Scientific research and technological advancements are crucial for innovation, productivity and economic growth. For this reason, through the R&D tax incentive, the South African government encourages private-sector companies to invest in scientific or technological R&D in the country.
Section 11D was introduced into the Income Tax Act to provide for an incentive for companies undertaking R&D. The term “Scientific or technological research and development” is defined in section 11D(1). Certain listed activities in the definition do not qualify as R&D.
Under section 11D companies undertaking scientific and technological R&D activities in South Africa until 31 December 2033 can qualify for a 150% deduction on their operational R&D expenditure, provided that such activities are approved by the Minister of Higher Education, Science and Innovation (the Minister). An accelerated depreciation allowance (that is, 50:30:20) for capital expenditure incurred on machinery or plant used for R&D is provided for under section 12C. Under section 13 a company may further qualify for a deduction on a building used for research and development.
Administration of the R&D Tax Incentive
The R&D tax incentive programme is administered by the Department of Science and Innovation in conjunction with SARS and the National Treasury.
The Department of Science and Innovation is responsible for managing the process of receiving all R&D project applications, processing such R&D project applications to approval or non-approval, communicating with applicants, and managing the receipt of progress reports after the approval of R&D projects. Most of these activities are managed through the R&D Tax Incentive Online System (“online system”), which was launched in October 2022.
The Department of Science and Technology has issued the ‘Scientific and Technological Research and Development Tax Incentive Guidelines for Applicants” to assist companies applying for the R&D tax incentive. The guidelines explain the objectives of the R&D tax incentive, who can apply, and the requirements that R&D activities must satisfy in order to qualify for the incentive. Applicants are encouraged to use these guidelines extensively and to contact the tax incentive unit at the Department of Science and Innovation if they have any questions.
The R&D Tax Incentive Adjudication and Monitoring Committee (“the committee”), established under section 11D evaluates applications and makes recommendations to the Minister. It consists of three members from the DSI, three from SARS and one from the National Treasury. In line with the provisions of the Income Tax Act, a panel of external technical experts is appointed by the DSI to assist the committee with assessments on the eligibility of the R&D projects.
All disclosures to, and discussions of, the committee and unit are treated as confidential.
SARS’s role in managing section 11D
The R&D tax incentive under section 11D is available only on expenditure actually incurred directly and solely in respect of carrying on of scientific and technological research and development in the Republic. SARS may audit these expenditures.
SARS will allow a deduction when:
- The R&D was pre-approved by the Minister, and the taxpayer has an approval letter issued by the Department of Science, and Innovation.
- The expenditure is incurred:
- Directly and solely for research and development
- In the production of income; and
- In the carrying on of trade.
- Within six months prior to or on or after the date of receipt of application by the Department of Science and Innovation for approval.
Even if the taxpayer has received pre-approval of an R&D project, SARS will still retain its audit oversight role.
SARS will work out whether the claimed expenditure is within the boundaries of the expenditure approved by the pre-approval committee. The expenditure is actually incurred in the production of income and in the carrying on of trade.
Other matters relevant to SARS
- Provisional Tax: when calculating Provisional Tax, it is important not to assume that the Minister will approve the application, as this is subject to penalties.
- Assessments: where approval is received after an assessment has been finalised, a Request For Correct (RFC)can be made to include the R&D expenditure approved by the R&D pre-approval committee.
