Page 479 - SAIT Compendium 2016 Volume2

IN 50 Income Tax acT: InTeRPReTaTIon noTes IN 50
6.4 Option/election — section 11D (6)
Section 11D (6) provides the taxpayer with an option to use a depreciation allowance under another section instead of the 50:30:20 deduction under section 11D (2). For this election to be effected—
• it must be exercised in the year of assessment that the eligible asset is brought into use for the rst time, that is, the
year of assessment in which a deduction under section 11D (2) is rst allowable; and
• once an election is made to depreciate a particular eligible asset under another section, the taxpayer cannot later
depreciate it under section 11D.
For example, a taxpayer can opt for a more favourable deduction of 100% under section 12E (1) for the cost of plant or machinery owned or acquired if the taxpayer quali es as a small business corporation. Another example is the 100% write-off for small items costing R7 000 or less under section 11 (e).
6.5 Amount other than government grant received or accrued to fund expenditure — section 11D(7)
6.5.1 The law — section 11D (7)
Section 11D (7) applies when a taxpayer (a) pays another taxpayer (b) to conduct qualifying R&D on A’s behalf. In this scenario, both A and B meet the income- generation requirements of section 11D (1) in that A will use the product of the R&D to produce its income, while B will derive income in the form of the funding it receives. However, section 11D (7) limits B’s deduction to 100% of the cost incurred to the extent that the R&D expenditure is funded.
The type of amount envisaged in section 11D (7) is in the nature of a fee or grant, rather than a loan.
The deduction-limitation rule does not apply if the amount of the grant—
‘is not deductible by any other person in terms of this Act’.
This means that the recipient of the grant will not be limited to a 100% deduction if the payer of the grant is not entitled
to a deduction under the Act. This would apply, for example, if the payer of the grant was an approved public bene t organisation exempt from income tax under section 10 (1) (cN) or not a resident of the Republic that does not receive income from a source within or deemed to be within the Republic.
The limitation applies only ‘to the extent’ that the R&D expenditure claimed by the recipient is funded by way of grant. Any unfunded expenditure will thus not be subject to the 100% limitation.
It is submitted that section 11D (7) envisages that the funding will be received or accrued before the relevant R&D expenditure is incurred. A grant received or accrued after the expenditure has been incurred would represent a recovery or recoupment to be dealt with under section 11D (9).
(7) Where any amount (other than a government grant) is received by or accrues to a taxpayer to fund expenditure that is otherwise eligible for deduction under subsection (1), the deduction for that expenditure shall be limited to 100 per cent in lieu of 150 per cent to the extent of that amount, unless that amount is not deductible by any other person in terms of this Act.
Example 13 — Expenditure funded by taxable entity
Facts:
Company A and Company C are residents of the Republic. Company C received R1 000 from Company A to nance R&D expenditure. Company C incurred qualifying R&D expenditure of R1 200. The research results are intended to be for the production of Company C’s income.
Calculate the amount which Company C is entitled to claim under section 11D (1).
Result:
Company C is entitled to the following deduction under section 11D (1):
100% of R1 000 [section 11D (7) limitation] 150% of R200 (no limitation)
Total deduction under section 11D (1)
The portion of the expenditure funded by the grant is limited to 100%.
R 1 000 300 1 300
Example 14 — Expenditure funded by non-resident
Facts:
Foreign Holdco, which is not a resident, owns all the shares in SA Subco. SA Subco carries on qualifying R&D activities. During the year of assessment SA Subco incurred R&D expenditure of R1 000. In the same year of assessment SA Subco received an amount of R400 from Foreign Holdco for the purpose of funding this expenditure. Result:
SA Subco will be entitled to a deduction of R1 500 (150% of R1 000) under section 11D (1). Since Foreign Holdco is not entitled to a deduction under the Act for the amount paid to SA Subco, SA Subco’s deduction is not limited to 100% under section 11D (7).
6.6 Government grant received or accrued to fund R&D expenditure — section 11D (8) 6.6.1 The law — section 11D (8)
Section 1 — De nition of a ‘government grant’
(8) Where any government grant is received by, or accrues to, a taxpayer to fund expenditure that is otherwise eligible for a deduction under subsection (1), the deduction for that expenditure shall be limited to 100 per cent in lieu of 150 per cent to the extent of twice that amount (except to the extent that expenditure is disallowed in terms of section 23 (n)).
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