What is capital expenditure?

The test is whether the spend delivers benefit beyond the current accounting period. Buying land, buildings and plant and machinery (a new CNC machine or a delivery truck) is CapEx. So are structural upgrades and extensions, major refurbishments that substantially extend an asset's useful life, large construction projects capitalised until they are ready for use, and purchased intangibles such as patents, licences and software. Internally developed software can be capitalised if it meets the recognition criteria, whereas subscription (SaaS) arrangements are usually OpEx.

Routine repairs and maintenance that keep an asset in its current condition are expensed as incurred. Land is a special case: it is CapEx but is typically not depreciated.

Under AASB 116 a cost is capitalised when future economic benefits are probable and the cost can be measured reliably. The capitalised amount includes the purchase price, the direct costs of bringing the asset into service and, where applicable, borrowing costs. It is recorded as a non-current asset and does not touch profit and loss on the day of purchase; instead it flows through as depreciation (tangible assets) or amortisation (intangibles) over the useful life.

Straight-line depreciation is the simplest version: cost less salvage value, divided by useful life. To find a company's CapEx from its accounts, take closing property, plant and equipment, subtract the opening balance and add back depreciation, adjusting for any revaluations or disposals. The result should roughly match "purchases of property, plant and equipment" under investing activities in the cash flow statement.

The ATO separates capital costs from deductible repairs. Capital costs are generally recovered over time: depreciating assets such as plant and machinery are claimed as decline in value under Division 40 over their effective life, and structural or building costs may qualify for capital works deductions under Division 43. Instant asset write-offs and other temporary measures periodically allow an immediate deduction for eligible assets; the thresholds and cut-off dates change, so check current ATO guidance before relying on one.

Classification drives timing. A routine repair that restores an asset to working condition is usually deductible in the year it is incurred; an improvement that increases value or extends useful life is capitalised and claimed under Division 40 or 43. The same split applies to rental properties, so keep separate records for improvements and repairs. CapEx can be paid for from retained earnings, a business loan, equipment finance or a lease.