Page 470 - SAIT Compendium 2016 Volume2

IN 50 Income Tax acT: InTeRPReTaTIon noTes IN 50 PART 1:
DEDUCTION OF EXPENDITURE
4. The law — section 11D (1)
11D. Deductions in respect of scienti c or technological research and development
(1) For the purposes of determining the taxable income derived by a taxpayer from carrying on any trade there shall be allowed as a deduction from the income of such taxpayer so derived, an amount equal to 150 per cent of so much of any expenditure actually incurred by that taxpayer directly in respect of activities undertaken in the Republic directly for purposes of—
(a) the discovery of novel, practical and non obvious information; or (b) the devising, developing or creation of any—
(i) invention as de ned in section 2 of the Patents Act, 1978 (Act 57 of 1978);
(ii) design as de ned in section 1 of the Designs Act, 1993 (Act 195 of 1993) that quali es for registration under
section 14 of that Act;
(iii) computer program as de ned in section 1 of the Copyright Act, 1978 (Act 98 of 1978); or (iv) knowledge essential to the use of such invention, design or computer program,
if that information, invention, design, computer program or knowledge is of a scienti c or technological nature, and is intended to be used by the taxpayer in the production of his or her income or is discovered, devised, developed or created by the taxpayer for purposes of deriving income.*
4.1 Entitlement to the incentive
Under section 11D (1), a taxpayer is entitled to the incentive if that taxpayer—
• is carrying on any trade;
• has actually incurred expenditure;
• directly for activities undertaken in the Republic; and
• directly for an R&D purpose (see Preamble and 4.2); and
that R&D purpose—
• is of a scienti c or technological nature, and
• is intended to be used by the taxpayer in the production of his or her income; or
• is discovered, devised, developed or created by the taxpayer for purposes of deriving income.
4.2 Qualifying R&D activities
In order to qualify for the tax incentive, the R&D activities must be directed towards one of a closed list of R&D purposes, each discussed more fully below (see 4.2.1 to 4.2.5). It is not suf cient that the activity be generally directed towards advancing scienti c or technological knowledge.
4.2.1 Discovery of novel, practical and non-obvious information
Discovery
A discovery is something that has already been in existence and brought to the discoverer’s awareness. This is usually the ascertaining of an existing fact of nature. An example of such an existing fact is the genetic sequence of a virus.
A discovery can be contrasted with an invention which is the product of human ingenuity. An invention is created while a discovery is pre-existing.
Novel
The information must be new or unusual and must not be available in South Africa or elsewhere to be considered novel.
Example 1 — Novelty of discovery
Facts:
The research team of Company A, based in South Africa, is conducting genetic research on infertile human males. In the process, the DNA sequence of a gene which causes obesity is discovered. With the relevant genetic information the team then developed a therapeutic product for promoting weight-loss. This product is patented.
Is any of the research expenditure deductible under section 11D?
Result:
The expenditure incurred in the research which leads up to the discovery of the obesity gene is deductible under section 11D, since the activity was originally directed towards the discovery of another novel, practical and non- obvious information, namely, the genetic cause, if any, of male infertility.
The work conducted after the discovery is also deductible as it relates to the ‘devising, developing or creation of’ an invention, being the therapeutic product.
Non-obvious
See 4.2.2
4.2.2 Invention as de ned in section 2 of the Patents Act 57 of 1978 (the Patents Act)
Under section 25 (1) of the Patents Act, an invention must be new, involve an inventive step and be capable of being used or applied in trade or industry or agriculture.
An invention does not need to be protected by way of a granted patent or be the subject of a patent application for the activity to qualify for a deduction. While there are many reasons why a taxpayer may choose not to apply for
* The words ‘or is discovered, devised, developed or created by the taxpayer for purposes of deriving income’ were added to section 11D (1) by section 19 (1) of the Revenue Laws Amendment Act 60 of 2008 and deemed under subsection (2) to have come into operation on 2 November 2006 and apply in respect of any activities undertaken on or after that date.
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