The R&D tax incentive is available to companies of all sizes in any sector of the economy. To be eligible, a company must be an incorporated entity and recognised as a company under the Income Tax Act. Individuals, non-profit organisation and trusts are not eligible.
At Corporate Tax Rate of 28%, the incentive translates into 14 cents per Rand spent on R&D. The following is an illustration of how the section 11D deduction is estimated:
|
EXPENDITURE (R’000) |
||
|
Item |
Without R&D |
With R&D |
|
Revenue |
1 000 |
1 000 |
|
Operating Expenditure (60%) |
600 |
600 |
|
R&D Expenditure |
- |
100 |
|
Operating Profit |
400 |
400 |
|
Tax Payable (28%) |
112 |
98 |
|
NPAT |
288 |
302 |
|
Total Saving |
|
14 |
At the level of a firm, the tax deduction helps to reduce the after-tax price of R&D (“user cost of R&D”). With reduced cost of R&D, a firm can be able to finance its R&D and scale up or undertake its R&D activities sooner than otherwise. From government point of view, the incentive deduction represents a tax revenue forgone. Its benefits should be visible by encouraging new and larger number of companies to perform and upgrade their R&D in the country and should see the private sector increasing R&D and improving South Africa's innovation performance (new and improved products, services, processes, enterprise, etc.)
In terms of section 11D(4) & (5), a company funding R&D undertaken by another company can qualify for R&D tax deduction, provided that the funded company does not claim. A company can also claim deduction of R&D it outsources to a South Africa university or science council. Companies in joint ventures (JVs) can claim to the extent that they fund the R&D. These provisions not only serve to encourage various forms of R&D collaboration and partnerships, but also help in mitigating the R&D funding gaps given the high costs and levels of uncertainty associated with R&D.
Section 11D(7) acknowledges that a firm can receive other funding from government, public entity or municipality towards its R&D activities. An amount equal to such a funding will be excluded when the R&D tax deduction is calculated. This is to ensure that only the R&D expenditure incurred by the company qualifies. A company does not claim for the R&D tax deduction of 150% for the amount of a government grant for the R&D expenses.