Small tax changes may bring sizeable savings
13 February 2015
Posted by: Author: Justin Arnesen
Author: Justin Arnesen (Cova Advisory & Associates)
We are all too familiar with the devil lying in the detail, the hazards being buried in the small print, and that all-encompassing escape clause: "terms and conditions apply". But life is like that, especially when you are dealing with the government, when clarity is not always its top priority. So it is with tax legislation, and not least tax incentives.
Many businesses would do well to take a careful look at some recent legislation — the Taxation Laws Amendment Act of 2014. This has introduced several changes that have had a direct effect on SA’s tax-incentive landscape.
They apply to important, multimillion-rand programmes and especially affect companies seeking support in research and development (R&D), industrial policy projects and setting up in special economic zones (SEZs).
The R&D tax incentive promotes technological advancement with a focus on innovation, which enables companies to be more competitive in the local and global markets. Recent changes, which have tightened up the criteria for a new development to be considered an innovation, will bring new challenges.
SA has never reached its targets in terms of R&D as a percentage of gross domestic product, and yet we are already seeing a higher rejection rate with the tighter rules, which require difficult predictions about a new venture. R&D is iterative by nature, which means lessons, learnings, tests and modifications happen as the R&D activities take place. Not everyone can consult a crystal ball as they go about filling in their forms.
But it is not all bad news. One positive change is that pharmaceutical and drug development companies can now be certain they are eligible for the R&D tax incentive — a change from the past, when the government’s perception was that this industry’s R&D was not done in SA.
Another important widening of the eligibility criteria will allow full claims to be made for new R&D, even when this is outsourced by the claimant to a third party. For the R&D incentive to be a real success, the government now needs to let the legislation mature. For the incentive to really take off, turnaround times for approval need to be substantially improved and the R&D tax benefit needs to be increased — because, when compared to our partner Brics (Brazil, Russia, India, China and SA) nations, our level of R&D support is much too low.
When it comes to industrial projects, an existing incentive, known as "section 12I", has allowed companies investing in new and expansion industrial projects to claim an additional investment and training allowance.
To qualify for the incentive, a company had been required to invest a minimum of R200m for new projects and R30m for expansion projects. The threshold for new projects has been reduced to a minimum of R50m. This should allow smaller new projects to get some support.
Another way in which the net is being cast wider is with the scrapping of a previous requirement that the project must create direct employment.
This new flexibility is based on the realisation that not all capital-intensive manufacturing projects create significant direct employment, and the earlier approach had meant that few projects could meet this unrealistic requirement.
Another improvement will allow the incentive to be claimed even when the company does not own the property that is housing the project. In the past, the benefit could go only to applicants who were also the owners of the land.
With these changes, the tax incentive is now more accessible to companies, and we encourage them to submit their applications sooner rather than later, with the looming application deadline of December 31 this year.
SEZs are specified geographical areas in which firms can enjoy tax benefits and other benefits. The SEZ programme is one of the focal schemes of the government in boosting employment and exports. The SEZ benefit period was to have ended on January 1 2024. The new change means the benefit will cease on that date for new applications but will still be offered for 10 years after a company has started operating in an SEZ.
So the devil is indeed in the detail, and a few seemingly obscure changes to South African tax legislation could make millions of rand of difference to a company that stays abreast of the changes, and seizes new opportunities.
The benefits may well amount to a lot more than small change.
This article first appeared on bdlive.co.za.