Ruby, now aged, 73 purchased a retail shop (for renting out to business tenants) on a quiet shopping strip in suburban Kensington in 1985 for $220,000. The contract of sale and purchase was entered into on 23 July 1985 but settlement (e.g. payment) of the contract occurred on 10 October 1985.

 

In September 2015 (work completed 30 September 2015), Ruby added another ground floor room (Back Room) at the back of the existing shop at a cost of $120,000. The local council application fee for the Back Room was $800. The aim of adding the Back Room was to provide the current tenants (and future tenants) with more floor area for their business. The Back Room would also allow a wider range of uses of the premises.

 

In March 2020 (work completed 31 March 2020), like many other owners on the shopping strip, Ruby added a second-floor dwelling (Upstairs Dwelling) to the shop at a cost of $360,000. At the time the Back Room was added, Ruby had no contemplation of adding the Upstairs Dwelling, although this had crossed her mind at times over the years. Ruby did not live in the dwelling; this was for tenants of the shop or any other tenants who wanted to rent a dwelling. As it turns out, the dwelling was rented to four university students from 1 April 2020. The architect's fees in respect of the design of the dwelling came to $18,000. Council application fees and the council inspection fees respectively were $680 and $1,200.

 

On being approached with an offer, Ruby sold the shop and the dwelling (as one item) on 31 May 2021 (settlement) for $1,6000,000. Exchange of contracts was on 28 February 2021. Ruby's accountant advised Ruby to get a valuer to make a valuation of the property and its components. Accordingly, a reputable retail property valuer provided the following valuations to Ruby as at the date of sale (31 May 2021):

 

Asset Valuation

Original Shop (without two additions) $800,000

Back Room $200,000

Upstairs Dwelling $600,000

 

Total $1,600,000

 

The valuer charged Ruby $7,000 for the valuation.

 

Advise Ruby on the CGT consequences of the above. Calculations must be shown if and where required. Explain your advice by reference to tax legislation and principles of income tax law.