The second proposed amendments (introduced during October 2011) seem to provide more clarity on most of the provisions which govern the research and development (R&D) tax incentive as compared to the first proposed amendments (introduced during June 2011).

The second proposed amendments define research and development (R&D), which was not defined previously. R&D is defined as “as systematic investigative or systematic experimental activities of which the result in uncertain for the purpose of discovering a non-obvious scientific or technological knowledge; or creating an invention, a design, a computer program or knowledge essential to the use of such invention, design or computer program ...”. From the definition, it appears that an R&D activity should satisfy a “systematic” test (amongst other tests) in order to be regarded as an eligible activity. The word “systematic” is defined as “...done or acting according to a fixed plan or system...”. Therefore, it emerges that in order for a taxpayer to prove that an alleged R&D activity was systematic, the taxpayer may have to produce R&D plans, and records of the R&D activity as supporting evidence. Investigations or experiments that are carried out in an ad hoc or random manner may not be regarded as a systematic activity, and hence not regarded as an eligible activity.

The current section 11D of the Income Tax Act No. 58 of 1962 provides that one of the qualifying activities includes R&D which results in the development or creation of a computer program as defined in section 1 of the Copyright Act No. 98 of 1978. In terms of the Copyright Act a computer program is 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”. Therefore, the costs for the R&D relating to a computer program will be deductible, on condition that the developed computer program is original and of a scientific and technological nature.

However, section 11D (5) provides that no deduction is allowed for the costs of “... management or internal business process...”. This is quite concerning and detrimental for software developers developing software packages for administration, human resources or accounting purposes because many of such packages are for management and/or business processes. Even if the software packages were developed for use by third parties, the development of the software activity was regarded as an excluded activity.

The first proposed amendments did not shed any light on the interpretation of the phrase “management and internal business process”. However, the second proposed amendments introduce a provision that “no deduction shall be allowed for expenditure incurred in respect of development of internal business process unless those internal business processes are mainly intended for sale or for granting the use or right of use or the grant of permission to use thereof...”.

The writer is of the view that this provision is gratifying to most software developers who develop software packages for “multiple sale” as opposed to “in-house use”. The writer envisages that when this provision becomes law, the provision will encourage software developers to increase their R&D spending and appreciate the benefits afforded by the R&D incentive (subject to satisfying other requirements).

Contact:
Tumelo Mashabela (neé Tshaya), associate - patent attorney at Adams & Adams law firm

Tel 012 432 6302, e-mail Tumelom@adamsadams.co.za