Page 476 - SAIT Compendium 2016 Volume2

IN 50 Income Tax acT: InTeRPReTaTIon noTes IN 50
Example 9 — Cost price
Facts:
Researcher purchases a machine under an instalment credit agreement (paragraph (a) of the de nition of an ‘instalment credit agreement’ in section 1 of the VAT Act) for R100 000, with a 10% deposit at 12% interest per year repayable over a 54-month period. His monthly instalments are R2 165,09. What are the income tax consequences?
Result:
The cost price of the machine for purposes of a deduction under section 11D (2) is R100 000. The interest payments will be deductible under section 24J over the period of the agreement, but will only qualify for a 100% deduction by virtue of section 11D (5B) (b).
Replacement of damaged or destroyed assets qualifying for rollover relief
Section 11D (3) (d) provides limited rollover relief for damaged or destroyed R&D depreciable eligible assets. For a detailed discussion on roll-over relief, see Chapter 13 of the Comprehensive Guide to CGT available on the SARS website. If the eligible asset is acquired as a replacement of another asset which was damaged or destroyed, the cost for purposes of claiming the allowance under section 11D (2) must be reduced by any amount which was recovered or recouped in respect of the damaged or destroyed asset that was excluded from the taxpayer’s taxable income under section 8 (4) (e), whether in the current or a previous year of assessment.
5.3 The building or any part thereof must be regularly used and speci cally equipped — section 11D (4)
Section 11D (4) imposes an ongoing requirement in the case of any building or any part thereof. It must be regularly used for an R&D purpose and be speci cally equipped for that use. This requirement denies the allowance to a taxpayer that acquires a building for an R&D purpose and then subsequently uses it for some other purpose.
The phrase ‘regularly used’ is not de ned in the Act, but since tax is an annual event, it is submitted that the building must be regularly used during a year of assessment. The regularity of use within each year of assessment depends in part on the nature of the R&D being undertaken. The facts and circumstances of each case must be taken into consideration in determining whether or not the building is regularly used.
The phrase ‘speci cally equipped’ is also not de ned in the Act and again, the question of whether a building is speci cally equipped depends upon the nature of the R&D and the facts and circumstances of the particular case.
PART 3: EXCLUSIONS AND LIMITATIONS
6. The law — sections 11D (5), (5A), (5B) and (6)
(5) Notwithstanding any other provision of this section, no deduction shall be allowed in terms of subsection (1) or (2) in respect of expenditure or costs relating to—
(a) exploration or prospecting;
(b) management or internal business processes;
(c) trade marks;
(d) the social sciences or humanities; or
(e) market research, sales or marketing promotion.
(5A) Notwithstanding any other provision of this section, no deduction shall be allowed in terms of subsection (1) in so far as that deduction is claimed in respect of expenditure incurred—
(a) to acquire, install, erect, improve or add to any building, machinery, plant, implement, utensil or article;
(b) to acquire, or for the right of use of, any invention, patent, design, copyright, work or knowledge; or
(c) by any person carrying on any banking, nancial services or insurance business.
(5B) Notwithstanding the provisions of subsection (1), the deduction to be allowed to a taxpayer in terms of that
subsection in respect of expenditure incurred by that taxpayer shall, in so far as that expenditure—
(a) is incurred to defray expenditure of any other person who is a connected person in relation to the taxpayer, be limited to an amount equal to 150 per cent of the amount of expenditure contemplated in subsection (1) incurred by that other person directly in respect of activities undertaken by that other person directly for purposes
contemplated in that subsection; or
(b) is incurred for the right of use of any property, or constitutes interest as de ned in section 24J (1), be limited to
the amount of the expenditure.
(6) The deductions contemplated in this section shall apply in lieu of any other deduction or allowance granted under
any other provision of this Act, unless the taxpayer elects in the year of assessment that any deduction contemplated in subsection (2) is rst allowable in respect of any building or part thereof, or any machinery, plant, implement, utensil or article, that the deduction or allowance granted under that other provision shall apply in respect of that building, part, machinery, plant, implement, utensil or article, in which case subsection (2) shall not apply in respect of that building, part, machinery, plant, implement, utensil or article, as the case may be.
6.1 Excluded activities
Under section 11D (5) certain activities are expressly excluded from the R&D incentive scheme and any expenditure or costs relating to them are not deductible under section 11D (1) or (2). These activities are explored in more detail below. 6.1.1 Exploration or prospecting
Exploration and prospecting have a wider meaning than that ascribed to these terms in paragraph 1 of the Tenth Schedule to the Act and in section 1 of the Mineral and Petroleum Resources Development Act 28 of 2002 respectively. Exploration would for instance include space exploration.
Examples of activities excluded from the tax-incentive scheme include the sinking of exploratory drill-holes for geotechnical investigations or to evaluate the mineral resources of a site.
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