Deductions
Capital expenditure
Capital expenditure is spending on acquiring or improving a lasting asset for the business, which is generally not deducted all at once but recovered over time through depreciation or other rules.
Capital expenditure is money spent to acquire, create or substantially improve a long-term asset, such as machinery, vehicles, premises, or significant equipment. It differs from day-to-day running costs because the benefit lasts for more than a short period. The key idea is that it builds the asset base of the business instead of simply keeping the business operating this month.
For income tax, capital expenditure is generally not deductible straight away. Instead, the cost may be recovered over time, for example through depreciation of a depreciating asset or the capital works deduction for buildings. Some capital items can be written off immediately for eligible small businesses under instant asset write-off rules, which are set by the government and change, so check ato.gov.au for the current limit. Other capital spending, such as buying land, is not depreciable at all.
Distinguishing capital from revenue spending is a matter of looking at the nature of the cost. Buying a new delivery van is capital. Paying for its fuel and servicing is revenue. Replacing a whole roof is more likely capital, while fixing a leak is a repair. Where a repair amounts to an improvement or replacement of a substantial part, it can shift towards capital, which is a frequent source of disagreement.
GST treats the two quite differently from income tax. A business registered for GST can generally claim a GST credit on a capital purchase in full in the BAS for the period of the tax invoice, even though the income tax deduction is spread over several years, as long as the purchase is for a creditable purpose. There is a specific BAS label for capital purchases, which is G10. Credits on cars are limited by the car limit.
The classification also matters on sale. When you sell a capital asset, GST is usually payable on the sale if you are registered and the asset was used in your enterprise, and there may be a balancing adjustment for income tax or a capital gain to consider. Keeping an asset register with purchase date, cost, GST claimed and depreciation method makes that much easier.
A common mistake is deducting a large capital item as a repair, or forgetting that the GST credit is claimed up front while the tax deduction is not. This is general information only, so confirm how it applies to you with the ATO or a registered tax professional.
Worked example
A registered café buys a new commercial oven for $11,000 including GST. The GST credit is $11,000 / 11 = $1,000, claimed in the BAS for the period of the invoice and reported at G10. The GST-exclusive cost of $10,000 is capital expenditure. Unless the instant asset write-off applies, it is depreciated over the oven's effective life, for example $2,000 a year using the prime cost method if the effective life is 5 years.
Practical tips
- Keep an asset register recording the date, cost, GST claimed and depreciation method for every capital item.
- Do not treat a major improvement as a repair just to get an immediate deduction. The ATO looks closely at this distinction.
- Claim the GST credit on capital purchases in the correct BAS period, even though the income tax deduction is spread out.