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The existing research and development (R&D) tax incentive for South African companies will be extended for 10 years from January 2024 and will be refined to make it simpler and more effective, Finance Minister Enoch Godongwana announced earlier this year. This provides local businesses with both opportunity and time to derive optimal benefits from this incentive, which offers both a rebate of 150% of R&D expenditure and accelerated depreciation of R&D equipment.
In this article, we unpack what the incentive aims to achieve and what it offers, how businesses can determine whether this research and development tax incentive applies to them, what the terms and conditions entail, and how to ensure your business can benefit while meeting all the requirements.
“The government expects that, by encouraging companies to undertake R&D in South Africa, local companies will strengthen their capabilities of developing value-added products, technologies and services.”
(Department of Science and Innovation (DSI) - South Africa)
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:
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?
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.
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