Companies that spend money on research and development projects benefit from tax in terms of the provisions of section 11D of the Income Tax Act. This Act encourages companies to spend more money on research and development which will then help to ensure that local research and development is not at a global competitive disadvantage. Section 11D of the Income Tax Act became law on 2 November 2006 and companies that spend money on research and development projects will enjoy the following tax benefits:
- Research and development operating costs
a deduction of 150% of the costs incurred may be claimed (previously the deduction was limited to 100% of the costs incurred).
- Research and development capital expenditure
the costs incurred may be claimed for tax purposes over three years, on a 50:30:20 basis (instead of the previous write-off period of four years, on a 40:20:20:20 basis).
In order for research and development expenditure to qualify for these benefits, the research and development activities must be undertaken within South Africa. In addition, this research and development 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. The research and development projects must be directed toward advancing scientific or technological knowledge and research and development activities that are contracted out to third parties (e.g. Universities) will also qualify for the 150% deduction.
The 150% deduction does not fully apply to research and development projects funded by Government grants. If a Government grant is received by the taxpayer to fund the research and development expenditure incurred, the 150% deduction is allowed only to the extent that the expenditure exceeds twice the amount of such grant. (e.g. if Government grants of R1000,000 is received, the 150% deduction will only apply to the research and development costs incurred that exceeds R2000,000).
Companies that claim for research and development deductions must submit reports annually to the Minister of Science and Technology.