Amendments to this Guidance encompass:

• the addition of Business Rule 8 covering exemptions to the Capital Asset Charge; and
• the addition under 'Explanatory Details' of a subsection on 'Exempt controlled physical assets'.

On what basis will the Capital Assets Charge (CAC) be calculated?

Definitions:

• Capital Assets Charge (CAC) is a charge levied on the written-down value of controlled   non-current physical assets  in a department’s balance sheet which aims to:
  * attribute to agency outputs the opportunity cost of capital used in service delivery;

  * facilitate the full costing of outputs; and

  * provide incentives to departments to identify and dispose of under utilized or surplus assets in a timely manner.

• Written Down Value (WDV): the gross value of an asset (acquisition cost or current cost) less accumulated depreciation.

          Application of the Rate

1. CAC is levied at a rate of 8.0% per cent on the written-down value of controlled non-current physical assets in each department’s balance sheet.
2. CAC should be budgeted on one twelfth of 8 per cent of the estimated written-down value of non-current physical assets controlled by the department at the end of each month.
3. Actual payments to be based on one twelfth of 8 per cent of the actual value of non-current physical assets controlled by the department at the end of the month.

Budgeting
4. General rule:
No change to departmental revenue to reflect a change in departmental asset base should occur, for example:
* increased asset base will increase expense which departments must accommodate;

* conversely, decreased asset base will decrease expense resulting in a benefit to departments.

5. Exceptions:
* where revaluations/devaluations are material and unrelated to management effectiveness; and

* where capital investment occurs to expand the overall capacity of departments (as opposed to investment which maintains overall capacity and for which no adjustment to departmental revenue will occur).

Any adjustment to departmental revenue must occur through either:
* change to output price (this must be accompanied and explained by variation to one of the QQT parameters of the output); or

* additional capital, only where government wishes to support the department as it manages through a CAC cost increase for which there is no compensating increase in output revenue.

6. The CAC must be allocated across each department’s outputs as part of the budgeting processes.
7. Departments must explicitly consider the CAC impact (and therefore the overall operating result impact) of resourcing decisions (e.g. acquisition and disposal of assets).

Controlled physical assets exempt from the CAC
8. Exemptions to the Capital Asset Charge relate to specific assets not to asset classes and require the prior approval of DTF.

Only the following assets specified in each agency below are currently exempt from the Capital Assets Charge:

- pavement and earthworks;

- Sound Barrier

- Bridges

- Traffic Signal Control Systems; and

- Construction in Progress.

* National Parks: specifically National Parks in the DNRE portfolio; and

*  Cultural Assets: specifically collections and structures in the DPC portfolio.

Explanatory details:

CAC Objectives

The CAC is a mechanism designed to:

• sensitise departmental mangers to the costs associated with capital assets;
• motivate managers to make sensible decisions regarding assets and to value their assets accurately;
• encourage managers to maintain assets in appropriate working order to meet service delivery requirements; and
• offer a means to reward effective management of existing assets.

Reduction of a department’s non-current physical assets during the year will reduce the CAC amount charged while not reducing the department’s revenue (provided it is planned and output delivery targets are met). This provides an incentive for departments to reduce their stock of under utilized assets.

Conversely, any increase in a department’s controlled non-current physical assets during the year above budgeted levels will increase the CAC charged without increasing the department’s revenue.

Departments will need to make compensating savings, or present a business case for additional output revenue (i.e. increased price) to offset this increased cost.

Exclusion of specific classes Assets from the CAC

Administered assets

Administered  assets will not be included in the calculation of the non-current physical assets base on which the CAC is charged as these assets do not contribute to output delivery.

Financial assets

Financial assets (which include cash, investments and deposits with the SAU inter-entity account ) and intangible assets are not subject to the CAC.

Exempt controlled physical assets

Controlled physical assets specified in Business Rule 8 above are exempt from the Capital Asset Charge.

Relationship to full costing of Outputs

In conjunction with depreciation expense, the CAC enables departments to recognize explicitly the full costs of their assets base. Departments are encouraged to reduce their total operating expenses through greater efficiency in the use of inputs.

The inclusion of costs relating to departmental assets in the total costs of providing outputs motivates departments to minimize these costs through more productive use of their assets, or disposal of under utilized assets.

CAC cost allocation across outputs

CAC is paid by a department as a whole, and it is each department’s responsibility to allocate CAC expenses across their outputs and to their internal divisions or agencies.

In order to ensure that prices are not distorted, the proportion of total departmental CAC that should be included in the cost of each output should reflect as closely as is practical the proportion of departmental non-current physical assets that are utilized in the production of the output.

Impact of Revaluations

Departments should routinely carry out asset revaluations   in accordance with accounting standards. Revaluations will affect the amount of CAC payable by the department. There is no automatic adjustment to output prices if a department incurs a higher CAC expense due to an upward revaluation.

Where revaluations/devaluations are material and unrelated to management effectiveness then any adjustment to departmental revenue must occur through either:

• change to output price (this must be accompanied and explained by variation to one of the QQT parameters of the output); or
• additional capital, only where government wishes to support the department as it manages through a CAC cost increase for which there is no compensating increase in output revenue.