Page 471 - SAIT Compendium 2016 Volume2

IN 50 Income Tax acT: InTeRPReTaTIon noTes IN 50
patent protection, it is necessary for the work to be protectable by way of a patent. In other words, all the requirements of the Patents Act for an ‘invention’ as de ned in that Act must be met but a patent application does not need to be made.
The word ‘new’ implies that it has not been made available to the public anywhere in the world (not only South Africa). Public disclosure may take many forms, such as publication, use, written or oral description [section 25 (6) of the Patents Act].
Example 2 — New
Facts:
A research team from a South African-resident Company B visits the Congo and makes contact with a Congolese healer. The healer has developed a new formula for a lotion which alleviates eczema. The team returns to South Africa with a sample of the lotion and, after some investigation, is able to determine its formula. Company B now wishes to enter the South African market.
Can the cost incurred by Company B for the research conducted in identifying the lotion’s formula qualify as a deduction under section 11D?
Result:
No. There is no invention as the formula is not new. It was manufactured and used in the Congo before it was developed in South Africa.
Inventive or non-obvious
Non-obvious means that the invention must be inventive [see section 25 (10) of the Patents Act]. This is a subjective inquiry. In the event of obviousness being contested, SARS will take into account any examination report or opinion conducted by an expert in the eld, such as an examining patent authority or a professional patent attorney.
Several categories of works are expressly excluded from patentability under the Patents Act. Any activity which is for the purpose of development or creation of any such excluded categories also does not qualify for the deduction.
Under section 25 (2) of the Patents Act the following are not an ‘invention’ and therefore will not qualify for the deduction (except when speci cally allowed as indicated):
• A discovery [but this category does constitute qualifying intellectual property under section 11D (1) (a) — see
4.2.1].
• A scienti c theory.
• A mathematical method.
• A literary, dramatic, musical or artistic work or any other aesthetic creation.
• A scheme, rule or method for performing a mental act, playing a game or doing business.
• A program for a computer (but this category is included in section 11D (1) (b) (iii) — see 4.2.4).
• The presentation of information.
Although scienti c theories and mathematical methods may not be patentable, they may constitute a discovery or novel, practical and non-obvious information [paragraph (a) of section 11D (1)] so that, in certain instances, the discovery of any such theory or method would be an R&D purpose for purposes of the tax incentive.
The following are also excluded from patentability under section 25 (4) (b) and (11) of the Patents Act respectively: • Any variety of animal or plant or any essentially biological process for the production of animals or plants, not being
a micro-biological process or the product of such a process.
• An invention of a method of treatment of the human or animal body by surgery or therapy or diagnosis practised on
the human or animal body.
4.2.3 Design as de ned in section 1 of the Designs Act 195 of 1993 (the Designs Act)
Although the Designs Act protects both aesthetic and functional designs, generally only functional designs qualify as an R&D purpose under section 11D. Aesthetic designs are not, generally, scienti c or technological in nature.
The term ‘functional design’ is de ned in section 1 of the Designs Act as—
‘any design applied to any article, whether for the pattern or the shape or the con guration thereof, or for any two or more of those purposes, and by whatever means it is applied, having features which are necessitated by the function which the article to which the design is applied, is to perform, and includes an integrated circuit topography, a mask work and a series of mask works’.
A functional design must be new and not commonplace in the art in question in order to be protectable (section 14 of the Designs Act).
Similar to an invention, a design will be deemed to be new if it is different in form or if it does not form part of the state of the art, in other words, it is new if it has not been made publicly available anywhere in the world.
4.2.4 Computer program
The Copyright Act 98 of 1978 (‘the Copyright Act’) de nes the term ‘computer program’ as—
‘a set of instructions xed or stored in any manner and which, when used directly or indirectly in a computer, directs
its operation to bring about a result’.
Under section 11D (5), expenditure or cost is not deductible at 150% or as a depreciation allowance if it relates to—
• exploration or prospecting;
• management or internal business processes;
• trade marks;
• social sciences or humanities; or
• market research, sales or marketing promotion.
These excluded activities are especially relevant in considering whether the tax incentive applies to computer programs. The development of websites, internet sales systems, or customer satisfaction questionnaires is accordingly not eligible for the deduction as these constitute market research, sales or marketing promotion. Software packages developed for
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