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Operating expenses play an important role in your business. Often abbreviated to OpEx, they encompass everything from paying the bills to keeping the lights on at your premises to covering staff wages. They keep the wheels of your business in motion and can significantly impact your bottom line.
What is an operating expense?
An operating expense refers to the cost of doing business. It covers any cost incurred through your day-to-day, regular business operations.
Examples of operating expenses
Operating expenses are categorised differently from business to business. For example, a company focused on developing new pharmaceuticals could classify research and development (R&D) costs as operational — they're an essential part of the day-to-day business.
However, a retail business looking to enter the market with a new product wouldn't categorise R&D as an operating expense — it's not a core part of their general operations.
Here are some specific examples of operating expenses for different industries:
Industry | Common operating expenses |
|---|---|
SaaS (Software as a Service) | • Cloud hosting and server costs • Software licences and development tools • Customer support platform subscriptions • Marketing automation and CRM systems • Website hosting and domain registration • Cybersecurity and data protection • Payment processing fees • Employee training and professional development |
Retail | • Shop rent and outgoings • Point-of-sale (POS) system fees • Inventory management software • Utilities (electricity, water, gas) • Shop fit-out maintenance and repairs • Product packaging and bags • Credit card merchant fees • Security systems and monitoring • Cleaning services |
Manufacturing | • Factory or warehouse rent • Equipment maintenance and repairs • Raw materials and supplies • Quality control and testing • Waste disposal and environmental compliance • Factory insurance and WorkCover • Freight and logistics • Safety equipment and compliance |
Trades (plumbing, electrical, building) | • Vehicle expenses (fuel, registration, insurance) • Tools and equipment maintenance • Trade licences and certifications • Public liability insurance • Mobile phone and communication • Uniforms and safety gear • Job management software • Local marketing • Professional association memberships |
Professional services (accounting, legal, consulting) | • Office rent or co-working space • Professional indemnity insurance • Practice management software • Professional memberships and registration fees • Continuing professional development (CPD) • Client entertainment and hospitality • Stationery and printing • Video conferencing subscriptions |
Profit and loss (P&L) statements generally split operating expenses into these categories:
Overheads
Core operating costs not directly linked to the output of products or services. They include rent, utilities and insurance.
Cost of goods sold (COGS)
Costs directly related to providing products or services. They include inventory, shipping, storage and labour costs.
Sales, general and administrative (SG&A)
Expenses not directly tied to your product or service. SG&A includes advertising, sales commissions, business travel, marketing and administration costs.
Depreciation and amortisation
Expenses linked to the diminishing value of your business's tangible (depreciation) and intangible (amortisation) assets. This loss in value is recorded as an operating expense.
Miscellaneous
Smaller, incidental purchases essential to operations. They include office supplies, minor equipment repairs and any postage or shipping (outside of providing a product).
Fully deductible operating expenses
The Australian Taxation Office (ATO) allows you to claim a full deduction for operating expenses in the same financial year you incur them, provided they're directly related to earning your business income. This is one of the key advantages of OpEx compared to capital expenses.
Immediate deductions apply when the expense meets three criteria: it must be incurred in carrying on your business, it must have a direct connection to earning assessable income, and it cannot be capital, private, or domestic in nature.
Examples of fully deductible operating expenses include:
Rent for business premises
Utility bills (electricity, gas, water, internet)
Advertising and marketing costs
Professional fees (accounting, legal, consulting)
Insurance premiums (public liability, professional indemnity, business insurance)
Training and professional development
Motor vehicle expenses (calculated using logbook or cents per kilometre method)
Repairs and maintenance to business assets
The key is keeping thorough records. The ATO expects you to have receipts, invoices, or bank statements that prove you incurred the expense and that it was for business purposes.
Partially deductible expenses
Some business expenses straddle the line between business and private use, or have specific ATO rules that limit how much you can claim. Getting these calculations right ensures you're claiming everything you're entitled to whilst staying compliant.
Motor vehicle expenses
Motor vehicle expenses are one of the most common partially deductible expenses for Aussie businesses. If you use your vehicle for both business and private purposes, you can only claim the business portion.
Home office expenses
Home office expenses also have specific rules depending on your working arrangement. If you run your business from home, you can claim a portion of your household running costs, including electricity, gas, internet, phone, and depreciation of office equipment. The ATO offers a fixed rate method or an actual cost method, which involves you calculating the specific percentage of your home used for business.
Mobile phone and internet
Mobile phone and internet costs can be claimed proportionally based on business use. If you use your personal phone for work, calculate the percentage of business calls and data usage, then apply this to your total phone bill (if you’re not using the fixed rate method of calculating home office expenses).
Meal expenses
Meal expenses while working have different rules depending on the circumstances. You can claim meals when travelling overnight for work or working overtime (with specific conditions), but your everyday lunch is generally considered a private expense.
The golden rule with partially deductible expenses is documentation. Keep detailed records showing how you calculated your business use percentage.
Expenses you can’t claim as OpEx
Not every business expense qualifies as an operating expense for tax purposes. Understanding what you can’t claim helps you avoid issues with the ATO.
Capital expenses
Capital expenses typically fall outside operating expenses. These are costs for assets that provide long-term value to your business, typically lasting more than 12 months (e.g., major equipment and machinery, office furniture, computers, and property purchases). Instead of being fully deductible in the year of purchase, capital expenses are claimed through depreciation over the asset's effective life.
Private or domestic expenses
Private or domestic expenses can never be claimed as operating expenses. The ATO is clear that costs must have a genuine connection to earning your business income. You can’t claim expenses for personal holidays, private entertainment, or household costs unrelated to your business activities.
Fines and penalties
Fines and penalties imposed by government agencies are not deductible, including parking fines, speeding tickets (even when driving for work), and penalties for late tax lodgements.
If you're unsure whether an expense is operating or capital in nature, it's worth checking with your accountant. Getting this classification right from the start will save you major headaches come tax time.
Common mistakes when classifying OpEx
Even experienced business owners sometimes get tripped up when categorising their expenses. Here are the most common mistakes Australian businesses make with operating expenses, and how to avoid them:
Confusing capital and operating expenses
Confusing capital and operating expenses tops the list. Many business owners try to claim the full cost of a new laptop, vehicle, or piece of equipment as an operating expense in the year of purchase. The reality is that assets with a useful life beyond 12 months are typically capital expenses. However, there's a helpful exception: under the instant asset write-off rules, eligible businesses can immediately deduct the cost of assets (currently up to $20,000 per asset for small businesses). These thresholds change, so check the current rules with your accountant.
Claiming personal expenses
Claiming personal expenses is a red flag for the ATO. The classic example is claiming 100% of your mobile phone or vehicle expenses when you also use them privately. If the ATO audits your return and finds personal expenses claimed as business deductions, you may face penalties and interest charges on top of the tax owed.
Forgetting the right apportionment of mixed-use assets
Forgetting the right apportionment of mixed-use assets leads to overclaiming. If you work from home in a room that's also the family study, or use equipment for both business and personal projects, you must apportion the expenses fairly. The ATO has sophisticated data matching tools these days that can identify claims that seem unusually high for your industry or business size.
Poor record-keeping
Poor record-keeping also causes problems when you need to substantiate your claims. The ATO requires evidence for every deduction, and "I know I bought it" doesn't cut it. Use accounting software to track expenses in real-time, store digital copies of receipts, and reconcile your accounts monthly to make life much easier for yourself.
When in doubt, ask your accountant before lodging your tax return. Some professional advice can save you a lot in penalties and create peace of mind that your operating expenses are correctly classified and claimed.
Importance of understanding business operating expenses
Increased operating expenses mean less bottom-line profit for a business, and reduced operating expenses can lead to a direct increase in profit. Profit aside, there are also legal and tax obligations to consider. Make sure you correctly report operating costs and understand their impact on tax obligations.
Higher OpEx = lower profits
Incorrect reporting = under or overpayments in tax
With a clear understanding of operating expenses, businesses can understand the revenue required to cover base costs and make a profit.
Managing operating expenses
Managing operating expenses effectively can boost your bottom line. Reducing operating costs can increase profitability, but it has downsides if you cut costs indiscriminately. Your business may suffer long-term if you compromise on the quality of your product or service or reduce your staff numbers.
To manage operating expenses effectively:
1. Review expense categories regularly
Keep a close eye on operating expenses, set a realistic budget, and review any discretionary spending.
2. Identify opportunities for change
Explore ways to bring your product or service to market more efficiently. Audit existing supplier contracts and try to negotiate more favourable terms.
3. Look to technology
Consider using a cloud-based business management platform to integrate workflows, streamline and automate processes. It’ll save time and money, too.
4. Reassess the staffing status quo
Consider outsourcing work, or implementing work-from-home policies where practical to reduce office overheads.
What are non-operating expenses?
Non-operating expenses are costs not directly associated with the day-to-day running of the business. They don't occur regularly or directly contribute to core operations.
Examples of non-operating expenses
Some common examples of non-operating expenses are:
Interest expenses
The cost of borrowing money through loans, bonds, or other forms of debt.
Losses from the sale of assets
When you sell equipment or property at less than its book value.
Restructuring costs
If your business loses money from restructuring, it’s considered a non-operating expense.
Inventory write-offs
When a product is unsellable, obsolete or no longer worth anything.
Foreign exchange losses
Fluctuations in exchange rates that result in a loss.
Incidents or disasters
Losses (and related costs) from isolated incidents or natural disasters are non-operating expenses.
Operating expenses (OpEx) vs capital expenditures (CapEx)
The main difference between operating expenses and capital expenditure is their terms of use. Operating expenses are day-to-day costs, whereas capital expenditure refers to significant investments that'll provide long-term benefits to the business.
Fixed and variable costs
Operating expenses fall into two categories: fixed and variable. Fixed costs, like rent, salaries and insurance, won't fluctuate if your production or sales go up or down. Variable costs fluctuate as a direct result of business outputs. For example, your inventory costs may increase as you sell more products. Further your labour costs and sales commissions may increase.
Fixed costs - remain the same for a fixed period.
Variable costs - fluctuate based on production and sales of products or services.
Operating expenses FAQs
Are salaries and wages considered operating expenses?
Yes, salaries and wages are operating expenses as they form part of the day-to-day costs of running a business. An exception to this is expenses relating to overtime or freelance work.
What are three common operating expense categories?
The three most common categories of operating expenses are overheads, general and administrative costs, and costs of goods sold.
Where do operating expenses go on a balance sheet?
Operating expenses sit under the liabilities category on a balance sheet.
What is an operating expense ratio, and how is it calculated?
The operating expense ratio (OER) measures financial efficiency and shows how much a business must spend to generate income. The calculation is:
(operating expenses + cost of goods sold) / net sales = operating ratio
What is a healthy operating expense ratio?
Generally, the lower your operating expense ratio the better, as it signifies how efficiently you’re able to generate revenue relative to your expenses. Typical OERs sit between 60-80%, with below 70% considered a healthy OER. However, this ratio may vary by industry. Further, even if your OER is good, it’s important to follow whether it’s tracking up or down over time.
Understand, optimise and succeed
A clear picture of your business's operating expenses is critical to success. They indicate the base-level costs you need to cover to keep the wheels in motion and can clarify where to make changes to drive efficiencies and increase profits.
With MYOB's advanced reporting capabilities, you can track operating expenses quickly and accurately to make informed decisions for long-term success. Get started with MYOB today!
Disclaimer: Information provided in this article is of a general nature and does not consider your personal situation. It does not constitute legal, financial, or other professional advice and should not be relied upon as a statement of law, policy or advice. You should consider whether this information is appropriate to your needs and, if necessary, seek independent advice. This information is only accurate at the time of publication. Although every effort has been made to verify the accuracy of the information contained on this webpage, MYOB disclaims, to the extent permitted by law, all liability for the information contained on this webpage or any loss or damage suffered by any person directly or indirectly through relying on this information.