Are Proposed Amendments to Section 11D Providing Clarity?
28/10/2011

The current section 11D of the Income Tax Act No. 58 of 1962 (the 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, and put in simple terms, 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 is further required to prove its eligibility by satisfying various eligibility requirements which relate to the taxpayer, the expenditure and the R&D activity. Other requirements include that the taxpayer must operate a trade 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 most taxpayers to meet most of the eligibility requirements and have access to the R&D incentives.

Section 11D, along with other sections of the Act, was reviewed and a Taxation Law Amendment Bill 2011 (“the Bill”) was subsequently drafted proposing amendments to the section. The proposed amendments are envisaged to come into operation for any expenditure incurred 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 (e.g. a trust or an individual) 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 reason for making such a distinction is not entirely clear to the writer.


Furthermore, all taxpayers will qualify for 100% deduction for costs incurred for a qualifying R&D activity as a matter of course. In terms of section 11A of the Act, a taxpayer is in any event entitled to a 100% deduction for costs incurred for R&D activity. Previously, taxpayers would submit claims under section 11A for the 100% deduction and then withdraw and resubmit the claim under section 11D in order to obtain the 150% deduction. Therefore, it was not entirely clear as to when a taxpayer could use sections 11A and 11D.

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 to decide on the eligibility for the additional 50% deduction to the Minister of Science and Technology. A company will qualify for the additional 50% only if the company obtains prior approval for conducting a particular R&D activity. This may be regarded as a burdensome and time consuming exercise and most companies may be reluctant to apply for the prior approval. On the other hand, this may be a positive development, in that once the taxpayer obtains such pre-approval, the taxpayer can continue and concentrate on the R&D activity without the uncertainty of whether or not the 150% deduction will be approved.

Section 11D(6) as proposed provides for an extended list of non-qualifying R&D activities and 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 the 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 relevant taxpayers. The Bill proposes to keep this exclusion without adding anything to it. Most taxpayers have hoped that the phrase “management or internal business process” would be amended or at least reworded in order to provide clarity to its meaning.

The writer appreciates that some of the proposed amendments have clarified some 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.

Tumelo Tshaya
tumelots@adamsadams.co.za