New SARS rules re grading deduction for costs of R&D
30/11/2006

A new breakthrough incentive to encourage scientific and technological research in South Africa has been legislated this week. It will favour those taxpayers wishing to embark on activities giving rise to research and development expenditure. With a tax deduction of 150 percent of qualifiable expenses incurred in South Africa, it will provide relief by mitigating the usually high costs attached to such activities which inevitably act as a deterrent to conducting such research, thereby ultimately hindering South Africa's global competitiveness.

This new regime for R&D contains two sets of incentives. Qualifying operating expenses are deductible at 150% and the depreciation allowance for qualifying capital R&D shifts from a 40:20:20:20 schedule to a 50:30:20 schedule. Registration expenses incurred in registering, extending or renewing intellectual property (e.g. patents and designs) remain deductible at 100%.

In order for the R&D expenditure to fall within the new regime, the R&D activities must not only be performed in South Africa, but the R&D must be performed for purposes of:

1. The discovery of novel, practical, and non-obvious information of a scientific or technological nature; or
2. The creation of any invention, patent, design or computer copyright or other similar property of a scientific or technological nature.

• No deductions are permitted in respect of management or internal business processes, trade marks, market research, prospecting for minerals or exploration for oil and gas, sales or marketing promotion, social sciences or humanities.
• Where expenditure is incurred partly for R&D and partly for other purposes, the deduction of 150% of expenditure is allowed to the extent that the expenditure is used for R&D purposes. Similar principles apply with respect to buildings, plant, implements, utensils and articles partly used for R&D. Only the R&D portion is eligible for the 50:30:20 depreciation. Buildings (or parts thereof) are not viewed as committed to R&D unless regularly used and specifically equipped for R&D use.
• Where a taxpayer recovers R&D expenditure which was allowed as a deduction, the recovery will trigger a recoupment of the income. Where the taxpayer ceases to use a building (or part of a building) for R&D purposes, all deductions previously allowed will be recouped. This recoupment is reduced by 10% for each year the building is used for R&D.
• The 150% deduction does not fully apply to R&D projects funded by Government grants. If a taxable Government grant is received by the taxpayer to fund the R&D expenditure incurred, the 150% is allowed only to the extent that the expenditure exceeds twice the amount of the Government grant. Taxpayers claiming the 150% R&D deduction or the 50:30:30 R&D depreciation schedule must submit information about the R&D project to the Minister of Science and Technology. The new R&D regime is effective retrospectively from 2 November 2006 and applies to all expenditure actually incurred, or buildings, machinery, plant, implements, utensils and articles of a capital nature brought into use for the first time on or after that date. R&D buildings brought into use for R&D purposes before the effective date will continue using the 40:20:20:20 depreciation schedule.