Last updated: 02nd Jul 2025
Does your business need money to purchase assets or expand into new markets? Access to capital at the right time is often the deciding factor between growth and stagnation.
Your business is likely to stagnate unless you regularly reinvest in physical assets, which is known as capital expenditure (capex).
Understanding capex is important for business owners because it affects how you manage your books and taxes.
It can also impact how your business is valued – if you hope to attract investors or sell it in future.
What Is Capital Expenditure?
Capital expenditure is a term that covers spending on assets used to generate income long-term within your business.
Typically, capex relates to investments in physical items of property, plant, and equipment (PP&E) that lose value through ‘wear and tear’ over time (depreciate).
For example:
- Buying new vehicles to expand the fleet of your mobile dog-washing business.
- Repairing walls and installing new ovens in a building you leased to run a bakery.
- Purchasing laptops and mobile phones for employees of your marketing agency.
- Replacing old welding machines to maintain your current service levels.
Important!
Capex isn’t recorded on your business’ profit and loss (P&L) statements. Instead, the costs are capitalised and recorded as an asset on your balance sheet.
According to the Australian Tax Office (ATO), in addition to depreciating assets and their installation, a capital expense can include money spent on:
- Setting up your business.
- Improving or expanding it, and even…
- Closing it down.
This doesn’t include general maintenance or repairs.
Ed Chan from Nash Advisory said routine activities like fixing a broken machine or getting a work car serviced need to be expensed.
Whereas improvements that provide an “enduring benefit” to the business of at least 12 months or more – like replacing a fence or building renovations – can be capitalised.
(Related: The Best Accounting Software For Australian SMBs).
Why Is Capex Beneficial To Business Growth?
Capitalising an expense means you’ll be able to claim tax deductions based on the asset’s decline in value over time, which is called depreciation.
Head of Tax at Melbourne-based Liston Newton Advisory, Stewart Lane, explains:
Being able to write off the total costs of a large asset can be an important strategy for:
- Reducing the financial impact of large business costs.
- Ensuring you don’t pay more tax than you need to.
- Offsetting some of the risk involved in investing for growth.
Example:
Let’s say you’re running an e-commerce site selling beauty products, but you need more space to store and manage inventory.
You’re confident your business has legs, so you take out a loan to fund the purchase a storage facility.
That means you can:
- Offer an expanded product range to customers, which lifts your revenue.
- Improve your bottom line (profit), which helps you pay down your loan.
- Claim tax deductions for the storage facility’s depreciation from when you start using it.
When To Capitalise Vs Expense?
Businesses can capitalise an expense when it has an “effective life” of more than a year.
The nitty gritty of exactly what can be capitalised and claimed at tax time is a question for your accountant, as there are eligibility rules.
Capex is different from business purchases that might form part of your everyday expenses (operational expenditure, or opex).
- Expenses are tracked in your P&L statement, so you can see what it costs to run your business day-to-day, and how that affects profitability.
- Opex deductions that your business is entitled to are claimed in full within the same financial year as when your costs are incurred.
If you capitalise an expense, you can claim a smaller portion of the costs of an asset over multiple years, which:
- Reduces your taxable income over multiple years, which can improve cashflow.
- Makes it clearer how profitable you’ve been year-to-year, for better financial reporting.
Example:
Let’s say you refurbish offices used in your business, spending $300K on furniture, desks, computers, printers and scanners.
If you claim those expenses in full in the same year, your annual profits will be down by $300K. But this doesn’t reflect your true operating costs, which makes it harder to analyse performance and plan budgets.
How Does CapEx Get Recorded?
Whether you do your books yourself or use an accountant, you’ll need to keep supplier invoices and receipts, and maintain accurate records, to ensure you can manage capex well.
You’ll need to determine the depreciation method you’ll use. Two common methods used are:
- Straight line depreciation, where the asset depreciates by the same amount each year.
- Diminishing value depreciation, where the amount you claim gradually tapers off.
If your annual business turnover is less than $10 million, you may be eligible to use the ATO’s simplified depreciation rules, which include:
- Instant asset write-offs for assets under $20,000; and
- The ability to pool costs above the $20K limit and claim 15% in the year you bought the assets, then 30% each year after that.
How Does Capex Get Reported?
When reviewing your financial reports, capex is found:
- On your balance sheet under assets. It will show your total assets’ (depreciated) value.
- On your cash flow statement, as money flowing out under ‘Investing activities’.
- On income/P&L statements, in the form of the annual depreciation cost.
Important!
While capex is not an ‘expense’ like opex, the annual depreciation costs of an asset (that you’ll claim on taxes) do get reported as a business expense on your P&L until the asset is fully depreciated.
If you’re looking to sell, get acquired or merge with another business, capex is also an important component in measuring:
- Your free cash flow, which is usually calculated by subtracting capex from your operating cash flow.
- Your business’ value, with cash flow and long-term potential impacted by capex and aging assets.
4 Tips For Planning Capex In Your Small Business Budget.
If you’re certain a large capital expenditure makes sense for your business, follow these four tips for budgeting:
- Forecast your financial position and think carefully about the direction your business is headed in. Consider the pros and cons of borrowing to expedite capital expenditure, or saving money over time to fund an asset purchase. Will having debt hamper other plans?
- Gather information about the asset/s you plan to invest in and the costs, timeframes and logistics involved. Be thorough but try to move quickly enough so that your quotes are still accurate when you’re ready to proceed.
- Make sure you’ve got clear guidelines in place, so everyone who’s involved or affected understands how the budget and/or capital project will be managed. Who approves what? In what timeframes?
- Get your tech stack right so you can budget effectively, monitor spending on asset/s, and track project deliverables related to capital works. Also, ensure your tools help you capture the data you’ll need to review your costs and the ROI of CapEx projects.
Final Word On Capex: Take A Long-Term View.
Decisions around capital expenditure are complicated by the fact that they require a strategic view of your business.
You can’t confidently plan for CapEx unless you’ve thought about:
- Will the asset reliably deliver a return on investment for your business over its lifetime?
- What are the total costs/downsides, such as disruption from capital works or less flexibility.
- What are the total costs over the lifetime of the asset, such as training, repairs, insurance etc.
- What’s the opportunity cost of channeling money into this asset, rather than other initiatives?
It’s not always easy to gauge the usefulness of an asset looking forward. Market trends change, business models change, technologies evolve, and macroeconomic conditions vary. But with the right preparation, investing in your business through CapEX can be a smart move.
Jody
