Single Touch Payroll: why Tax Directors should be nervous

Two tax directors asked me recently about Single Touch Payroll (STP).  “What do we need to be aware of once STP comes in, and what should we be doing now to get ready?” This perplexed me a little – when we talk to employers about helping resolve issues within their payroll function, we speak to HR or Finance or Shared Services.  Not Tax.  

So – what do Tax Directors need to be aware of once STP comes in?  

STP will streamline the way employers report tax and superannuation information to the Australian Taxation Office (ATO), and, like SuperStream, supports the Government’s commitment to reduce red tape by $1 billion per year.  It is scheduled to be enacted by the ATO on 1 July 2018, although employers can choose to opt in from 1 July 2017.

STP promises simplification of administration for employers, as they will no longer need to provide year-end payment summaries or reconciliations.  Instead, the reporting will align with business processes, such as payroll cycles.  This means that the information will be reported to the ATO in real-time (each pay cycle) and then be made available to employees through myGov, allowing employees to track their year to date earnings and remittances in real time.  The ATO is also looking to STP to support greater SG compliance, on the basis that when SG payments are made to employees’ funds, the information will be automatically reported to the ATO. 

Real-time reporting of payments and remittances, by extension, could also mean real-time reporting of errors.  But, not yet.  At the moment, STP does not require an explanation of variances by the employer.  Instead, the YTD figures are simply over-ridden each period. And this is fortunate - according to Australian Payroll Association’s 2017 Payroll Benchmarking Report, the average error rate for ASX100 companies as a percentage of total payslips is approximately 0.5 per cent.  This suggests that large employers (ASX100) are correcting an average of $3,950,000 of payroll errors annually.  That would be a scary number to advise the ATO each year.

However, before we decide STP is only an improved reporting mechanism, it is worth considering the United Kingdom (UK) experience arising from their implementation of Real Time Information (RTI) – their real time reporting system, which also promised to “make it easy for customers to deal with their taxes and get things right”.  Like Australia, payroll errors were corrected in the UK in the following pay periods.  However, after a light touch approach during implementation, the UK tax authority, the HMRC, announced a series of significant penalties for late submissions and late payments of PAYE tax... and now, a few years on from implementation of the UK’s version of STP, the ways in which employers can correct payroll errors in the following pay period without penalty are reducing, and are more transparent to HMRC, who will challenge regular adjustments to returns.

And herein lies the rub with STP.  Currently, the ATO only plans to use STP to identify employees claiming multiple tax-free thresholds and non-payment (as opposed to incorrect payment) of SG by employers.  However, STP also gives the ATO the basis to access real-time visibility over the accuracy and timeliness of a company’s payroll processes, as they pertain to tax remittances and SG payments. 

So, should the ATO follow the UK experience of RTI?

To answer my Tax Directors’ questions - STP is something of which they need to be aware.  Because, no Tax Director is going to be happy knowing that the ATO may well soon discover that their payroll is making, on average, $3.9 million of errors per year.  

And what should Tax Directors be doing now?  Well, if they don’t believe their payroll function can consistently deliver accurate payroll reporting and remittance, Tax Directors have a vested interest in supporting the payroll function to fix the processes.  And STP starts in 15 months ...