CapEx vs OpEx


16th July, 2021

CapEx vs OpEx: Assets, expenses and tax planning

Monitoring and measuring expenditure and expenses is critical for business owners to not only better understand their costs, but also for planning taxes. Here’s why.

Many small businesses choose to lease equipment and subscribe to technology services and software instead of paying upfront to own outright.

By doing this, they get all the benefits of having up-to-date tools and services without sinking huge amounts of money into depreciating assets.

The ability to pay for the use of what you actually need is one of the advantages of operating expenses (OpEx) versus capital expenditure (CapEx).

What is CapEx?

Capital expenditure, or CapEx, is money spent on fixed assets for a business over the long term. These funds are used to buy, set up and maintain buildings, machinery, vehicles and computer equipment.

This type of purchase is usually made by a business when it wants to broaden the types of operations it undertakes.

Read this next: What are fixed expenses for small businesses?

What are CapEx examples?

Examples of CapEx include purchasing, upgrading or maintaining physical assets such as:

  • buildings
  • land or other property
  • storage facilities
  • plant or machinery
  • furniture
  • vehicles, and
  • computer equipment and hardware

Intangible assets like software and patents may sometimes be included within the CapEx category. See the ‘Asset purchases’ section, below, or ask your tax professional for further information about your business’s circumstances.

What is OpEx?

Operating expenses, or OpEx, are the day-to-day running costs of a business. These include the ongoing costs of producing products, running a business and building and maintaining systems. OpEx might also be for sales, or research and development.

What are OpEx examples?

Examples of OpEx include costs such as:

  • wages and salaries
  • rent and leases
  • travel and vehicle expenses
  • consumable supplies such as paper and ink
  • accounting expenses
  • license or legal fees
  • advertising and marketing
  • professional services such as accounting or legal
  • insurances
  • property management and taxes
  • software subscriptions, and
  • utilities such as electricity, telephone and internet.

What’s the difference between CapEx and OpEx?

The main difference between CapEx vs OpEx is that capital expenses (CapEx) are significant purchases a business makes and intends to draw value from over a long term, whereas operational expenses (OpEx) are the daily costs of running a business.

Why are CapEx and OpEx important?

CapEx and OpEx are important because capital expenditure and operating expenses are treated differently under taxation legislation. These will have consequences for for business tax planning and asset acquisition.

How does capital expenditure (CapEx) affect tax?

As capital expenditure can be deducted over time for depreciating assets, businesses with an aggregated turnover below $500 million may be eligible for instant asset write-offs.

Small businesses can apply simplified depreciation rules to instantly write off assets below a threshold of $150,000 (for businesses with less than $10 million aggregated turnover).

For more information on CapEx claims, read the ATO’s guide to claiming a tax deduction for depreciating assets and other capital expenditure.

How do operating expenses (OpEx) affect tax?

Operating expenses can generally be deducted from income tax each tax period. Tax-related expenses, such as paying fees to an accountant or tax advisor to help you prepare and file tax records are covered under operating expenses.

For more information on OpEx claims, including tax-related operating expenses, read the ATO’s guide to claiming a tax deduction for other operating expenses.

Asset purchases: Upgrades are easier on a lease or subscription

Just as gaining access to the machinery you may need to set up or run a business is made easier with hire and lease agreements, getting hold of the digital technology you need to run your business more efficiently is made a lot easier with cloud subscriptions for storage, software and more.

That’s because the money you pay to use cloud services is generally a subscription per month or year (OpEx), compared to the traditional up-front large investments (CapEx) for buying and setting up on-premise hardware and software.

You pay a lot less to get what you need right away, and because it’s all in the cloud, maintenance and security is managed by the provider.

Most cloud subscriptions include free trials or discounts for a month or more, so you can test new features and decide which plan is best before committing.

In many cases, you can also upgrade your cloud plan or subscription to gain access to more services, storage, software features and add-on apps to help your business grow.

When you need to scale your business technology fast, cloud is quickly becoming the popular choice for businesses of all stripes.

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This information is general in nature and does not constitute professional advice. For guidance specific to your situation, MYOB suggests engaging a specialist advisor near you ASAP.