Some research and development can result in tax benefits

The importance of encouraging research and development in South Africa has been recognised and increased tax incentives introduced.  A new section 11D has been inserted into the Income Tax Act, with effect from 2 November 2006, to provide for increased deductions for both operating and capital expenditure in respect of research and development.

Research and development that will fall within the ambit of the new section is that which is undertaken for the purposes of:

the discovery of novel, practical and non-obvious scientific or technological information; or

developing an invention, design, computer program or similar property.

There are then several specific exclusions from what will constitute qualifying research and development.  These exclusions relate to exploration and prospecting, management or internal business processes, trademarks, social sciences or humanities and market research, sales or marketing promotion. 

The deduction that will be allowed in respect of qualifying operating expenditure will be equal to 150% of such expenditure.  Qualifying capital expenditure, which includes buildings, machinery and other equipment, can be written off over a three year period on a 50:30:20 basis.  In the case of a building used partly for research and development activities, an appropriate portion of the cost will qualify. 

In cases where an amount (other than a government grant) is received to fund research and development operating expenditure, the deduction will be limited to 100%.  If such funding is received in the form of a taxable government grant, then a 100% deduction will be allowed in respect of expenditure up to double the amount of the government grant, with further expenditure qualifying for the 150% deduction.  A tax free government grant is intended to result in no deduction being allowed.

There are specific recoupment provisions applicable in respect of research and development expenditure.  In respect of operating expenditure, recoupments are based on the deduction allowed rather than the expense itself (i.e. on a 150% basis).  If a building ceases to be used for research and development purposes, the an amount equal to the deductions allowed in respect of that building less 10% for each year that it was used for qualifying purposes, will be included in the taxpayers income. 

Taxpayers claiming allowances under section 11D will have to submit reports to the Minister of Science and Technology.  The Minister will submit an annual report, not disclosing any taxpayer details, to Parliament on the benefits of the relevant activities. 

Tim Desmond, a Director at Garlicke & Bousfield Inc.