Can the R&D Tax Incentive Benefit Your Business?

Research and development (R&D) is essential to boost innovation in the business sector, as it improves the capability to develop new products and processes and to improve existing ones. This is crucial for improving competitiveness and growth of the South African economy.

Section 11D of the Income Tax Act offers a R&D tax incentive to promote private sector R&D investment in South Africa. In the following paragraphs, you will find out what the incentive offers, which companies qualify, and the terms and conditions that apply.

What does the R&D incentive offer businesses? 

Section 11D allows R&D spending to be considered when determining taxable income in two ways:

1. A deduction equal to 150% of expenditure incurred directly for R&D; and
2. An accelerated depreciation deduction (50:30:20) for capital expenditure on machinery or plant used for R&D.

According to the DSI, the tax deduction will help to reduce the cost of R&D, which will enable companies to finance their R&D and scale up or undertake R&D activities sooner than otherwise.

Which companies can benefit from the R&D incentive? 

To be eligible, a company must be an incorporated entity and recognised as a company under the Income Tax Act. Individuals, non-profit organisations and trusts are not eligible.

As the aim is to encourage South African companies to invest in R&D, the incentive is available to businesses of all sizes and in all economic sectors.

Companies can also claim a deduction of R&D it outsources to another company, or to a South African university or science council. Companies in joint ventures (JVs) can claim to the extent that they fund the R&D. Prototypes and pilot plants created solely for purposes of R&D are also eligible.

However, where a company receives funding from government, a public entity or a municipality towards its R&D activities, this funding will be excluded when the R&D tax deduction is calculated.

What are the terms and conditions? 

• The R&D activities must be approved by the Minister of Science and Innovation on recommendation by the R&D Tax Incentive Adjudication and Monitoring Committee that evaluates applications and reviews the annual progress reports that must be submitted.
• The R&D expenditure claimed should be incurred directly and solely for R&D undertaken in South Africa, and in the production of income and the carrying on of any trade.
• R&D expenditure claimed should be incurred after the date the application is submitted to the DSI.
• Applications awaiting approval should not be included in provisional tax calculations to avoid penalties. Where approval is received after a tax assessment has been finalised, a Request for Correction can be made.
• There is an extensive list of exclusions and limitations.
• Since last year, applications and progress reports can only be submitted via the new online automated system.
• According to the 2023 Budget Review, government is refining the R&D incentive to make it simpler to understand and administer.

Before claiming the R&D tax incentive against taxable income, and certainly before commencing any R&D activities in reliance on the tax incentive being allowed, ask your accountant to confirm that you can benefit optimally from this substantial incentive, while meeting all the requirements.