The current section 11D of the Income Tax Act provides for research and development (R&D) incentives which include a 150% deduction of operating expenses and accelerated depreciation of any building or part thereof, machinery, plant, implements, utensil or article.

Currently, in order to access the R&D incentive, a taxpayer is required to submit a claim in a form of a tax return to the South African Revenue Services (SARS) and request a deduction for costs incurred for R&D activities (amongst other things) in a particular tax year under assessment. The taxpayer must also prove eligibility by satisfying various eligibility requirements.

To qualify, the taxpayer must also operate a business and must intend to apply the R&D outcomes to generate an income. Moreover, the taxpayer must have incurred the expenditure directly for R&D activities. It has been quite a challenge for taxpayers to meet all of the eligibility requirements in order to have access to the R&D incentives.

The section, along with other sections of the Act, was reviewed and a Taxation Law Amendment Bill 2011 was subsequently drafted proposing amendments. The proposed amendments are envisaged to come into operation on or after 1 January 2012.

The amendments introduce a provision which makes a clear distinction between a company as a taxpayer and any taxpayer other than a company, - a trust or individual for example in relation to the requirement that the R&D expenditure should have been incurred in “production of income”. The Bill provides that if the taxpayer is a company, then the taxpayer need only show that the expenditure was incurred in its pursuance of the production of income. However, an individual or a trust must show that the expenditure was incurred in the pursuance of the production of income and in the carrying out of any trade. The reasons for this distinction are not entirely clear to the writer.

The Bill also provides that SARS will no longer be entrusted with the responsibility of approving or rejecting the R&D claims. The Bill shifts the responsibility for deciding eligibility to the Minister of Science and Technology. A company will qualify for the additional 50% only if it obtains prior approval for conducting a particular R&D activity. This may be viewed as a burdensome and time-consuming exercise and most companies may be reluctant to apply for the prior approval. It may on the other hand be viewed as a positive development, in that once the taxpayer obtains such pre-approval, then the R&D activity can continue without the uncertainty of whether or not the 150% deduction will be approved.

The section as proposed provides for an extended list of non-qualifying R&D activities. These include routine testing and quality control, trade mark related costs, market research, social science research including arts and humanities, legal and financial activities, oil and gas or mineral exploration or prospecting, and management and internal business process.
The list has been increased and taxpayers can only hope that the DST will issue guidelines on the interpretation/explanation of non-qualifying R&D activities. For example, the lack of clarity with regard to the meaning of “management or internal business process” as provided in the current Act has been a predicament for taxpayers. The Bill proposes to keep this exclusion without adding anything to it. Most taxpayers had hoped these references would be amended or at least reworded in order to provide clarity.

Some of the SUBSQUENT proposed amendments have clarified certain issues, for example, the confusion between whether a claim should be submitted in terms of sections 11A and 11D. However, overall, the proposed requirements are not providing the clarity for which taxpayers had hoped.

Furthermore, the amendments seem to suggest an R&D incentive which includes a 50% deduction only. This may not be enough of an incentive to stimulate R&D and may result in fewer private sector investments in the research and development of scientific or technological activities - ultimately defeating the purpose of the incentive.

Written By Tumelo Tshaya, Associate Patent Attorney at Adams & Adams