Page 478 - SAIT Compendium 2016 Volume2

IN 50
Income Tax acT: InTeRPReTaTIon noTes
IN 50
Direct R&D expenditure
Indirect administration expenditure Total expenditure
10% mark up
Research fee
Calculate the amount which Subco can claim as a deduction under section 11D.
Result:
R 800 000 100 000 900 000 90 000 990 000
Subco and R&D Co are connected persons in relation to each other by virtue of Huge Ltd (their common holding company) and Subco is thus governed by the limitation in section 11D (5B). Subco may deduct an amount of R800 000 3 150% = R1 200 000 of the R&D fee paid to R&D Co. The indirect expenditure and the pro t margin do not qualify for the deduction.
Section 11D (5B) (b) limits the deduction under section 11D (1) to 100% in the case of expenditure on the right of use of any property and any interest contemplated in section 24J (1).
Amounts paid for the ‘right of use of any property’ do not include the cost of purchasing property, including any acquisition 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.
The ordinary meaning of the word ‘property’ includes movable and immovable property and will thus include the right of use of any eligible asset used for an R&D purpose.
Example 12 — Limitation of deduction for rent and interest — section 11D (5B) (b) Facts:
R&D Co. incurred the following expenditure in relation to its R&D activities:
Rental — hire of laboratory from third party
Interest on bank loan used to nance purchase of R&D equipment
Total rent and interest incurred
Calculate the amount which R&D Co. can claim as a deduction under section 11D.
Result:
The rental comprises payment for the right to use property. Under section 11D (5B) (b) the deduction for interest and the right of use of property is limited to 100% of the cost incurred. R&D Co.’s deduction under section 11D (1) is therefore limited to R200 000.
R 50 000 150 000 200 000
Right of use
The personal servitude of usus (right of use) is a lesser right than usufruct, but, like usufruct, it is a real right and attaches to the asset rather than the person. It entitles a person to use another’s property but not to appropriate its fruits.* The right of use can be acquired over land, a house or animals, and in each of these the user may use the thing without becoming the owner of the fruits of the thing or the thing itself.†
Lease rentals and lease premiums paid will be regarded as payments for the ‘right of use of any property’‡ as well as rental paid for the use of any movable or immovable property.
The effect of this paragraph is that the deductions for leases and rental payments will be limited to 100% and not 150%.
Interest as de ned in section 24J
‘interest’ includes the—
(a) gross amount of any interest or related nance charges, discount or premium payable or receivable in terms of or
in respect of a nancial arrangement;
(b) amount (or portion thereof) payable by a borrower to the lender in terms of any lending arrangement as represents
compensation for any amount to which the lender would, but for such lending arrangement, have been entitled;
and
(c) absolute value of the difference between all amounts receivable and payable by a person in terms of a sale and
leaseback arrangement as contemplated in section 23G throughout the full term of such arrangement, to which
such person is a party,
irrespective of whether such amount is—
(i) calculated with reference to a xed rate of interest or a variable rate of interest; or
(ii) payable or receivable as a lump sum or in unequal instalments during the term of the nancial arrangement;
Any nance charges, rental or lease payments will therefore not qualify for the 150% allowance, even if they are deductible under section 11D (1). Note that the limitation applies even if the rent or interest is paid to an unconnected third party.
* C G van der Merwe and M J de Waal The Law of South Africa 24 (First Reissue Volume) [CD- ROM] (My LexisNexis: 31 July 2000) LexisNexis Butterworths, Durban in para 441 under Servitudes / Personal Servitudes / Usus.
† James Lamprecht ‘Usufruct, Usus and Habitatio — Say what you mean and get what you want’ (16 March 2006) available online at [Accessed 25 August 2008].
‡ See, for example, C: SARS v BP South Africa (Pty) Ltd 2006 (5) SA 559 (SCA), 68 SATC 229 at 238.
470 saIT comPendIum oF Tax LegIsLaTIon VoLume 2