Case Study Two: Jim and Jacquie

At the beginning of the $2022$ income year, Jim and Jacquie set up an eBay account to sell personal items from their household. Setting up the account was free. During the period July $2021$ through to June $2022,$ their total sales were $$5,000$ and this all related to second hand personal items sold below their cost. However, Jim and Jacq

uie discovered through this process there was a large market for low$-$cost children$$s clothing.

From the start of the $2023$ income year $($i$.$e$.$ July $2022),$ Jim and Jacquie began to source foreign made children$$s clothing and sell this through their eBay account. Jim and Jacquie have spent $$30,000$ during the income year acquiring stock. Some of the stock is sold exactly as it was purchased, whereas some stock is modified through the addition of unique screen printed designed or iron$-$on transfers that are design by Jim and printed using a machine he designed and built himself as a hobby. All listings are made with a minimum bid price of $150\%$ of the cost price. Up to $30$ June $2023$ Jim and Jacquie have made total sales of $$23,500$ in relation to children$$s clothing. Jim and Jacquie have also received total postage income of $$7,000.$ The total cost of postage to customers was $$6,000.$

Fortunately for Jim, after an appearance with his screen printed clothing designs on a television program, he was approached by a manufacturing company to purchase his prototype and working designs. Jim was paid a lump sum of $$700,000$ during the $2024$ income year in exchange for transferring all designs, prototypes, past drawings and in$-$progress drawings to the company. The agreement also stated that Jim would provide knowledge and input into the ongoing design process and any new designs for a period of $12$ months. During this $12$ month period, Jim and Jacquie will return to focusing on selling clothing without the modifications. There was to be no additional remuneration for Jim$$s time in working with the company, simply the lump sum payment. Jim was also given $10\%$ of the shares in the company $($market value of $$100,000)$ in exchange for entering into the agreement.

During the whole period, Jim had a full$-$time job as an accountant and Jacquie works part$-$time in office administration. All income received from sales of children$$s clothing is currently being put back into purchasing new stock. Jacquie is also working on a website which will launch in May $2025.$ The website will allow Jim and Jacquie to sell their stock directly online without the need for eBay auctions.

Required:

$1.$ Discuss with reference to appropriate legislation, case law and$/$or rulings whether Jim and Jacquie are carrying on a business for taxation law purposes in any of the $2022,2023$ or $2024$ income years.

$2.$ AssumingJacquieandJimarecarryingonabusinessfortaxationlawpurposes;provideadviceastowhether the cash or accruals basis of accounting should be used.

$3.$ Provide advice with reference to appropriate legislation, case law and$/$or rulings as to whether any of the amounts received by Jim in relation to the sale of his designs and prototypes are assessable as ordinary income.