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Tax Incentives for Research and Development

Are you aware that Section 11D of the Income Tax Act provides tax incentives and this has been in force since 2006 and is referred to as the Research and Development (R&D) Tax Incentive.

For the purpose of this article the following Acts are relevant:

Income Tax Act 58 of 1962
Patents Act 57 of 1978
Designs Act 195 of 1993
Copyright Act 98 of 1978

Additionally, SARS has published a document named “Guidelines for good practice in the conduct of clinical trials with human participants in South Africa” when dealing with medical clinical trials.

This incentive was introduced by the South African Government and aimed at increasing scientific and technological research and development expenditure by businesses throughout all sectors in South Africa.

The incentive is administered by the Department of Science and Technology, along with the South African Revenue Service (SARS) and the National Treasury and remains in use until at least 2022, with an indication from the relevant Deputy Director that it will be extended past this initial date.

The primary aim of Section 11D is to allow a tax deduction equal to 150% of expenditure incurred directly and solely for R&D activity in South Africa and applicable to business of all sizes and in all sectors of the economy. Additionally, accelerated depreciation deduction (that is, 50:30:20) for capital expenditure incurred on machinery or plant used for R&D. In order to qualify for the tax incentive, a taxpayer must meet various stringent requirements relating to the taxpayer, the particular expenditure, and the research and development activities.

There are 4 requirements for this deduction:

• the expenditure needs to be incurred in the production of income;
• the expenditure needs to be incurred in the carrying on of any trade;
• the research and development need to be approved by the Minister of Science and Technology i.e. department of Science and Technology;
• the expenditure needs to be incurred on or after the date of receipt of the application by the Department for approval of the research and development.

The above mentioned section excluded certain expenditure that does not qualify for deduction i.e. immovable property, machinery, implements etc. Section 12 of the Act does however allow for a deduction of new of unused machinery acquired for the purpose of research and development together with the improvement to any machinery, plant, implement, utensil or article that was acquired for purpose of research and development. If such an article was acquired after 1 January 2012 and brought into use by the taxpayer on or after date for purpose of research and development, then a deduction is allowed. The first year of assessment in which the machinery was brought into use will qualify for a 50 % deduction, 30 % the following year of assessment and 20 % the year thereafter. Section 13 of the Act also allows for a 2% deduction for buildings acquired by a taxpayer for the purpose of research and development.

Note: While undertaking R&D it is important that businesses are aware of the Patents Act too so as to avoid any infringement of the Act and contravention of a third-party’s R&D and copyrights, etc. In such a case all incentives claimed could be lost.

From the Department of Science and Technology and the Act, The Tax Incentive, in boosting innovation by improving the capability for developing new products and processes and improving existing ones , provides this tax deduction for expenditure wherein the relevant project is aimed at systematic investigative or systematic experimental activities of which the result is uncertain, the purpose of which is:

• discovering non-obvious scientific or technological knowledge;
• creating or developing an invention as defined in the South African Patents Act;
• creating or developing a functional design as defined in the South African Designs Act;
• creating or developing a computer program as defined in the South African Copyright Act;
• creating or developing a multi-source pharmaceutical product; or
• conducting a clinical trial as provided for in the Guidelines for good practice in the conduct of clinical trials with human participants in South Africa.”

The deduction is not limited to the above project aims, but also for projects for which the aim is a significant and innovative improvement to any of the above inventions, functional designs or computer programs. Improvements in this context being a new or improved function, improved performance, improved reliability, or improved quality.

Consequently, the R&D Tax Incentive should be a key consideration for any business, micro, small or large, going forward with their product research and development activities in South Africa.

From a practical point of view, it is important to take note that, for the purposes of determining taxable income in respect of any year of assessment, to allow the deduction from income, only if:
• the research and development expenditure is incurred in South Africa;
• and the research and development project has been approved in terms of s11D; and
• the expenditure is incurred on or after the date of receipt of an application in terms of s11D by the DST.

Author Craig Tonkin

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