timer with no hours on the slip is a file that cannot explain a Fair Work hours query.

Casual loading belongs in ordinary earnings, not in an allowance you invented so the rate looks lower. Read the award, then read casual loading, leave and the payroll file. Do not invent a loading percentage. The award or the registered agreement is the source.

If someone converts from casual to permanent, change the employment basis on the day the conversion takes effect, and start leave accruals from that day. Leaving them as casual “until we get around to it” is how unused-leave-on-termination later has nothing to terminate.

Finalisation is not a January surprise

STP finalisation is when the year’s miscodes become the employee’s pre-fill. If you have been dumping overtime into Gross since July, January is a poor time to discover it. Run a year-to-date income-type report in October, not in the week the ATO starts reminding you.

Reconcile three things before you finalise:

• year-to-date gross and each income type, against the payroll general ledger
• PAYG withholding, against the PAYG clearing account and the BAS
• Super Guarantee, against ordinary time earnings and the clearing house — and, since 1 July 2026, against payday super

If those three do not agree, do not finalise. Fix the pay items, lodge an update event, and then finalise. A “we will journal it in the ledger only” fix leaves the ATO holding the wrong year.

A short Phase 2 close for the bookkeeper

On the afternoon you run pay, before you submit:

1. Preview the STP event. Read every income type, not just the net.
2. Confirm unused leave on termination, bonuses, overtime and directors’ fees are not sitting in Gross.
3. Confirm each allowance has a type you can name.
4. Confirm employment basis and tax treatment still match the employee file.
5. Confirm the wages, PAYG and super journals will hit the accounts you reconcile at month-end.

Then submit. Then file the pay summary, the super clearing-house receipt and the STP acknowledgement together. A feed of “payroll cleared” is not that pack.

The Rosebery desk used to treat a pay run as a letter to three readers at once: the employee, the ATO, and the person who will open the file in July. Phase 2 did not change the readers. It only stopped you from writing them a single number and hoping they would not ask what it meant.