Soil compaction is a serious problem confronting horticultural production systems globally and occurs more readily in tropical systems as a consequence of wet-dry climatic oscillations in these regions. Soil compaction alters soil microbial structure and function as a result of the limitation of air permeability and oxygen availability, which has implications for soil nutrition and soil-borne disease. This study investigates the influence of compaction on soil microbial functional diversity and activity in the presence and absence of capsicum plant roots, and with the addition of compost or changes to irrigation regimes, both of which are management strategies traditionally designed to reduce compaction in the paddock. Experimental treatments of four levels of soil compaction were established, with or without capsicum seedlings planted into the compacted media. A further experimental set-up, with two water treatments (optimal or low) and compost additions in factorial combination with compaction was also established. The findings revealed that microbial functional diversity and activity was higher in uncompacted bare (unplanted) soil compared to soil with the presence of capsicum plant roots. Further, there were lower levels of activity at higher soil compaction levels, and lower functional diversity. The results suggest that compaction is a significant driver of soil microbial health in sub-tropical horticultural systems, particularly when soil moisture and soil carbon is low, and that careful ongoing management of compaction will be required.