Capital expenditure: a guide for businesses
What is capital expenditure (CapEx)?
Capital expenditure refers to payments specifically made for acquiring, maintaining or upgrading fixed assets, such as buildings, vehicles and equipment. The “capital” part of this term means that the cost is an investment that’s capitalised over the asset’s “effective life.”
This is important as capital expenditures are costly purchases, so expensing the asset over future periods can help prevent a significant hit on a business’ bottom line. If an item has an effective life of a year or less, the Australian Tax Office doesn’t consider it a capital expenditure. See the ATO’s publication on the effective life of business assets by industry.
Why CapEx is important for your business
CapEx supports your long-term business growth without creating an immediate financial burden. Regardless of whether you pay cash for an asset or finance it, you can claim tax deductions for the asset’s depreciation, beginning with the year you start using it.
Another benefit of CapEx investments is that they bring immediate value to your business, even while you continue paying for them. So, for example, if you finance the cost of expanding your restaurant’s dining area, and the expansion allows you to serve 50 additional customers per day, you’re earning income from your investment that can help you pay off the construction costs.
What’s the difference between capital expenditure (CapEx) and operating expenses (OpEx)?
The main difference between CapEx versus OpEx is that CapEx are long-term investments — assets with a useful life of one year or longer, whereas operating expenses are the everyday costs of running a business, such as rent, payroll, office supplies, insurance and more.
Capital expenditure examples
Capital expenditure differs from one business to the next, as the business makes the investments it requires to maintain its long-term operations. However, some capital expenditure examples include:
purchases of buildings or land for the purpose of conducting business
equipment and machinery for manufacturing or creating products
computers and servers
patents and licences.
Capital expenditure formulas
There are two ways to calculate depreciation for CapEx. You may generally use either method, unless the ATO specifies otherwise, based on the type of asset.
Prime cost (straight line)
With this method, you depreciate the asset uniformly over its effective life. For example, if the asset is worth $20,000 and has an effective life of 5 years, you’d claim $4,000 (20% of its value) annually for 5 years.
Diminishing value depreciates at a constant rate from the base value of the asset's effective life. Therefore, depreciation expense is larger at the start of the life and progressively gets smaller towards the end.
So, for example, if your asset is worth $50,000 and has an effective life of 10 years, you’d claim 20% of the value ($10,000) in year one. In year two, you’d calculate your deduction on a base value of $40,000 ($50,000 minus depreciation of $10,000).
What capital expenditures are tax-deductible?
Consult the ATO or your accountant for guidance on claiming a tax deduction for capital expenditure. You may be able to claim for the following:
Capital works (division 43)
This includes buildings and structural improvements such as updating plumbing or replacing a roof.
Plant and Equipment (division 40)
Plant and equipment are tangible assets that can be removed from a commercial building, such as desks, blinds, shelving, or commercial ovens. Depreciation can be claimed for the effective life of the asset (set out by the ATO guidelines).
Startup or business cessation costs
You may be able to claim a straight-line deduction, over a five-year period for these costs only if they aren’t part of a depreciating asset and aren’t deductible under other parts of tax law.
Costs associated with specific types of projects
Some projects — if they support long-term growth — may be deductible using the diminishing value method. Examples include feasibility studies or environmental impact assessments.
Certain primary production assets
Businesses may claim deductions immediately for the cost of dams, tanks, pumps and other water facilities, if they purchased them after May 2015. They may also depreciate over three years the cost of storage assets, such as tanks and silos.
If you acquire or lease land for primary production purposes, you may be entitled to an immediate deduction.
Electricity and phone line investments
You may be able to claim depreciation over 10 years for the cost of connecting or extending to mains electricity and phone lines. Businesses that don’t meet the criteria for deducting these costs may be able to claim them as capital works.
Businesses may deduct costs of mining exploration or prospecting equipment. The cost of rehabilitating a mine or quarry for your business purposes may also be deductible.
You can’t claim a capital expenditure for a vehicle if you’re also using the cents per kilometre method to deduct car-related expenses. Otherwise, you can claim a CapEx deduction for vehicles, although the ATO caps the maximum effective life for some types of trucks and commercial vehicles. There is also a luxury car limit for depreciation on cars.
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