Tax Incentives for those in the Research and Development Industry

Is your business participating in research and development activities?

Then I have good news for you, because you qualify for tax incentives as set out in the Income Tax Act, Section 11D. Maybe your business receives funding from overseas. No worries. You still benefit from these special incentives.

Want to know what tax incentives I'm talking about? Then read further.

Oh yes, and just a very important note: these tax incentives only apply to expenditure specifically made for research and development.

• Operational (or non-capital) expenditure - 150% of these expenses actually incurred can be claimed as a tax deduction.

• Capital allowances as listed below, calculated at the cost of the assets, are available in respect of capital assets specifically used for research and development activities:

- 50% in the first year the asset is brought in for use by the taxpayer.

- 30% in its second year of use.

- 20% in the third year of use.

If you, as the taxpayer, have actually incurred expenditure (including operational and capital expenses, the following tax incentives apply:

• Expenditure directly in respect of research and development activities in South Africa for the purpose of the discovery of novel, practical or non-obvious information, and

• Devising, developing or creating an invention of which the design, computer programme or knowledge is essential to the use of such invention. That is if the invention is of scientific or technological nature and you (the taxpayer) intends to the use it as a source of income.

Tax incentives in respect of salaries and wages in the research and development industry:

• Salaries and wages of employees working in research and development can be claimed for at 150% of the actual expenses occurred. That means if an employee engaged in research and development activities gets a salary of R100 000 per annum, a tax deduction of R150 000 may be claimed.

Taxpayers must be able to show proof of their allocation of expenses. They must be able to substantiate the hours and expenses spent by employees on research and development activities. Timesheets are a handy tool to assist taxpayers in this regard.

Non-qualifying Expenses

The following research and development activities do not qualify as research and development activities:

• Market research, sales or marketing promotion

• Social sciences and humanities

• Trade mark creation

• Management or enhancement of internal business processes

• Prospecting of minerals or exploration for oil or gas.

Funding of Research and Development Expenditure

If your business receives funding from another person for research and development activities the tax deduction is limited to 100%. The funder can deduct 150% of the expenses.

Would you like to know for what tax incentives you qualify for? Then call us now for more information.