Recent amendments to s11D of the Income Tax Act 58 of 1962 (Act) signify wholesale changes in the way research and development (R&D) activities will be interpreted going forward. Until 31 March 2012, taxpayers are allowed to claim a deduction of 150% for qualifying R&D costs relating to the discovery of novel, practical and non-obvious information, subject to certain compliance requirements being met.
With effect from 1 April 2012 (or such later date as may be published in a Government Gazette) taxpayers will only be able to claim a 100% deduction for R&D activities undertaken, unless the taxpayer applies to and receives approval from the Minister of Science and Technology before the R&D is undertaken, in order to qualify for an additional 50% deduction.
In light of these amendments and those to the formalised definition of R&D activities, software developers will have to carefully consider whether their development of computer programmes fall within the revised definition.
Section 11D of the Act defines the type of activities that will fall within the ambit of “research and development” as, among others, the “systematic, investigative or systematic experimental activities of which the result is uncertain” for developing computer programmes or knowledge essential to use of computer programmes.
Software developers who wish to rely on the deduction under s11D of the Act will have to ensure that the computer programme developed is innovative. The criteria to assess whether any software development undertaken is sufficiently innovative will be a factual question based on the functionality, operability, improvement in performance, quality and reliability of such software.
The amendment to s11D of the Act allows a software developer to get an initial tax deduction or allowance of 100% for costs incurred in developing innovative computer programmes or updating existing computer programmes, provided that the computer programme developed is a separately identifiable R&D activity undertaken in South Africa and that the costs were incurred in the production of income and in the carrying on of any trade.
In order to qualify for the additional 50% deduction, a software developer (that is a company) must receive approval from the Minister of Science and Technology and incur the expenditure relating to R&D on or after the date of receipt of the application by the Department of Science and Technology.
It will also be necessary for the Department of Science and Technology to approve any deduction for expenditure that a taxpayer incurs to fund R&D activities, including the commissioning of software development. All entities that are funding innovative software development must consider submitting an application to the Department of Science and Technology for this additional 50% deduction. Although the amendments to s11D of the Act are welcome, they appear to have placed an additional compliance burden on taxpayers wishing to claim a deduction. The determination as to whether an application must be made for the additional 50% deduction will have to be weighed up against the potential costs involved.
Ruaan van Eeden Director, Tax practice, Tayyibah Suliman, Senior Associate, and Mukelo Ngobese, Candidate Attorney, Technology Media and Telecommunications practice, Cliffe Dekker Hofmeyr