CapEx vs. OpEx: Assets, expenses and tax planning

Measuring expenses is critical for business owners to not only better understand their costs, but also for planning taxes. Here’s why.

Many small businesses choose to lease equipment and subscribe to technology services and software instead of paying upfront to own outright.

By doing this, they get all the benefits of having up-to-date tools and services without sinking huge amounts of money into depreciating assets.

The ability to pay for the use of what you actually need is one of the advantages of operating expenses (OpEx) versus capital expenses (CapEx).

What’s the difference between CapEx and OpEx?

Capital expenses are significant purchases a business makes and intends to draw value from over a long term, whereas operational expenses are the daily costs of running a business.

Here’s a more detailed explanation with examples:

• CapEx (capital expenses) – money spent on fixed assets for a business over the long term, such as buying and setting up buildings, machinery, vehicles and computer equipment
• OpEx (operating expenses) – the day-to-day running costs of a business, including wages, rent and leases, travel, consumable supplies such as paper and ink, software subscriptions and utilities such as electricity

What are the tax implications of CapEx vs OpEx?

Capital expenses and operating expenses are treated differently under taxation legislation, which will have outcomes for business tax planning and asset acquisition.

Find out how each type of expense is treated under tax legislation below.

How does capital expenses affect tax?

As capital expenses  can be deducted over time for depreciating assets, and businesses with an aggregated turnover below $500 million may be eligible for instant asset write-offs. Small businesses can apply simplified depreciation rules to instantly write off assets below a threshold of $150,000 (for businesses with less than $10 million aggregated turnover).

For more information on CapEx claims, read the ATO’s guide to claiming a tax deduction for depreciating assets and other capital expenses.

How does operating expenses affect tax?

Operating expenses can generally be deducted from income tax each tax period. Tax-related expenses, such as paying fees to an accountant or tax advisor to help you prepare and file tax records are covered under operating expenses.

For more information on OpEx claims, including tax-related operating expenses, read the ATO’s guide to claiming a tax deduction for other operating expenses.

Asset purchases: Upgrades are easier on a lease or subscription

Just as gaining access to the machinery you may need to setup or run a business is made easier with hire and lease agreements, getting hold of the digital technology you need to run your business more efficiently is made a lot easier with cloud subscription models for storage, software and more.

That’s because the money you pay to use cloud services is generally a subscription per month or year (OpEx), compared to the traditional upfront large investments (CapEx) for buying and setting up on-premise hardware and software.

You pay a lot less to get what you need right away, and because it’s all in the cloud, maintenance and security is managed by the provider.

Most cloud subscriptions include free trials or discounts for a month or more, so you can test new features and decide which plan is best before committing.

In many cases, you can also upgrade your cloud plan or subscription to gain access to more services, storage, software features and add-on apps to help your business grow.

When you need to scale your business technology fast, cloud is quickly becoming the popular choice for businesses of all stripes.

This information is general in nature and does not constitute professional advice. For guidance specific to your situation, MYOB suggests engaging a specialist advisor near you ASAP.