NEW TAX DEDUCTIONS FOR SCIENTIFIC/TECHNOLOGICAL RESEARCH AND DEVELOPMENT (“R&D”)
By Betsie Strydom and Timothy Jones
At as 30 January 2007, Section 11B(2)(b) of the Income Tax Act allows a taxpayer to deduct 100% of expenditure actually incurred for the R&D expenditure and certain other specified expenses relating to intellectual property ("IP"). Furthermore, taxpayers can currently depreciate the cost of buildings, machinery or plant, utensils and articles used for the purpose of R&D over 4 years at the rate of 40:20:20:20.
This will change when the Revenue Laws Amendment Bill of 2006 is promulgated. This Bill proposes greater deductions for operating (revenue) expenses and accelerated depreciation allowances for capital R&D expenses. It is proposed that Section 11D will come into effect from 2 November 2006.
A new section 11D will be inserted into the act and it will give a tax deduction of 150% for expenses incurred in respect of scientific or technological R&D. This greater deduction will only be available for R&D activities conducted in South Africa which consist of:
the discovery of novel, practical and non-obvious information of a scientific or technological nature; or
the creation or development of any invention, design or computer program or similar property of a scientific or technological nature.
The increased deduction is only for scientific or technological R&D and not for other research related expenses in respect of business, management, market research, or the like. Buildings, machinery and other equipment will not be regarded as having been committed to R&D unless they are regularly used for R&D and are specifically equipped for scientific or technological R&D. The proposed deduction does not apply to trade mark expenses which are catered for in the current section 11(gB) of the Income Tax Act.
In addition, the capital depreciation allowance for capital R&D expenditure will be increased to 50 % in the first year followed by 30 % and 20 % in the second and third years respectively. The depreciation allowance is calculated on the cost of the asset, which is deemed to be the actual cost to the taxpayer alternatively the arms length cost of the asset, whichever value is the lesser of the two.
In order to avoid the artificial deduction of expenditure not actually incurred, if a taxpayer receives an amount in order to fund expenditure (which would otherwise comply with the requirements in the proposed section 11D), the taxpayer’s deduction shall be 100% and not 150%. For example if a company A hires an independent contracting business B to outsource qualifying R&D activities on behalf of company A and company A pays the relevant amount of R1000 to contracting company B for the expenditure to be incurred, contracting company B in this instance would not be entitled to the 150% deduction because it receives the necessary funds to conduct the R&D activity. Company A would be entitled to deduct the 150% expenditure in this instance for the qualifying R&D expenditure incurred. Contracting company B would only be entitled to deduct the R1000 normally allowed for conducting its business.
The 150 % grant does not fully apply to R&D projects funded by government grants. A taxpayer who receives a government grant for R&D expenditure which is otherwise deductible in accordance with the proposed legislation, can only claim a 150% deduction if the expenditure exceeds twice the amount of the Government grant.
Any taxpayer who is eligible for the proposed deductions, must submit to the Minister of Science and Technology such information as the Minister may from time to time prescribe. The Minister will annually report to Parliament.