Tax: When is R&D Deductible at an Inflated Rate?
- Section 11D of the Income Tax Act
By Willem Oberholzer, Director, KISCH Tax Advisory
Public sector investment aimed at bolstering research and development (“R&D”) in local scientific and technological endeavours was the driving force behind the South African government’s introduction of section 11D of the Income Tax Act No. 58 of 1962.
What Qualifies as R&D?
The Act defines scientific/technological R&D as systematic investigative/systematic experimental activities aimed at resolving scientific/technological uncertainty, the resolution of which is not readily deducible by a person skilled in the relevant scientific or technological field, for the purpose of:??
- Discovering non-obvious scientific or technological knowledge;?
- Creating/developing new or significantly improved products, processes, or services;?
- Creating/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.
Section 11D approval provides for:
- 150% deduction of qualifying R&D expenses; and
Accelerated depreciation of any building/part of any building, machinery, plant, implements, utensil, or article which were acquired solely for the purposes of R&D.
The taxpayer must, however, first obtain approval from the Minister in terms of section 11D. Further, the taxpayer must meet certain requirements relating to their expenditure and R&D activities to qualify for the incentives. These include that the taxpayer must operate a trade, that the specific activity they are carrying out must advance scientific/technological knowledge in general, that the taxpayer must intend to apply the R&D outcomes to generate income, that the taxpayer must have incurred the expenditure directly for the R&D activities, and that the R&D must constitute a qualifying activity.
Research funded by a third party is limited to a 100% deduction. Research funded through a taxable government grant is deductible - expenditure equal to twice the grant amount is deductible at 100% (costs exceeding twice the grant amount are deductible at 150%). If the grant is tax exempt, expenditure equal to twice the grant amount is not allowed, but expenditure exceeding twice the grant amount is deductible at 150%. Registration expenses to obtain and/or renew a patent or design are deductible, but do not fall under section 11D – they can be found rather under section 11gB.
Successfully navigating this section of the Income Tax Act, as well as the supporting sections requires in-depth knowledge of both intellectual property law and tax law. If you have any queries or require any assistance in collating the relevant technical information for SARS in support of your section 11D R&D application, please do not hesitate to contact us.
Willem Oberholzer
Director
KISCH Tax Advisory
+ 27 83 326 0500
Willemo@kisch-ip.com
Kobus du Raan
Director
Patents Department
+ 27 71 869 6788
Kobusd@kisch-ip.com