Page 477 - SAIT Compendium 2016 Volume2

IN 50 Income Tax acT: InTeRPReTaTIon noTes IN 50
6.1.2 Management or internal business processes
This exclusion is especially relevant to the inclusion of software as an R&D purpose (see 4.2.4). Accordingly the following software-related activities, whether or not they are of a routine nature, do not qualify for the deduction:
• Support for existing systems.
• Business application software.
6.1.3 Trade marks
Any expenditure relating to trade marks, whether for the creation, development, protection, renewal or enforcement of a trade mark is not deductible under section 11D.
6.1.4 The social sciences or humanities
Although scienti c methods may be used in social science research, including quantitative and qualitative methods, such research does not qualify for the deduction. Examples of such social sciences include languages and literature, history, philosophy, religion, visual and performing arts (including music), psychology and economics.
6.1.5 Market research, sales or marketing promotion
Activities associated with a project but not directly contributing to the resolution of scienti c or technological uncertainty do not constitute eligible R&D. Examples include identifying or researching market niches in which R&D may be bene cial to a company, and the examination of a project’s nancial, marketing, and legal aspects.
6.2 Excluded expenditure — section 11D (5A)
Section 11D (1) does not exclude expenditure of a capital nature. To avoid expenditure being deducted under the 150% deduction [section 11D (1)] and the depreciation deduction [section 11D (2)], section 11D (5A) prohibits a deduction under section 11D (1) claimed for expenditure incurred—
• to acquire, install, erect, improve or add to any building, machinery, plant, implement, utensil or article, or
• to acquire, or for the right of use of, any invention, design, copyright, work or knowledge.
The effect of section 11D (5A) (a) and (b) is that if expenditure is eligible for a 150% deduction and for the depreciation deduction under section 11D (2), the depreciation deduction takes precedence.
Note: With effect from years of assessment commencing on or after 1 January 2004, section 11 (gC) allows as a deduction from income an allowance (5% or 10%) for expenditure incurred on the acquisition of certain incorporeal property provided that the expenditure actually incurred exceeds R5 000.
It speci cally excludes expenditure incurred by way of devising, developing or creating this intellectual property.
Under section 11D (5A) (b), expenditure incurred to acquire or for the right of use of any invention, design, copyright, work or knowledge is not allowable under section 11D (1). See 6.3 for clarity on the concept of ‘right of use’.
Under section 11D (5A) (c) the 150% deduction is also disallowed if expenditure is incurred by any person carrying on any banking, nancial services or insurance business.
6.3 Limitation of expenditure — section 11D (5B)
Section 11D (5B) (a) contains an ‘anti-mark-up’ rule when one connected person (a) pays another connected person (b) for R&D expenditure incurred on A’s behalf. A will only be entitled to the 150% deduction to the extent of B’s actual direct R&D expenditure. In other words, should B add a mark up to its actual costs in billing A, the mark-up portion will not qualify for the 150% deduction.
Example 11 — Expenditure paid by a connected person — section 11D (5) (a)
Facts:
Huge Ltd is a listed company which has two wholly-owned subsidiaries, Subco and R&D Co, both of which operate in South Africa. All R&D activities for the entire group are carried out by R&D Co.
Under the agreement between Subco and R&D Co, Subco pays R&D Co a research fee based on R&D Co’s cost plus 10%. Subco is obliged to pay the fee even if the research is unsuccessful.
R&D Co charges Subco a fee of R990 000 for research on qualifying R&D projects during the year of assessment. The fee is made up as follows:
Example 10 — Non-qualifying rental expenditure
Facts:
R&D Co. hires a laboratory and purchases equipment for conducting a new research project. What are the income tax consequences of the above transactions?
Result:
The rent will be deductible under section 11D (1) as it is payable for the right of use of the laboratory and is not excluded under section 11D (5A) (b) (see 6.3). However, under section 11D (5B) (b) the deduction for the rent will be limited to 100% instead of 150%.
The cost of the equipment will be deductible under section 11D (2).
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