Capital funding

Australian Government entities are appropriated ongoing capital funding, through the Budget process, in:

• Appropriation Acts (No. 1/3/5):
  • Non-corporate Commonwealth entities (NCEs) are not funded for depreciation expense, they receive their funding in the form of a departmental capital budget (DCB) and/or an administered capital budget (ACB).
    • DCB and ACB provide non-operating funding, which are used to meet the costs associated with the replacement of minor assets (that is, assets valued at $10 million or less), or maintenance costs that are eligible to be capitalised (for example, depreciation, amortisation and make-good expenses).
  • Corporate Commonwealth entities (CCEs) and entities who operate on a cost recovery basis are funded (or partially funded) for depreciation expenses. In this guide, depreciation or amortisation expenses are simply referred to as ‘depreciation expenses’.
• Appropriation Acts (No. 2/4/6) - as a collection development acquisition budget (CDAB):
  • Non-ongoing capital funding is appropriated through Appropriation Acts (No. 2/4/6) as departmental equity injections and administered assets and liabilities:
    • Departmental equity injections appropriations may be used to make payments related to enhancing the entity’s asset base or reducing prior year liabilities but cannot be used for operating expenditure purposes.
    • Administered assets and liabilities may be used to enhance existing administered assets and/or discharge administered liabilities relating to the activities administered by NCEs on behalf of the Government. This means that appropriations for administered assets and liabilities are allocated for functions managed by an NCE for the Government.
  • For further details please refer to Equity injections and administered assets and liabilities below.

Entities may also fund the purchase of assets from other sources such as their cash reserves, for example:

• their Public Governance, Performance and Accountability Act 2013 (PGPA Act) external revenue retained under section 74, where amounts have been credited to a departmental item in Appropriation Acts (No. 1/3/5), and
• where applicable from their special account receipts.

Cash reserves are defined separately for NCEs and CCEs.

• For NCE they comprise of:
  • cash and cash equivalents (cash at bank, cash on hand and cash in special accounts)
  • appropriations receivable (undrawn appropriations held in the Official Public Account), and
  • other financial assets such as short-term receivables (for example, grants, interest, dividends, trade debtors, sub-lease receivable), accrued revenue (for example, accrued sales of goods and services).
• For CCEs they comprise of:
  • cash and cash equivalents (cash at bank and cash on hand)
  • investments (investments in deposits, interesting bearing securities, shares, derivatives and other investments), and
  • other financial assets such as short-term receivables (for example, grants, interest, dividends, trade debtors, sub-lease receivable), accrued revenue (for example, accrued sales of goods and services).

For further information on Appropriations, DCB, CDAB’s and section 74 non-ongoing capital funding, please refer to RMG-100 Guide to appropriations available in the right-hand menu under Resource Management Guides.

An increase in capital funding, either on a one-off or ongoing basis, must be sought through new NPP where the increase is due to:

• a change to accounting standards
• asset revaluations, and
• additional asset purchases.

An NPP is required where an entity intends to purchase new assets, capitalised expenditure on existing assets or replace existing assets worth more:

• $15 million or more over one year, or
• $45 million over the forward estimates.

For further information, refer to New policy proposals. Contact your Finance Agency Advice Unit (AAU) first to discuss your NPP requirements.

Most NCEs, excluding fully cost-recovered entities, receive ongoing capital funding through a DCB annual appropriation or other sources of capital funding.

For further information refer to Non-ongoing and other sources of capital funding below. 

Departmental and administered capital budget

Budget funded NCEs are provided DCB and/or ACB funding to meet the costs associated with:

• the replacement of minor assets (valued at $10 million or less), and
• capitalised maintenance and make-good (costing $10 million or less in aggregate).

Usually most DCB, CDABs and some certain ACB funding where identified are subject to the efficiency dividend and indexation rules and are recognised in the entity’s accounts as contributions of equity.

Refer to Departmental appropriations included in RMG-116 Accounting for annual appropriations, available in the right-hand menu under Resource Management Guides.

The DCB thresholds do not apply to the Department of Defence as the entity is not subject to the efficiency dividend and indexation rules. The Department of Defence may also use DCB funding to purchase inventories and for impairment purposes.

Under the annual Appropriation Acts sunset provisions, all annual appropriations automatically extinguish after 3 years (when the relevant appropriation Act is repealed).

• ACB funding no longer required by an NCE must be withheld under section 51 of the PGPA Act.
• Withholding or quarantining annual appropriations under section 51 of the PGPA Act refers to the means by which the Government manages access to appropriation amounts that entities no longer require, or no longer have policy authority to spend. For further information refer to Withholding or quarantining annual appropriations in RMG-100 Guide to Appropriations and the latest estimates memoranda advising on:
  • the end-of-financial year process for section 51 withholdings of annual appropriations and
  • movement of funds, reallocations and reclassifications.

When the estimated total of all capital expenditure exceeds available funding within a year, an estimates variation under movement of funds process may be required to re-profile capital expenditure between financial years, refer to Movements of capital expenditure.

Entities are required to maintain up-to-date capital expenditure estimates in Central Budget Management System (CBMS) as they impact the calculation of budget aggregates.

Forward year estimates – DCB and ACB

When creating a third forward year estimate (FE3), DCB and ACB estimates should be created based on the FE2 estimate, factoring in:

• baseline changes, such as the efficiency dividend and indexation, and
• adjustments for ad hoc, temporary or permanent transfers.

A temporary transfer involves the entity receiving an increase or decrease to their DCB or ACB funding for a fixed number of years. To prevent the DCB or ACB from being inflated or deflated in the new FE3, once a temporary transfer expires any increase or decrease applied to DCB and ACB funding must be cancelled-out in the forward year estimates along with any impact associated with indexation.

A permanent transfer involves receiving an ongoing increase or decrease to a DCB or ACB funding that continues in the new FE3 year and beyond.

When creating the FE3, entities should adopt a commonsense approach to ensure all temporary and permanent transfers have been taken into account.

All FE3 adjustments must be recorded in CBMS, with the description clearly specifying the:

• reason for the adjustment
• expenditure that is moving, and
• entities affected.

Refer to the Step-by-step guide for creating Forward Estimate Year 3 DCB, ACB and/ or CDAB in CBMS available in the right-hand menu under Tools and templates. 

When is a reclassification between departmental operating and departmental capital budget required?

A reclassification is required to move expenditure between different appropriation types (from departmental operating, to DCB, or vice versa). 

Entities should refer to EM 2023-27 Reclassifying between ordinary annual services departmental operating and capital expenditure and the ‘How to – Reclassification of departmental operating and departmental capital budget appropriations’ available from CBMS under ‘Estimates Memoranda’ and ‘Guidance and Resources’ respectively.

This typically arises from an expected change in the accounting treatment of budgeted expenditure within the current financial year. Examples include where an entity moves from owning and operating their own IT to system to a cloud computing arrangement (moving from capital to operating expenditure).
 

The opposite of the above 2 examples may also be true where the entity elects to maintain control of their own property and systems.

Further explanation of above:

1. From departmental operating to DCB
   • Where an entity has budgeted for expenditure funded through a DCB appropriation, and later determines the expenditure should have been accounted for as an operating expense as it is not eligible to be capitalised.
   • As the budgeted expenditure would now be consistent with a departmental operating appropriation, a reclassification request should be made.
   • Instances where this may occur are when:
     • An entity chooses to use a cloud service arrangement in place of procuring their own IT system.
     • An entity (the commissioning entity) may have an agreement with another government entity (the service provider) to provide services on its behalf. These agreements are deemed to be SSA, which are an operating expenditure and cannot be funded from DCB funding.
2. From departmental operating to DCB
   • Where an entity has budgeted for departmental operating expenses, and later determines the expenditure shall now be eligible to be capitalised to be used for the replacement of minor assets, or for capitalised maintenance and make-good costs (both of which must be valued at $10 million or less).
   • As the budgeted expenditure would now be consistent with a DCB appropriation, a reclassification request should be made.
   • Instances where this may occur are when:
     • An entity may choose to move from a cloud service provider and procure their own IT system.
     • Where an entity experiences a one-off unplanned increase in their capitalised expenditure (for minor asset replacement, capitalised maintenance and make-good costs) and where they choose to offset their capital expenditure against existing departmental operating resources (an entity may only do this when no operating loss or financial sustainability issues will be triggered).
     • A new entity was established without a DCB, and it requires funding for the replacement of minor assets.

Information technology – DCB

Where an entity chooses to use existing funding, and moves from maintaining internal IT capability to external IT capability (for example, move from an internal data warehousing to a cloud computing service through an external provider) and a transfer of funding is required, a reclassification of funds, that is, capital to operating expenditure must be requested.

Entities should refer to RMG-109 Accounting for internally developed software and cloud computing arrangements available in the right-hand menu under Resource Management Guides.

Fit out incentives for sub-leasing – DCB

DCB may be used to fund a property fit out provided as a lease incentive for a sub-lease, provided that:

• Part of the rental income is used for replenishing the entity’s DCB back to its original level by the end of the lease, and
• The total value of the fit-out is not greater than $10 million and can be considered a minor asset.

If the total value of the fit-out is greater than $10 million, in any one financial year, the fit-out is regarded a major asset and requires a NPP to authorise funding.

Shared services agreements – DCB

An entity (the commissioning entity) may have an agreement with another government entity (the service provider) to provide services on its behalf. 

These agreements are deemed to be a SSA, which are operating expenditure in nature and cannot be funded from DCB.

Transfer of DCB and purchase of assets by the service provider

Under a SSA, the commissioning entity and service provider may agree to the transfer of DCB. 

Under a SSA, where the service provider acquires assets to deliver services on behalf of the commissioning entity, the commissioning entity may transfer some of its DCB funding to the service provider.

The transfer of funding and change in capital expenditure estimates between entities should not impact on fiscal balance and underlying cash – that is, capital continues to be classified as capital and does not create any operational surplus or deficit issues for the entities.

Transfers between the commissioning entities and service providers must be reflected in CBMS in time for inclusion in the appropriation bills. Entities should refer to the latest relevant estimates memoranda issued at Budget or for Additional estimates which specify the appropriate timeline entities are required to follow.

Additional Estimates in RMG-100 Guide to appropriations provides additional guidance and is available under Resource Management Guides.

Transfer of assets from commissioning entity to service provider 

Under a SSA, the commissioning entity may transfer existing assets to the service provider.

This is generally treated as a ‘contribution of equity’ transaction and requires prior approval by the Minister for Finance.

The authority to approve the transfer of assets from commissioning entities and service providers will be determined by the thresholds specified under Designated equity criteria in RMG-123 Designating transfers of assets and liabilities as 'contributions by owners' (equity).

Entities must comply with the legislative (such as, section 75 transfer instruments under the PGPA Act) and non‑legislative instruments and criteria for the transfer of assets to, or from, another entity. Non-legislative instruments may comprise of the Administrative Arrangement Orders as described on the Federal Register of Legislation and non-legislative criteria may encompass:

• the Finance and the Australian Public Service Commission’s Machinery of Government Changes Guide, and
• our Resource Management Guides.

Invoicing for capital services and charging a fee to the commissioning entity

In invoicing for capital services, the service provider may charge a fee to the commissioning entity for the provision of those services. 

Where this occurs, the:

• Commissioning entity requests a reclassification of DCB to operating expenditure where DCB funded capital expenditure estimates are reduced. Where DCB appropriations have already been provided, the DCB appropriation will need to be withheld under section 51 of the PGPA Act. 
• The service provider recognises the funding as related entity revenue and increases their ‘internally funded’ operating expenditure estimates in CBMS.

The transfer of funding and change in capital and operating expenditure estimates between entities should not impact on fiscal balance and underlying cash. Entities must check for any fiscal and/or underlying cash balance impacts with a view to correcting them before posting their annual estimates adjustments in CBMS.

Once entered into CBMS this will be reflected in the next set of appropriation bills. 

Changes to current year estimates must be completed in time to be included in the Additional Estimates appropriation bills. Entities should refer to the relevant Estimates Memoranda issued at Budget or for Additional estimates which specify the appropriate timelines entities are required to follow.

Additional Estimates in RMG-100 Guide to appropriations provides additional guidance and is available in the right-hand menu under Resource Management Guides.

Funding of CCE for depreciation expenses

CCEs are funded for ordinary annual services appropriations, through Appropriation Acts (No. 1/3/5).

CCE funding for depreciation expenses is:

• typically classified as departmental
• subject to the efficiency dividend but not indexation, and
• recognised as revenue in the statement of comprehensive income.

If a CCE requires new funding to replace assets they will need to prepare an NPP.

Collection development acquisition budgets

CDABs provide funding to National Collection Institutions (NCI).

An NCI is an entity where the primary function or purpose under its enabling legislation requires it to develop and maintain collections of heritage and cultural assets. 

NCIs are provided with CDAB funding:

• as an equity injection in Appropriation Acts (No. 2/4/6), and
• to grow and develop the NCI heritage and cultural asset collections.

A government decision is required if an NCI proposes to use CDAB funding for another purpose.

CDAB FE3 estimates are to be based on the previous year’s estimates, adjusted for indexation, the efficiency dividend, temporary adjustments and government decisions.

RMG-125 Commonwealth entities financial statements guide provides a full list of NCI and is available in the right-hand menu under Resource Management Guides.

Machinery of government changes – DCB and ACB

When MoG changes occur, the transferring entity (transferor) may be required to transfer their current and future year DCB and ACB funding with the function and assets received by the gaining entity (transferee):

• Entities must negotiate the amount of unspent DCB and ACB to be transferred under section 75 of the PGPA Act.
• The affected entities are to revise their CMP (and, if appropriate, their property capital expenditure forecast to reflect the functions or assets that have been transferred or received by the gaining entity.

On transfer, the gaining entity must recognise the outstanding DCB appropriation receivable transferred as a contribution of equity – in accordance with the Public Governance, Performance and Accountability (Financial Reporting) Rule 2015.

For further information, refer to RMG-118 Accounting for machinery of government changes and RMG-116 Accounting for annual appropriations, available in the right-hand menu under Resource Management Guides. 

Appropriation Acts (No. 2/4/6) provide appropriations for items that do not form part of the ordinary annual services of the government. 

This may include departmental and administered capital funding.

Equity injections and administered assets and liabilities

Capital funding through Appropriation Acts (No. 2/4/6) is provided in the form of an appropriation for an equity injection or administered assets and liabilities, to:

• purchase new assets or replace existing major assets valued at more than $10 million
• discharge liabilities or loans, and/or
• provide start-up capital for new entities.

Usually, these type of funding sources are considered as non-ongoing capital funding arrangements:

• Departmental equity injections appropriations may be used to make payments related to enhancing the entity’s asset base or reducing prior year liabilities but cannot not be used for operating expenditure purposes.
• Administered assets and liabilities may be used to enhance existing administered assets and/or discharge administered liabilities relating to the activities administered by non-corporate entities on behalf of the Government. This means administered assets and liabilities appropriations are provided for functions managed by a non-corporate entity on behalf of the Government.

Entities may seek a new appropriation for the budget and forward estimate years, for equity injection and administered assets and liabilities funding, where their unspent appropriations extinguish after 3 years following the sunsetting of the relevant annual Appropriation Act.

In relation to administered assets and liabilities:

• Where an entity, underspends an administered appropriation:
  • a separate NPP will be required to use the underspend for another capital project, or
  • the underspend should be withheld under section 51 of the PGPA Act.
• Where an entity, intends to increase the budget for an administered capital project, a separate government decision is required for the additional funding.

Where entities seek a reappropriation under the Movement of Funds process, and for further information, please contact your AAU.
 

Other sources of capital funding

In addition to using DCB, ACB, or seeking additional appropriations, entities may use other appropriation funding for the purchase of assets and to undertake capital expenditure such as using:

• cash reserves generated from:
  • external revenue (receipts retained under section 74 the PGPA Act from the sale of assets), and/or
  • special appropriations including special accounts receipts retained by the entity.

With the section 74 external revenue, amounts credited to a departmental item in Appropriation Acts (No. 1/3/5) may only be used for the replacement of minor departmental assets and the capitalised maintenance of minor departmental assets (valued at $10 million or less).  

Where entities seek to purchase new departmental assets or replace major departmental assets, entities would need to seek a reclassification and receive reappropriation through Appropriation Acts (No. 2/4/6) equity injections. 

For Administered Assets, entities will need to seek Government approval prior to acquiring these assets.

RMG-307 Retainable receipts and RMG-100 Guide to appropriations provide additional guidance and are available in the right-hand menu under Resource Management Guides.