Colette is a Chartered Accountant with her own business. Due to the retirement of a number of

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Question:

Colette is a Chartered Accountant with her own business. Due to the retirement of a number of her clients, the business was starting to make a loss for the first time in twenty years. To cover the loss, she decided to start disposing of her assets. Her portfolio is as follows:

Colette sold her Thornbury property to her brother, and the transaction was settled on 1 July 2017. At the time, the market value of the property was $900,000.

When she bought the property on 1 May 1985, it was a vacant block of land. A broker sourced the land for her after undertaking preliminary investigations of the surrounding areas. The broker's fee was $900. On finding the property, the acquisition costs included legal fees of $990 and stamp duty of $10,000.

On 1 July 2013, Colette built a house on the property at a cost of $200,000 (land was valued at $400,000). The house has been rented out since completion and Colette pays bank interest of $25,000 per annum.

On 22 September 2016, Colette inspected the Thornbury property and decided to renovate it, undertaking the following:

1. a) Replacement of the kitchen at a cost of $50,000;

2. b) Replastering and repainting a wall that had been damaged due to a leak costing $20,000;

Colette also has a carry forward capital loss from the sale of shares from the 2010-2011 income year in the amount of $6,000.

Required:

Using relevant legislation and case law to explain your answer:

1. a) Explain to Colette whether the cost to build the house of $220,000, bank interest of $25,000, replacement of kitchen of $50,000 and replastering and repainting the wall of $20,000 would be deductible for income tax purposes; and

2. b) Explain how Collette's net capital gain would be determined in relation to the disposal of her capital assets (show relevant calculations).