Research & development incentives amended

David Badenhorst gives a brief overview of recent amendments to Section 11D of the Income Tax Act governing the research and development (R&D) arena in South Africa:

In an attempt to encourage research and development in the country, the South African government has been offering South African taxpayers a research and development tax incentive since 2006.

Section 11B of the Income Tax Act previously governed the research and development (R&D) arena in South Africa. It allowed a taxpayer to deduct 150% of all non-capital R&D expenditure and wear and tear allowances on new and unused buildings and machinery purchased. In terms of this section, SARS was required to deliberate both on the technical and financial merits of the disclosures. However, SARS did not have the requisite skills and experience to consider and critically evaluate the technical merits of each submission and this led to perceived abuse of the incentive programme. A number of taxpayers also expressed concern about the waiting period and its associated uncertainty while SARS assessed their claims.

Last year, the Treasury effectively changed material components of the legislation in order to split the reporting and approval process to ensure more certainty for taxpayers at the inception of their R&D project.

This resulted in a change to the tax legislation effective from 1 October 2012. Section 11D was introduced and provides that tax payers have to formally apply at the office of the Minister of Science and Technology (DST) for approval of their proposed R&D expenditure for tax deductibility purposes. From that date, taxpayers have therefore been allowed to claim 100% of their R&D non-capital expenditure as an “automatic deduction” (without any DST approval) and an additional “supercharged deduction” of 50% (from the date of submission of the application) with approval from the DST. For new and unused buildings and machinery taxpayers have been able to claim wear and tear allowances in accordance with sections 12C and 13(1) of the Act.

From 1 January 2014 this rule has been amended further. It now states that the 100% “automatic deduction” does no longer apply to non-capital R&D. DST approval is now also required for the 100% portion. Furthermore, for capital expenditure the taxpayer receives a full 150% deduction on approved new and unused buildings and machinery which are solely developed for and used in a specific R&D project and where there is no objective to use it for any other purpose than for the specific R&D project.

For any other machinery (that does not qualify for the 150% deduction), a wear-and-tear allowance is permitted at 50:30:20 in accordance with section 12C of the Act. Other new and unused buildings (that do not qualify for the 150% deduction) may qualify for a wear-and-tear allowance of 5% per annum in accordance with section 13(1) of the Act.

• The claiming of these allowances can become quite technical. Should you require further information, please phone David Badenhorst at Exceed’s Stellenbosch office, tel 021 882 8140