What is capital expenditure?

Published Thursday 23 July 2026

Table of contents

• What is capital expenditure (capex)?
• Types of capital expenditure
• Capital expenditure examples
• Capex vs opex: what's the difference?
• How to calculate capital expenditure
• Capital expenditure and depreciation in Australia
• How capex affects your financial statements
• Why capital expenditure matters for your business
• Track your capital expenditure with Xero
• FAQs on capital expenditure

Key takeaways

• Capital expenditure (capex) is money you spend on long-term assets like equipment, vehicles, or property that benefit your business for more than 1 year.
• Capex sits on your balance sheet as an asset and is gradually expensed through depreciation, rather than being deducted in full the year you buy it.
• In Australia, the ATO allows several depreciation methods including the instant asset write-off for eligible purchases, which can reduce your taxable income sooner.
• Understanding the difference between capex and opex helps you plan cash flow, forecast tax deductions, and make smarter spending decisions.

What is capital expenditure (capex)?

Capital expenditure is money you spend to buy, upgrade, or extend the life of a long-term asset. These assets are things like equipment, vehicles, buildings, or technology that you'll use in your business for more than 1 year.

You might also see capital expenditure shortened to "capex." It's a term accountants and business advisors use regularly, and it shows up on your financial statements under property, plant and equipment (PP&E).

Unlike everyday running costs, capex isn't fully deducted from your taxable income in the year you spend it. Instead, the cost is spread across the asset's useful life through depreciation. This means a $30,000 delivery van doesn't hit your profit and loss statement all at once; it's expensed gradually over several years.

For small business owners, capex decisions tend to be some of the biggest financial commitments you'll make. Getting them right means better cash flow planning, stronger tax outcomes, and a clearer picture of how your business is growing.

Types of capital expenditure

Not all capex serves the same purpose. Understanding the different types helps you budget more accurately and make decisions that match your business goals.

Maintenance capex

Maintenance capex is what you spend to keep your existing fixed assets in working order. It's about replacing or repairing things so your business can continue operating at its current level.

Think of it as the cost of standing still. Replacing a broken oven in your bakery or swapping out an ageing laptop are both maintenance capex. You're not growing; you're sustaining what you already have.

Growth capex

Growth capex is money you spend to expand your capacity, enter new markets, or increase productivity. It's a discretionary investment aimed at generating more revenue.

For example, if you buy 3 new delivery vans to serve a wider area, that's growth capex. So is fitting out a second retail location or purchasing software that automates a manual process. Growth capex is about moving your business forward.

Capital expenditure examples

Capex covers a wide range of purchases depending on your industry and business model. Here are some common examples that small businesses in Australia typically encounter.

• Buying commercial property or land for your business premises
• Fitting out a new office, shop, or warehouse with furniture and fixtures
• Purchasing vehicles like utes, delivery vans, or company cars
• Buying equipment such as ovens, machinery, or power tools
• Upgrading computers, servers, or point-of-sale systems
• Investing in research and development (R&D) for new products

The key test is whether the asset will benefit your business beyond the current financial year. If it will, it's likely capex rather than an operating expense.

Capex vs opex: what's the difference?

Capex and opex are 2 fundamentally different types of business spending, and they're treated differently in your accounts. Knowing which is which helps you manage cash flow and understand your tax position.

Capital expenditure (capex) covers long-term asset purchases. You record capex on your balance sheet, and the cost is depreciated over the asset's useful life. A $15,000 commercial espresso machine for your cafe is capex; it'll serve your business for years.

Operating expenditure (opex) covers the day-to-day costs of running your business. You deduct opex in full on your profit and loss statement in the period you spend it. Rent, wages, utility bills, marketing, and office supplies are all opex.

Here's a practical way to think about it: if you buy a delivery van, that's capex. The fuel, insurance, and servicing costs for that van are opex. The van is the asset; everything it costs to run is an operating expense.

Getting this distinction right matters because it affects your reported profit, your tax deductions, and your cash flow forecasts. Misclassifying capex as opex (or the other way around) can create problems with the ATO and distort your financial picture.

How to calculate capital expenditure

If you want to work out how much your business has spent on capex over a period, there's a straightforward formula you can use. It draws on figures from your balance sheet and income statement.

The formula is:

CapEx = PP&E (current period) - PP&E (prior period) + Depreciation

PP&E stands for property, plant and equipment, which is the balance sheet line where your long-term assets sit. Depreciation is the amount your assets have been expensed during the period.

Worked example

Say you run a landscaping business in Melbourne. At the end of the 2024-25 financial year, your balance sheet shows PP&E of $120,000. At the start of the year, PP&E was $95,000. Your depreciation expense for the year was $15,000.

Using the formula: CapEx = $120,000 - $95,000 + $15,000 = $40,000.

That means you spent $40,000 on new or upgraded assets during the year. This might include the new ride-on mower, trailer, and ute you purchased to take on bigger jobs. Having this number helps you track whether your investment in assets is keeping pace with your growth plans.

Capital expenditure and depreciation in Australia

When you buy a capital asset in Australia, you generally can't claim the full cost as a tax deduction straight away. Instead, the ATO requires you to depreciate the asset over its effective life.

ATO depreciation methods

The ATO recognises 2 main depreciation methods for most business assets under Division 40 of the tax legislation.

• Diminishing value method: you claim a higher deduction in the earlier years and less as the asset ages. This front-loads your tax benefit.
• Prime cost method: you claim an equal deduction each year over the asset's effective life. This spreads the tax benefit evenly.

Building and structural improvements fall under Division 43, which allows deductions for construction costs at a set rate (typically 2.5% or 4% per year depending on the type of building).

Instant asset write-off

The Australian Government's instant asset write-off scheme lets eligible businesses deduct the full cost of qualifying assets immediately, rather than depreciating them over several years. The thresholds and eligibility criteria change regularly, so it's worth checking the ATO website or speaking with your accountant for the latest rules.

For small businesses, this can make a real difference to cash flow and tax planning. If you're considering a major purchase, timing it to fall within the current write-off threshold could reduce your taxable income significantly.

How capex affects your financial statements

Capital expenditure doesn't just sit in 1 place on your accounts. It flows through 3 key financial statements, each telling a different part of the story.

Balance sheet

When you buy a capital asset, it's recorded on your balance sheet under PP&E. The asset increases your total assets, and the value decreases each year as depreciation is applied. Your balance sheet shows what you own and what it's currently worth.

Income statement

Capex doesn't appear directly on your income statement (profit and loss). Instead, the depreciation expense for each asset shows up as a cost, reducing your reported profit gradually over time. This is why a large asset purchase doesn't wipe out your profit in the year you buy it.

Cash flow statement

Your cash flow statement is where capex hits hardest. The full cash outlay appears under "investing activities" in the period you make the purchase. Even though the expense is spread across years for profit purposes, the cash leaves your account straight away. This is why cash flow planning is so critical when you're making capex decisions.

Why capital expenditure matters for your business

Understanding capex isn't just an accounting exercise. It directly affects how you plan, grow, and manage your money day to day.

Cash flow planning

Large asset purchases can put serious pressure on your cash flow. Knowing the difference between capex and opex helps you forecast when big outflows are coming and make sure you've got enough cash to cover them without disrupting daily operations.

Tax benefits

Capex gives you access to depreciation deductions and, in some cases, the instant asset write-off. Timing your purchases strategically can reduce your taxable income in the years where it matters most. Your accountant can help you work out the best approach for your situation.

Growth decisions

Every piece of growth capex is an investment in your business's future capacity. Tracking what you've spent and the return it's generating helps you decide whether to invest more, hold steady, or redirect your spending. It's the difference between guessing and making confident, informed decisions about where your money goes.

Track your capital expenditure with Xero

Keeping on top of your capital expenditure is easier when your accounting software does the heavy lifting. With Xero, you can set up a fixed asset register to track each asset's purchase date, cost, depreciation method, and current book value, all in 1 place.

Xero's customisable reporting lets you see exactly how much you've spent on assets over any period, and cash flow monitoring tools help you understand the impact of large purchases before you commit. Bank feeds automatically capture transactions as they happen, so you're not chasing receipts at tax time.

Whether you're replacing a single laptop or fitting out a new premises, having real-time visibility over your finances helps you make capex decisions with confidence. Get one month free.

FAQs on capital expenditure

Here are some frequently asked questions about capital expenditure.

Is capex tax deductible in Australia?

Yes, but not usually all at once. The cost of a capital asset is typically deducted over its effective life through depreciation, unless it qualifies for the instant asset write-off.

Does capital expenditure affect profit?

Not directly in the year you buy the asset. The purchase goes on your balance sheet, and only the annual depreciation amount flows through to your profit and loss statement as an expense.

What is the difference between capex and revenue expenditure?

Capex buys or improves long-term assets, while revenue expenditure covers day-to-day running costs. Revenue expenditure (opex) is fully deducted in the period it's incurred; capex is depreciated over time.

Can capital expenditure be negative?

In practice, no. If the capex formula produces a negative result, it usually means you've sold or disposed of more assets than you've purchased during the period.

What is a good capex ratio?

There's no single "good" number; it depends on your industry and growth stage. A capex-to-revenue ratio between 5% and 15% is common for small businesses, but capital-intensive industries like construction or manufacturing typically sit higher.