The section 11D Research and Development Tax Incentive
Section 11D is a relatively unknown research and development (R&D) incentive that was introduced into the Income Tax Act on 2 November 2006. The incentive is supported fully by the Department of Science and Technology and has already resulted in substantial tax savings to those taxpayers who have participated. The tax saving comes in the form of a super deduction of an additional 50% on qualifying expenditure as well as an accelerated wear and tear allowance on qualifying equipment.
Section 11D sets out certain criteria which must be met before any investigation into the potential qualification of a taxpayer’s activities is launched:
– The taxpayer must be carrying on a trade and, where the R&D activities lead to a ‘result’, the result must be used in the production of income;
– The expenditure must be actually incurred by that taxpayer directly in respect of R&D activities;
– The R&D activities must be undertaken in the Republic.
For the taxpayer’s activities to be classified as qualifying Research and Development activities, the activities must be of a scientific or technological nature and be undertaken for purposes of:
1. The discovery of novel, practical and non obvious information;
2. The devising, developing or creation of any-
(a) Invention (registerable in terms of the Patent Act)
(b) Design (as defined in the Designs Act)
(c) Computer program (As defined in the Copyright Act)
(d) Knowledge essential to the use of such invention, design or computer program.
For an invention to be registerable in terms of the Patents Act, it must be novel, involve an inventive step and be capable of use or application in trade or agriculture. A registerable functional design is any design applied to any article, whether for the pattern or the shape or the configuration thereof, or for any two or more of those purposes, and by whatever means it is applied, having features which are necessitated by the function. Having the mere purpose of devising, developing or creating an invention or design is sufficient to qualify a taxpayer for the allowance and actual registration of the intellectual property is not required.
The Copyright Act defines a computer program as a set of instructions fixed or stored in any manner and which, when used directly or indirectly in a computer, directs its operation to bring about a result. It is worth noting that novelty is not required when it comes to computer programs. However, in terms of section 11D(5) of the Act, no deduction will be allowed in respect of any cost or expenditure relating to ‘management or internal business processes’. Due to a lack of guidance by the courts, this exclusion is highly contentious and taxpayers and the South African Revenue Service are often at odds as to exactly what constitutes ‘management or internal business processes’ .
Insofar as expenditure is concerned, the requirement is that it must relate directly to the R&D activities. Generally speaking, the bulk of qualifying expenditure relates to the salaries of staff engaged in R&D activities as well as any consumables used during the R&D process. It is worth noting that a taxpayer who engages a third party to do qualifying research on that taxpayer’s behalf may under certain instances still be entitled to qualify for the additional 50% deduction.
Certain types of expenditure and certain activities are however expressly excluded from the working of section 11D and it is therefore advised that you consult your tax advisor to assist in you in correctly quantifying your allowance.
All material subject to our Legal Disclaimers.