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also apply to a company that pays another company a fee to conduct R&D on its behalf (that is, the company will use the product of the research in its business to produce income.
For purposes of deriving income
A taxpayer will also be entitled to the section 11D (1) deduction when the product of that taxpayer’s R&D activities is discovered, devised, developed or created on behalf of someone else, provided that the taxpayer derives income from its R&D activities (for example, in the form of a fee paid to the taxpayer by the person on whose behalf the R&D is being conducted).
PART 2: DEPRECIATION ALLOWANCE
5. The law — section 11D (2), (3) and (4)
(2) There shall be allowed as a deduction by a taxpayer in respect of any building or part thereof, machinery, plant, implement, utensil or article which—
(a) is owned by that taxpayer, or acquired by that taxpayer as purchaser in terms of an agreement contemplated in
paragraph (a) of the de nition of ‘instalment credit agreement’ in section 1 of the Value-added Tax Act, 1991 (Act
89 of 1991);
(b) is rst brought into use by that taxpayer solely and directly for purposes contemplated in subsection (1); and
(c) prior to rst being brought into use by that taxpayer solely and directly for purposes contemplated in subsection
(1), was not used by any person for any purpose;
(d) ...
an amount equal to 50 per cent of the cost to that taxpayer of that building, part, machinery, plant, implement, utensil or article in the year of assessment that it is bought into use for the rst time by that taxpayer and 30 per cent in the rst succeeding year of assessment and 20 per cent in the second succeeding year of assessment: Provided that no deduction shall be allowed to a taxpayer under this section in respect of any building, part, machinery, plant, implement, utensil or article if that taxpayer ceased to use that building, part, machinery, plant, implement, utensil or article, solely and directly for purposes contemplated in subsection (1) during any previous year of assessment.
(3) For the purposes of this section, the cost to the taxpayer of any building, machinery, plant, implement, utensil or article shall be deemed to be the lesser of—
(a) the actual cost to the taxpayer in respect of the acquisition, installation and erection thereof;
(b) the cost which a person would, if he or she had acquired, installed or erected that building, machinery, plant,
implement, utensil or article under a cash transaction concluded at arm’s length on the date on which the transaction for the acquisition, installation or erection thereof was in fact concluded, have incurred in respect of the cost of such acquisition, installation or erection; or
(c) ..... .
(d) where the building, machinery, plant, implement, utensil or article has been acquired to replace an asset which
has been damaged or destroyed, such cost less any amount which has been recovered or recouped in respect of the damaged or destroyed asset and has been excluded from the taxpayer’s income in terms of section 8 (4) (e), whether in the current or any previous year of assessment.
(4) Notwithstanding any other provision of this section, any building or any part thereof shall be deemed not to have been used for purposes contemplated in subsection (2) unless such building or part is regularly used for those purposes and is speci cally equipped for such use.
5.1 Eligible asset
A depreciation allowance is provided under section 11D (2) on the cost of any eligible asset used for an R&D purpose at the rate of 50% in the year of assessment in which the eligible asset was brought into use for the rst time by the taxpayer, 30% in the rst succeeding year of assessment and 20% in the second succeeding year of assessment.
Interpretation Note No. 47 dealing with deductions allowable under section 11 (e) is useful in considering what constitutes an eligible asset.
For a deduction to be allowed under section 11D (2) the eligible asset must be—
• Owned by the taxpayer, or acquired by that taxpayer as purchaser
The expression ‘acquired by that taxpayer as purchaser’ means acquired under an agreement contemplated in paragraph (a) of the de nition of an ‘instalment credit agreement’ in section 1 of the Value-Added Tax Act 89 of 1991.
A lessee is accordingly not entitled to the deduction, but a co-owner may depreciate the eligible asset proportionately to his or her share in the eligible asset, provided that all other requirements are met.
• First brought into use by that taxpayer
The phrase ‘brought into use for the rst time’ was considered in ITC 1804* in the context of section 12C (1) (b). The court distinguished the letting of an asset by a lessor from the use of the asset by the lessee. Boruchowitz J stated the following:†
‘The bringing into use of an asset is an act of a physical nature whereas letting or hiring is a jural or non-physical act. Only the user ... can bring the machinery or plant into use for the rst time for the purposes of its trade and this is a factual question.’
If an asset was rst used by a taxpayer for any purpose other than those in section 11D (1), it may not be depreciated under section 11D (2).
* (2005) 68 SATC 105 (G). † (2005) 68 SATC 105 (G).
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