Single Touch Payroll Phase 2 — Can You Outsource STP2 Payroll Processing to India?

What Changed in STP Phase 2

Income Types — Getting This Right

Every employee's pay event must report an income type code. Getting this wrong means employees may receive incorrect ATO pre-fill data on their tax returns, and the ATO may flag the employer for review.

• SAW — Salary and Wages. This is the code for the vast majority of Australian employees — anyone on a standard employment contract paid a salary or hourly wage
• WHM — Working Holiday Maker. Must be used for employees on 417 or 462 visas. Critical — using SAW instead of WHM means the 15% flat rate is not applied correctly and the employee's tax return pre-fill will be wrong
• CLO — Closely Held Payee. Used for family members employed in a family business or trust where the employment relationship is not truly arm's length
• LAB — Labour Hire. Where a labour hire firm is paying the worker and on-hiring to the end employer
• VOL — Voluntary Agreement. Used where a contractor has entered into a voluntary agreement for PAYG withholding to apply to their payments

The Indian CA team reviews each employee's visa status and employment arrangement and assigns the correct income type during onboarding. Any changes (e.g. a WHM whose visa changes) are updated immediately.

Tax Treatment Codes — What the Indian Team Configures

STP Phase 2 requires a tax treatment code for each employee. This drives the correct withholding calculation. The Indian team sets these up based on information from the employee's TFN declaration:

• Regular — standard PAYG withholding applies to Australian residents
• No TFN — highest marginal rate withheld where employee has not provided a TFN
• HELP — employee has a HELP, VSL, SSL, or other study debt — additional withholding applies
• Seniors/Pensioners — seniors and pensioners tax offset applies
• Tax-free threshold — whether the employee has claimed the tax-free threshold on their TFN declaration (affects withholding scale)

Allowance Disaggregation

Under STP2, allowances that were previously bundled into gross wages must be reported separately by type. The Indian team separates these in payroll setup:

• Travel allowances (per-kilometre or daily travel)
• Tool and equipment allowances
• Uniform and laundry allowances
• Overtime meal allowances
• Site and remote area allowances
• LAFHA (Living Away From Home Allowance)

Each allowance type has its own STP2 classification and tax treatment. Some allowances are below the ATO reasonable amounts and are reportable but not taxable — the Indian team codes these correctly to avoid over-withholding.

Payday Super — STP2 Connection (from July 2026)

From 1 July 2026, Payday Super requires super contributions to be paid to the employee's fund on each payday rather than quarterly. STP Phase 2 data provides the ATO with the payroll baseline against which Payday Super compliance is checked. The Indian CA team processes both the payroll and the super payment run on each payday — ensuring STP2 and Payday Super compliance are handled together. See our full Payday Super guide.

Frequently Asked Questions