Deductions

Peter and Jane have been married for several years. They moved from Dunedin four years ago and are now staying in Mt Albert. Jane is a lecturer at a university in Auckland while Peter is a Sales Manager for a bakery business. Two years ago, the couple purchased their first rental property in Mt Albert for $595,000. The property is a two bedroom house with a land area of 950sq metres. The attraction in buying this property was its capability of being subdivided. Shortly after purchase, the couple managed to find tenants who moved in within two weeks. The tenants were initially paying $550 per week which has now increased to $600 per week. Every three months, Jane inspects the rental property to see if the tenants are looking after the property. To date, there have been no major structural issues with the rental property. Last week, one of the tenants contacted Jane to advise that the roof appears to be leaking. This has resulted in damages to the tenants furniture.

Jane has contacted Ron of Roofs R Us who has inspected the rental property and advised that the tiled roof needs to be replaced as there are lots of missing, broken and leaking tiles. The cost of repairing the roof is $4,500. The couple also received two other quotes of $5,500 from Repair Roofs and $5,100 from No Roof Leaks. Jane discusses this matter with Peter and both have agreed to get Roofs R Us to repair the roof. Ron and his team successfully complete the work and invoice Jane and Peter who duly pay the amount of $4,500.

Identify the relevant facts.Identify the key issue(s)Identify the relevant sections of the Income Tax Act 2007 and any tax cases.Explain to Jane and Peter on whether the expenditure is of a revenue or capital nature. You are expected to apply the relevant sections of the Income Tax Act and the tests from the case BP Australia.

Word Limit: 500 words