Capital budgeting

New policy proposals (NPPs) are any policy proposals that require a government decision and that have potential financial impact, including on the fiscal balance, underlying cash balance, headline cash balance, net debt or net worth on existing estimates within the forward estimates period or beyond (including drawing down on cash reserves or moving expenditure from outside into the forward estimates).

For further information and additional criteria that help define a NPP, please refer to the NPP definition provided in the PGPA Glossary.

Entities must bring forward an NPP and capital business case for consideration by Government where they propose to spend more than:

$15 million  in any one financial year $45 million  in total over the budget and forward year estimates

departmental capital budget or administered capital budget funding depreciation funding (corporate Commonwealth entities) other funding or prior year capital appropriations – including, but not limited to, asset replacement or capitalised maintenance, projects and procurement involving assets.

NPPs for ongoing or future funding

For minor ongoing changes, entities may submit an NPP to request an ongoing increase to their departmental capital budget (DCB) or administered capital budget (ACB).

Where ongoing or future funding is required (typically for assets valued at more than $10 million), the NPP should clearly identify the funding is ongoing, its timing and purpose, such as:

• the replacement of the asset
• capitalised maintenance, and/or
• make-good costs.

An entity can nominate a minor part of their DCB, ACB or depreciation funding as an offset for new assets or other NPP types (for example, operating expenses or savings proposals). This is subject to the entity demonstrating the funding is in excess of long-term capital needs.
 

NPPs for property management major capital works

NPPs for major capital works projects being undertaken by or on behalf of the Commonwealth (excluding fit-outs), must apply the two stage capital works approval process outlined in RMG-500 Commonwealth Property Management Framework.

This excludes the Department of Defence’s (Defence) capital works proposals where a Defence portfolio budget submission seeks agreement for the annual Defence Management and Financial Plan (DMFP).
 

Defence Portfolio Budget Submission

Defence portfolio budget submission should seek agreement to the annual DMFP, which updates the Internal Program Budget view of Defence.

The supporting 20-year financial data underpinning the DMFP and the Defence Integrated Investment Program, must be provided to the relevant Finance Agency Advice Unit (AAU) to support the Government’s consideration.

The National Security Committee of Cabinet or the Prime Minister determine the appropriate approach for Defence investments projects, informed by advice from the Defence Investment Committee.

This is particularly important as the forward work plan reflects all proposed approaches to Government within the upcoming financial year, will be brought forward for Government consideration in the context of a bi-annual update of the Defence Integrated Investment Program. 

A truncated Smart Buyer risk assessment should be used when recommending approaches to Government (including tailored approval authority or approval pathway) for projects.
 

NPPs for major infrastructure projects

Major infrastructure projects (that are not considered to be balance sheet proposals) include but are not limited to transport, energy, communications, water, social, and other nationally significant infrastructure projects.

Where the Commonwealth contribution is $250 million or more, entities must come forward through a 2-pass consideration process where they must:

• Seek an assessment from Australian Government entities in respect of financing options prior to first pass consideration via assessments@ica.gov.au mailbox.
• Ensure that Infrastructure Australia has positively assessed the business case prior to second pass consideration of the policy proposal for investment.
• Comply with the requirements of the Commonwealth Investment Framework.
   

NPPs for office accommodation and shopfront leases

Non-Corporate Commonwealth Entities (NCEs) must follow the lease notification and endorsement processes outlined under RMG-500.
 

NPPs for the creation of a new entity

Non-Corporate Commonwealth Entities

Where an NPP proposes the creation of a new NCE, the NPP should address the need for:

• setup of capital funding – through Appropriation Acts (No. 2/4/6), and
• setup of an ongoing DCB or ACB.

The proposed amount of DCB and ACB funding for the new entity should consider the DCB and ACB amounts provided to comparable entities (such as, similar size, function and asset base).

For example, where a new entity is essentially a separation of an existing function out of an existing entity, the new entity’s capital requirements could be reasonably determined by looking at their allocation of the capital budget prior to separation. Where the function is new or there is a significant change to the function being separated out, capital funding requirements for the new entity should be assessed as part of the original NPP creating the entity. This approach ensures sufficient capital funding is available upon commencement.

Where DCB and ACB funding is required to commence replacing assets in future years, this must be explicitly identified in the NPP.
 

Corporate Commonwealth Entities

Similarly, where an NPP proposes the creation of a new Corporate Commonwealth Entities (CCE), the NPP should address the need for:

• depreciation funding

Depreciation funding can be based on the assets transferred or purchased as part of its creation. 

Changes to an entity’s corporate or non-corporate status

If an entity changes its status from a CCE to an NCE, funding previously provided for depreciation expenses will need to be considered in-line with the net cash funding arrangements: 

• Funding for the replacement of minor assets (valued at $10 million or less) will need to reclassify from operating to DCB.
• Funding for the replacement of major assets (valued at more than $10 million) will need to be appropriated through Appropriation Acts (No. 2/4/6). Entities should seek an NPP for capital funding through Appropriation Acts (No. 2/4/6) if they have not already done so.

If an entity changes its status from an NCE to a CCE, funding for the DCB will be reclassified as departmental operating funding to cover the entity’s depreciation expenses. It is unlikely the reclassification from DCB funding and the entity’s depreciation expenses will match. Where a change of status occurs and funding is requested to cover additional depreciation expense capital requirements, entities must:

• discuss the additional funding requirements with their AAU
• outline their funding request in a NPP, and
• disclose the additional capital funding requirements in their next Portfolio Budget Statements (PB statements) or Portfolio Additional Estimates Statements (PAES).

Item 7 under subsection 27(2) of the Public Governance, Performance and Accountability Rule 2014 (PGPA Rule), enables NCEs to retain receipts related to the sale of departmental non-financial assets.

Proceeds from the sale of non-financial assets may be considered offsets for capital expenditure proposals.

Subsection 27(7) of the PGPA Rule limits the amount that can be receipted from the sale of non-financial assets under item 7 (less costs incurred for the sale) to no more than 5% of an NCE’s total departmental items in an appropriation Act for the financial year. Generally, for amounts greater than 5% and where no government decision exists, the funds are returned to the Consolidated Revenue Fund (CRF).

Entities must consult their AAU in relation to the sale of significant assets and when updating estimates for asset acquisitions.

The proceeds from the sale of assets must not be used for recurring expenditure such as salaries or supplier costs.

For further information, refer to Sale of Departmental assets included in RMG-307 Retainable receipts, available in the right-hand menu under Resource Management Guides.

Please talk to your AAU in the first instance for movements of capital expenditure.

Movements of capital expenditure will be subject to the agreement of Finance or the Minister for Finance where the net accumulated amount per entity within a financial year (taking into account both the Budget and MYEFO updates) to be moved to or from any one year exceeds the stated thresholds.

Any unspent or unallocated DCB and ACB appropriations from prior years should be used before seeking reappropriation in future years.

Requests for the movement of capital expenditure must include a revised Capital Management Plan (CMP) and are to be submitted to the relevant AAU and CMP-PCEF@finance.gov.au.

Refer to the CMP checklist.

Movement of loan or investment amounts

Entities should contact their AAU where they need to reprofile a:

• ‘loan’ or ‘loan and expenditure’, for a yet-to-be appropriated multi-year loan or investment involving a movement of funds, and/or
• ‘expenditure’ for a loan or investment amount that has been appropriated or an unspent portion that remains at the end of the budget period. 
   

Movements that result in an operating loss

Some transactions involving asset funding or movements of funds may result in operating losses. Where an NCE is in receipt of a DCB or CDAB, the NCE:

• should adjust the operating result for the relevant depreciation expenses to ensure the resulting operating loss is not a consequence of the move to net cash appropriation arrangement, and
• may budget for an operating loss up to the relevant amount of unfunded depreciation expenses including their Depreciation on Right-of-Use assets.

Depreciation expenses must be excluded from the calculation of an operating loss where they relate to:

• cost-recovery, and/or
• externally funded operations with a component for the recovery of depreciation expenses.

A list of material cost-recovery entities, where a component of depreciation expenses is excluded from net cash arrangements, is included in RMG-125 Commonwealth entities financial statements guide.
 

Movements that result in an operating loss for CCEs that are National Collection Institutions

CCEs that are National Collecting Institutions (NCI) with a CDAB, are subject to limited net cash appropriation arrangements.

An NCI may budget for an operating loss up to the amount of their heritage and cultural assets depreciation expenses (excluding any building depreciation expenses) for their purchased assets.

For further information on this process and its timing, entities should contact their AAU.

Reclassifying between operating and capital expenditure

DCB and ACB funding must be used for the purpose it was provided – such as, for the replacement of minor assets and/or capitalised maintenance.

Reclassifications are limited to activities with existing policy authority which means an entity will need to already have DCB established before they can reclassify funds between operating and capital expenditure. Entities who seek to use their DCB funding for operating expenditure (or vice versa) purposes must seek a reclassification as they require:

1. an approval from the relevant decision-maker
2. the original appropriation to be withheld under section 51 of the PGPA Act, and
3. a reappropriation.

Entities should ensure a reclassification is completed in time for Additional Estimates. This allows inclusion in the Additional Estimates Annual Appropriation Bills with the correct split between operating and capital expenditure reported in their PAES. 

The reclassification of DCB and ACB funding into operating funding (or vice versa) can only occur within a financial year (that is, not between years) and is subject to the agreement of Finance (if the value of the reclassification is less than $20 million at the Central Budget Management System (CBMS) program level) or the Minister for Finance (if the value is $20 million or more at the CBMS program level).

Appropriate steps must be taken to ensure the change can be reflected in an entity’s financial statements, where:

• funding is reclassified from DCB to operating expenditure – or vice versa – during the year (that is, post Budget)
• the reclassification of administered operating to administered capital in Appropriation Acts (No. 2/4/6) is subject to written agreement of Finance or the Minister of Finance depending on the threshold.

For all reclassification requests entities should contact their AAU.

Circumstances where a reclassification may be requested

A reclassification may be requested, where:

• A decision is taken to change the asset capitalisation threshold of the entity.

  For example, instead of assets being capitalised with a value of $1,000, they are now capitalised where their value is $2,000 or more.

• The entity has entered into a shared services agreement (SSA) with another government entity and there are changes in the way the entity manages its assets – such as leasing rather than purchasing.
• There is an outsourcing of services, which would have normally required the entity to purchase assets – such as engaging cloud computing services instead of using in-house data management.
  • Entities should refer to RMG-109 Accounting for internally developed software and cloud computing arrangements.
     

CCEs reclassification of expenditure for cloud computing arrangements

Where a CCE is considering a cloud computing arrangement in which the proposed expenditure would be expensed, and for which they have already received an appropriation through Appropriation Acts 2/4/6, CCEs will need to request a reclassification of expenditure from capital (Appropriation Acts 2/4/6) to operating (Appropriation Acts 1/3/5).

If a reclassification is approved, CCEs will need to consider how to effectively reduce the amount appropriated through Appropriation Acts 2/4/6, because CCEs may not be able to apply section 51 withholdings like NCEs can. This is because portfolio departments are usually required, by the CCE’s own enabling legislation, to pay amounts appropriated to CCEs in full by the end of the financial year. This includes the full amount appropriated through Appropriation Acts 2/4/6.

Due to this, if a reclassification is approved, where possible, CCEs will need to reduce a future amount to be provided in Appropriation Acts 2/4/6 (preferably in the same financial year, or in the next financial year if the same financial year is not an option). CCEs should contact their AAU, when adopting this suggested approach.

Where a CCE intends to use their reserves to fund operating or capital expenditure – they may require policy authority and should consult with their AAU.

CCEs should refer to RMG-109 Accounting for internally developed software and cloud computing arrangements.

Capital management plans

The CMP is a strategic planning document prepared by the entity that details an entity’s actual and anticipated capital expenditure, and how the entity proposes to fund it. The CMP forms part of an entity’s financial management strategy as it is part of its asset management planning, considering current needs and forecasting for future replacement requirements. The CMP is provided by an entity to Finance’s AAU so they can gain visibility on an entity’s proposed planned capital expenditure before approving entities estimates adjustments in CBMS.

The CMP increases entities’ financial management accountability, particularly their balance sheet management by:

• providing government with visibility of planned capital expenditure
• assisting internal budget decision-making by entities and providing information to support the entity’s capital expenditure estimates particularly in support of budget bids in CBMS
• supports the validation of capital expenditure adjustments in CBMS for NPPs or movement of funds, and
• to help identify future capital needs and pressures.

Requests for capital funding are, preceded by the need for funding, which are usually identified in an entity’s CMP.
 

Entities that must prepare CMPs

CMPs must be prepared by all General Government Sector entities (except for Government Business Enterprises) that:

• own assets
• plan to purchase new assets
• plan to replace existing assets, and
• incur other capital expenditure across the budget and forward-year estimates.

Entities that do not meet these requirements should advise their AAU that a CMP is not required.

The CMP template is available to Australian Government officials through CBMS from:

Guidance and Resources → Reference Material → CMP PCEF Template 20xx.xlsx

Minimum requirements and presentation for CMPs

CMPs should reflect the entity’s strategic budget priorities, as agreed by the Government, and they must:

• align with other internal plans, for example the entity’s corporate plans and internal budgets, and
• be consistent with capital expenditure estimates in CBMS.

For entities with significant long-lived asset holdings or future budget pressures, budgeted capital expenditure data beyond the forward estimates should be included in their CMP.

Portfolio departments should ensure that the CMPs across the portfolio are presented consistently to aid analysis and comparability across the portfolio.

Assets under construction should be recorded against the relevant asset class.

To aid reconciliation of the CMP with CBMS, entities that do not budget for assets under construction in the CBMS ‘Asset Movement Table’ until they are capitalised, should note this in their CMP.

Right-of-Use assets should be excluded from the CMP as, even though they are being recorded on the balance sheet, they are not funded through capital appropriations. 

CMP checklist

Refer to the CMP checklist.

When a CMP must be revised

In a normal Budget year, all entities are required to provide Finance with a CMP in February prior to the commencement of the Budget update. The update will reflect any changes since the previous Budget or MYEFO update, and/or include decisions discussed with your AAU.

Where material entities have significant changes, they should provide Finance with an updated CMP in October at the commencement of the MYEFO update. This revision should consider actual capital expenditure for the prior year, revised year-to-date estimates and any major funding decisions since the last Budget.

Outside these 2 formal updates, material entities should also provide Finance with revised CMPs whenever there are significant changes encompassing:

• government decisions or measures
• approved movement of capital expenditure requests
• approved reclassifications between operating and capital expenditure
• Machinery of Government changes
• transfer of capital amounts between entities, and/or
• other changes – such as the restructuring of an entity’s expenditure due to emerging priorities or changes to the corporate structure.

Finance does not require the submission of revised CMPs at MYEFO for changes arising from indexation or third forward year estimate (FE3) creation.

Revised CMPs are to be provided to the relevant AAU and CMP-PCEF@finance.gov.au. Entities are encouraged to include an updated property capital expenditure forecast (PCEF).

The submission of a CMP and PCEF does not constitute agreement by Finance (or the government) to the planned capital expenditure or additional funding.

Property capital expenditure forecasts

The PCEF template is optional and does not have to be completed every time prior to Budget or MYEFO update. All General Government Sector entities are encouraged to prepare and maintain a PCEF when they undertake a fit out.

The PCEF focuses on and supports the management of property related, long-term capital expenditure according to discrete capital works over forward estimates. It assists with capital planning and feeds into the CMP.

A PCEF should include:

• 4 years of actual capital expenditure
• 10 years of budgeted capital expenditure on property, and
• other non-financial property information.

The PCEF template is included with the CMP template and is available to Australian Government officials from CBMS at:

Guidance and Resources → Reference Material → CMP PCEF Template 20xx.xlsx

Providing a PCEF to the relevant AAU does not constitute an agreement by Finance or the government to the planned capital expenditure, or the provision of additional funding.

For further information, contact your AAU. For guidance on technical accounting policy, email Budget Framework.

Capital budget reporting 

Entities must report their planned and actual capital expenditure in their PB statements and PAES (where required). Budgeted and actual capital expenditure data is available through various reports in CBMS and should be consistent with information in the:

• CMP
• PB statements or PAES, and
• corporate plan (if relevant).

The relevant tables or sections of the PB statement include the:

To run these reports, go to CBMS:

All Reports → Statutory Reports → PBS (or PAES) folder

CBMS operational reports

Capital budget reconciliation report – reconciles the Capital budget statement, Asset movement table and Cash flow statement, and advises of inconsistencies that require remediation of budget estimates in CBMS. 

To run this report, go to CBMS:

All Reports → Operational Reports → Estimates → Annual Estimates → AE.OR.07 Annual Estimates Capital Budget Reconciliation

Capital budget threshold report – provides an analysis of estimates adjustments entered by entities throughout the year and advises where the entity may need to seek the Minister for Finance’s approval for a movement of capital expenditure. This report also assists with identifying transactions that impact calculations associated with the creation of a new FE3 estimate in CBMS. 

To run this report, go to CBMS:

All Reports → Operational Reports → Estimates → Annual Estimates → AE.OR.05 Annual Estimates Capital Threshold Report

Capital budget statement – shows appropriation funding provided for assets compared to the budgeted capital expenditure across the current, budget and forward year estimates.

To run this report, go to CBMS:

All Reports → Operational Reports → Estimates → Annual Estimates → AE.OR.06 Annual Estimates Capital Budget Statement Report

Examples for updating capital expenditure estimates in CBMS journals, refer to Examples of Journals used for updating capital expenditure estimates in CBMS.