Most non-corporate Commonwealth entities (NCEs), excluding fully cost-recovered entities, receive ongoing capital funding through a departmental capital budget (DCB) annual appropriation or other sources of capital funding (refer Equity injections, administered assets or liabilities and other sources of funding).
Departmental and administered capital budgets
From 2011, Budget funded NCEs were provided DCB and / or administered capital budget (ACB) funding to meet the costs associated with:
- the replacement of minor assets (valued at $10 million or less)
- capitalised maintenance and make-good (costing $10 million or less in aggregate).
Both DCB and ACB funding are subject to the efficiency dividend and indexation rules and are recognised in the entity’s accounts as contributions of equity – see RMG-125 Commonwealth entities financial statements guide.
The DCB thresholds do not apply to the Department of Defence (Defence) as the entity is not subject to the efficiency dividend and indexation rules. Defence may use DCB funding to purchase inventories and for impairment purposes.
Under the sunset provisions for an annual appropriation, DCB and ACB appropriations automatically extinguish after 3 years (when the relevant appropriation Act is repealed).
ACB funding no longer required by an NCE should be withheld under section 51 of the Public Governance, Performance and Accountability Act 2013 (PGPA Act).
When the total of all capital expenditure exceeds the prescribed thresholds, a movement of funds (MoF) may be required to re-profile capital expenditure between financial years, refer to the movements of capital expenditure section.
Entities should maintain up-to-date capital expenditure estimates in the 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 on the basis of the previous year’s FE3 estimate, factoring in:
- baseline changes, such as the efficiency dividend and indexation
- 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 that period has ended the increase or decrease must be cancelled-out along with the impact of associated indexation.
A permanent transfer involves the entity receiving an ongoing increase or decrease to a DCB or ACB that will continue in the new FE3 and beyond.
When creating the FE3, entities should take a common sense approach to ensure that 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
- entities affected.
Step by step guide to creating FE3 in CBMS
Information technology – DCB
Where an entity switches from maintaining internal information technology (IT) capability to external IT capability (e.g. switching from internal data warehousing to cloud computing through an external provider) and a transfer of funding is required, they must request a reallocation between capital and operating expenditure.
Sub-leasing incentives – 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 to replenish the DCB, to its original level, by the end of the lease
- the total value of the fit-out is not more than $10 million – if it is more than $10 million in any one year, the fit-out is regarded a major asset and requires an NPP.
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 shared services agreements (SSA), which are operating expenditure in nature and cannot be funded from DCB.
SSA can take various forms – for example, an agreement with a service provider to:
- deliver and administer payments on behalf of the commissioning entity
- provide corporate or other support services to another entity.
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.
In this situation, the:
- commissioning entity requests part of their DCB to be transferred to the service provider and reduces their DCB estimates in CBMS
- service provider:
- recognises the funding as an equity transfer and increases their DCB estimates in CBMS
- maintains a register of all DCB amounts transferred from commissioning entities, so an acquittal can be derived between amounts transferred and consumed.
The transfer of funding and change in capital expenditure estimates between entities should not impact on fiscal balance and underlying cash – i.e. capital continues to be classified as capital and does not create any operational surplus or deficit issues for the entities.
Transfers between commissioning entities and service providers should be reflected in CBMS in time to be included in the appropriation bills.
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 likely to be treated as a contribution of equity transaction and may require prior approval by the Minister for Finance (Finance Minister).
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 Deeming or designating transfers of assets and liabilities as ‘contributions by owners’ (equity).
Entities must comply with the legislative and non‑legislative criteria for the transfer of assets to, or from, another entity.
Invoicing for capital services
Under a SSA, the service provider may charge a fee to the commissioning entity for the provision of capital services. Where this occurs, the:
- commissioning entity requests a reallocation of DCB to operating expenditure. The commissioning entity reduces their DCB funded capital expenditure estimates
- 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 and, once entered into CBMS, will be reflected in the next set of appropriation bills. Changes to current year estimates must be completed by no later than the timing required for production of the Additional Estimates appropriation bills.
Funding of Corporate Commonwealth Entities 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
- to be used for capitalised maintenance and the replacement of assets
- subject to the efficiency dividend but not indexation
- recognised as revenue in the statement of comprehensive income.
If a CCE requires funding to replace assets they will need to prepare an NPP.
Collection development acquisition budgets
CDABs provide funding to Designated Collection Institutions (DCI).
A DCI is an entity where the primary function or purpose under its enabling legislation is to develop and maintain collections of heritage and cultural assets. CDAB funding is provided:
- as an equity injection in appropriation Acts (No. 2/4/6)
- to grow and develop the DCI heritage and cultural asset collections.
A government decision is required if a DCI 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.
Machinery of government changes – DCB and ACB
When MoG changes occur, a component of the transferring entity’s current and future DCB and ACB transfers with the functions and assets:
- entities will negotiate the amount of unspent DCB and ACB to be transferred
- the affected entities are to revise their CMP (and, if appropriate, their PCEF) to reflect the functions or assets that have been lost or gained.
On transfer, the gaining entity must recognise the outstanding DCB and ACB appropriation receivable transferred as a contribution of equity – in accordance with the Public Governance, Performance and Accountability (Financial Reporting) Rule 2015.