Page 472 - SAIT Compendium 2016 Volume2

IN 50 Income Tax acT: InTeRPReTaTIon noTes IN 50
administration, human resources or accounting purposes are similarly excluded from the tax-incentive scheme as they constitute management or internal business processes.
For the devising of software to qualify as an R&D purpose, the computer program must— meet the de nition under section 1 of the Copyright Act;
be of a scienti c or technological nature;
be intended to be used by the taxpayer in the production of his or her income; or
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Research into developing software for management and internal business processes will therefore not be eligible for a deduction. In this regard it is irrelevant whether such software is developed for use in-house or is developed for the purpose of sale to end-users.
be devised, developed or created by the taxpayer for purposes of deriving income; and not be for excluded activities under section 11D (5).
If a taxpayer develops a computer program for sale for use under licence, any related R&D expenditure would qualify for the section 11D deduction insofar as the program is not for internal business processes and all other requirements are met.
Example 3 — Computer software
Facts:
Software Co. designs computer software which allows its clients’ employees to monitor how much time is spent on the telephone. The software is licensed to clients. The company employs several computer programmers to improve the software and adapt it to clients’ needs.
Does the development of Software Co.’s software constitute an R&D purpose and will the expenditure incurred qualify for a deduction under section 11D (1)?
Result:
The software constitutes a ‘computer program’ as de ned in the Copyright Act, and it therefore comprises an R&D purpose under section 11D (1) (b) (iii). However, under section 11D (5) (b) the cost of developing and adapting the software will not qualify as a deduction because the software relates to management or internal business processes.
4.2.5 Knowledge essential to the use of such invention, design or computer program
The word ‘knowledge’ bears its ordinary dictionary meaning and is de ned in the Oxford English Dictionary as—
‘facts, information, and skills acquired by a person through experience or education; the theoretical or practical understanding of a subject; what is known in a particular eld or in total; facts and information; or awareness or familiarity gained by experience of a fact or situation’.
Under section 11D (1) (b) (iv) the knowledge must be essential to the use of an invention, design or computer program. This requirement is more stringent than that in the old section 11B regime, which referred to knowledge connected to the use of an invention, etc.
Example 4 — Knowledge essential to the use
Facts:
A manufacturing company develops a new machine for manufacturing widgets which is faster than older machines and requires less maintenance. Several parts of the machine are protected by way of registered designs.
While developing the new machine, the manufacturing company develops extensive know-how relating to the operation of the machine and maintenance procedures. One of the company’s employees spent three months writing a comprehensive operating manual for the machine.
Is the cost of drawing up the operating manual deductible under section 11D?
Result:
The cost of drawing up the operating manual is deductible under section 11D as it represents know-how essential to the use of the design.
4.3 Requirements
Once it is determined that activities are for an R&D purpose as described in paragraph (a) and (b) of section 11D (1), each item of expenditure must be separately considered.
4.3.1 Carrying on any trade
See paragraph 4 of Interpretation Note No. 33* for a discussion of this topic.
A taxpayer may begin a program of scienti c or technological research and development before trading commences. Such so-called start-up expenditure would not qualify as a deduction under section 11D while trade is not underway.
Section 11A permits a deduction for R&D expenditure that would have quali ed under section 11D but for the fact that it was incurred before the commencement of trade. The pre-trade R&D expenditure will be allowed as a deduction when the taxpayer commences to carry on trade [section 11A (1)]. However, under section 11A (2) the deduction is ring-fenced, that is, it is limited to the income less other allowable deductions from the particular trade. A taxpayer that abandons an R&D project before the commencement of trade will not be entitled to a deduction of the related R&D expenditure under section 11A. The latter provision requires that trade must commence before the qualifying pre-trade expenditure can be claimed as a deduction. However, once trade commences, the pre-trade R&D expenditure will qualify for the 150% deduction provided the requirements of section 11D are complied with.
4.3.2 Expenditure actually incurred by the taxpayer
This phrase is used in other sections of the Act which have been considered by the courts. The general principle laid down by the courts is that expenditure is actually incurred not when it is paid (if paid in a subsequent year) but when the taxpayer incurs an unconditional legal liability.
* 4 July 2005, ‘Assessed Losses: Companies: The Trade and Income from Trade Requirements’.
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