Hi @TLee
You're correct, this is a new error response from the ATO for STP Phase 2 submissions. From what I understand it occurs specifically when there is a mismatch in employee information not reflecting what it should be in reality.
I've only seen it once before so don't have a great deal to go off but I'll outline an example below. To be explicitly clear, its only an example and I'm not an accountant or tax agent so cannot advise on tax or what tax selections you should be entering for an employee etc.
Below you'll see an employee I've created who has not supplied a TFN so I've selected the 'No' option, however their tax scale has been set to TFT not claimed. When I send through a submission with this setup it results in the error response from your previous reply being sent back.
In reality however, the tax scale selection should have been Scale 4 which is for No TFN.
https://us.v-cdn.net/6032430/uploads/DGPTDMVNCB8U/image.png
As starting point, I'd recommend reviewing your employee information and ensuring that its accurate in terms of the information in their profiles matching up to what it should be.
ATO Error: First two characters of the tax treatment code must be one of the following
System
Member Posts: 228 Moderator 
This discussion was created from comments split from: Error: where an income stream collection is present, PAYGW amount must be provided.
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Hi Rav,
I submitted the pay run for last week and got rejected from ATO. The reason is very strange. Would you tell me how to response to ATO
kind Regards,
Selina
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Hi @Selina
I'd recommend taking a look at my reply linked below on a previous related post from a fellow member on the Community. Click on the date in the linked post below to open it in full view on the original thread.
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Thanks Rav,
I do have a new employee that has no TFN, but she is going to apply one. Do I need to wait till she has her TFN to resubmit the rejected pay runs or change the tax scale first?
Kind Regards,
Selina
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