Print Page   |   Report Abuse
News & Press: Corporate Tax

Research and development expenditure - The 150% deduction

09 March 2012   (0 Comments)
Posted by: SAIT Technical
Share |

Research and development expenditure - The 150% deduction

PWC Synopsis - RC Williams

Treasury and SARS are acutely aware of the need for South Africa to become more activelyengaged in scientific and technological innovation (to save the country having to pay exorbitantroyalties to foreigners) and have perhaps cast envious eyes over the ocean to our antipodeancousins who have so successfully established themselves as world leaders in various specialistareas of technological innovation.

Some research and development expenditure probably qualifies, in any event, for deduction under the general deduction provisions of s 11(a), but some such expenditure may well be of a capital nature and therefore not deductible under that provision; the dividing line in this regard may be difficult to draw. It was no doubt because of the uncertain ambit of s 11(a) in regard to R & D expenditure as well as to provide a strong fiscal and financial incentive that s 11D of the Income Tax was formulated to provide a specific and generous tax allowance for qualifying expenditure in this regard. The 150% tax deduction accorded by s 11D to qualifying expenditure on research and development was first introduced as from 2 November 2006, and has undergone various amendments since then.

Section 11D has been redrafted in its entirety

The whole of s 11D is now to be replaced in respect of expenditure incurred in respect of "research and development” (as now defined) incurred on or after 1 April 2012 (or such later date as is determined by the Minister of Finance) but before 1 April 2022. Implicitly, therefore, SARS is thus promising that this generous deduction will not be withdrawn before 1 April 2022. Without some such assurance, the deduction would probably have been a dead letter, as no enterprise is likely to set up expensive infrastructure and personnel for research and development if the deduction rug could be pulled out from under its feet at any time. However, s 11D(12)(b)(iv)(bb) explicitly contemplates that this section may undergo "amendment” or "adjustment”.

It is regrettable that the latter provision did not add "but not retrospectively and not in such a manner as to deny the deduction of on-going expenditure to which the taxpayer had committed itself prior to such amendment or adjustment”. The Taxation Laws Amendment Act no 24 of 2011 amends s 11D in regard to the substantive aspects contained in s 11D(1) - (10) while the Taxation Laws Second Amendment Act 25 of 2011 amends the administrative provisions contained in s 11D(11) - (18). Both the substantive and the administrative provisions are lengthy and complex and any taxpayer tempted by the fiscal carrot of a 150% tax deduction should not make any financial commitment until professional advisers have scrutinised the proposed project and measured it against the criteria and administrative aspects of s 11D.

The scope of qualifying R & D projects

The clear intent of the new s 11D, as with its soon-to-be-repealed predecessor, is to provide for a 150% deduction in respect of scientific and technological research and development. Clearly, expenditure incurred to try to develop an AIDS vaccine will qualify for the fiscal incentive. But what about the development of a new birdseed to improve the stamina of racing pigeons? And how are the tax rules to differentiate between expenditure on research aimed at developing an improved product and the routine quality control processes that virtually every manufacturer engages in? It is extraordinarily difficult to draw these and other lines and to express qualifying criteria for R & D expenditure clearly and unambiguously. And of course, SARS faces great problems of monitoring and enforcement to ensure that a taxpayer engaged in genuinely qualifying scientific research does not include the salaries of his ordinary administrative staff as R & D expenses.

What R & D projects will qualify for the 150% deduction?

As regards the over-arching question as to what kind of research is worthy of the fiscal incentive, s 11D, in both its old and its new format, adopts the only workable criterion: expenditure incurred in any research and development for the purpose of discovering scientific or technological knowledge or for creating any invention that is patentable under the Patents Act 57 of 1978, any design that is registrable in terms of the Designs Act 195 of 1993, any computer program as defined in the Copyright Act 98 of 1978, or any knowledge essential to such invention, design or computer program can potentially qualify for the 150% deduction.

Thus, it may seem, that expenditure incurred in developing a new birdseed will indeed qualify for the fiscal incentive, provided that it will be patentable. Section 11D in its new format goes further than its previous incarnation and now usefully provides for the deductibility of expenditure incurred, not merely in creating anew, but in improving any such invention, design or computer program if the expenditure relates to a new or improved function, improved performance, improved reliability or improvement of quality in that invention, design, computer program or knowledge. In order to be deductible, the expenditure in question must be -

· actually incurred;

· by the taxpayer;

· directly and solely in respect of research and development undertaken in the Republic.

The words "directly and solely” are, it seems, intended to exclude administrative expenses such as the salary of staff who are not themselves engaged in research and development.

In the production of income and in the carrying on of any trade

In addition to satisfying the foregoing requirements, qualifying expenditure must be incurred -

· in the production of income; and

· in the carrying on of any trade.

These are of course also key requirements for the deductibility of expenditure under the generaldeduction provisions of s 11(a), but it is noteworthy that, unlike s 11(a), expenditure is not disqualified from deduction under s 11D merely because it was "of a capital nature”. Thus, capital expenditure that satisfies the criteria for deductibility in s 11D will also be deductible. Conversely, non-capital research and development expenditure that fails to satisfy the criteria in s 11D may be deductible under s 11(a) - but of course, the incentive for a taxpayer to bring his expenditure under s 11D is the prospect of a 150% deduction.

The establishment and functions of the statutory committee

Apart from the statutory criteria,outlined above, that must be satisfied for the expenditure on research and development to qualify for the 150% deduction, there is another significant hurdle to be cleared by the taxpayer. The amended s 11D provides for the establishment of a statutory committee which will be required to "evaluate” taxpayers’ applications. Now, it could indeed make sense to have a technical committee to determine whether the taxpayer’s application for approval of research that may qualify for the 150% deduction satisfies the criteria set out in s 11D(1)(a) and (b),

namely that it is research directed to discovering new scientific or technological knowledge or creating a patentable invention, a registrable design or a computer program.But the difficulty is that s 11D(9) says that -

"The Minister of Science and Technology …’must approve any research and development being carried on or funded for the purposes of [the additional 50% deduction provided for in s 11D(3)] having regard to— (a) the innovative nature of the research and development;(b) the extent to which carrying on that research and development requires specialised skills; and(c) such other criteria as the Minister of Science and Technology in consultation with the Minister of Finance may prescribe by regulation.

These are additional criteria, distinct from and now - at the tail-end of s 11D - superimposed upon those laid down at the outset in s 11D(1)(a) and (b). It is presumably at this stage that the taxpayer who proposes to engage in R & D to develop a new and improved birdseed will find that his application for approval is turned down. But why, he will no doubt protest - a new, improved birdseed will be patentable and will therefore satisfy the criteria in s 11D(1)(a) and (b)? To which the Committee’s answer, via the Minister (and as foreshadowed in s 11D(9), quoted above) will no doubt be, ‘yes, but it’s not innovative enough’. In short, the criteria set out in s 11D(9) are not objective criteria, but involve subjective views of committee members as to the degree of innovation involved in the proposed research and the level of "specialised skills” that it involves. C

onsequently, the opening words of s 11D(9) which say that the Minister "must approve” – thereby connoting an obligation and apparently heralding criteria which, if fulfilled, will give the applicant an absolute right to approval of the application – are wholly misleading. The criteria in this sub-section are so rubbery and subjective that an adverse decision will be very difficult to challenge by way of judicial review. Section 11D(9) thus seems to contemplate that the Minister can decline to approve an R & D application - even though it fulfils the earlier criteria laid down in s 11D(1)(a) and (b), namely that it was aimed at creating a patentable invention, registrable design or a computer program. It is, however, significant that s 11D(16) explicitly provides that the Minister must provide written reasons for any decision to grant or deny any application for approval of an R & D project. This clearly foreshadows that an adverse decision can be taken on judicial review by an unsuccessful applicant.In conclusion


Section 240A of the Tax Administration Act, 2011 (as amended) requires that all tax practitioners register with a recognized controlling body before 1 July 2013. It is a criminal offense to not register with both a recognized controlling body and SARS.


The Act requires that a minimum academic and practical requirments be set to register with a controlling body. Click here for the minimum requirements of SAIT.

Membership Management Software Powered by®  ::  Legal