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). 
 

Item Property in Thornbury Subaru Outback Wagon (Vehicle) Sculpture Purchase Date 1 May 1985 1 Oct 2012 18 Sep 1985 Purchase Price $20,000 $40,000 $11,000 Sale Date 30 June 2017 1 May 2017 1 May 2017 Sale Price $700,000 $15,000 $55,000 Item Property in Thornbury Subaru Outback Wagon (Vehicle) Sculpture Purchase Date 1 May 1985 1 Oct 2012 18 Sep 1985 Purchase Price $20,000 $40,000 $11,000 Sale Date 30 June 2017 1 May 2017 1 May 2017 Sale Price $700,000 $15,000 $55,000