10 June 2011

Tax incentives revised under new Tax Bill

The Taxation Law Amendment Bill 2011 (TLAB) proposes amendments to and, in some cases, outright replacement of provisions dealing with tax incentives. This article will deal with the important changes to section 12I and section 11D of the Income Tax Act, dealing with industrial policy projects and research and development initiatives respectively. The question is whether the proposed changes make it easier for taxpayers to qualify and access these incentives?

Section 12I

In an effort to enhance the importance attributed to Industrial Development Zones (IDZ) through the section 12I tax incentive, the TLAB proposes an amendment to the additional investment allowance for industrial projects to be established in these areas. The proposed amended to section 12I will allow for an additional investment allowance of 100% (up from 55%) and 70% (up from 35%) for industrial projects falling within an IDZ with preferred or normal qualifying status, respectively.

The amendment relating to increased deductions for projects within an IDZ comes into operation on 1 January 2012 for approvals made on or after that date. Potential applicants with projects in an IDZ may want to hold back on submission so as to time the approval for post 31 December 2011.

A further and equally important amendment is proposed in relation to the contracting for and acquisition of assets. As section 12I currently stands applicants are required to apply and receive approval for the section 12I incentive before they could contract for or acquire any assets. This position is set to change with the proposed deletion of the word "or" and the insertion of the word "and" in section 12I(2). Even though the change seems insignificant it has the effect of allowing applicant to at least contract for assets (but not to acquire), before approval is given. The position relating to the acquisition of assets remains unchanged and in order to be eligible under section 12I, applicants will only be allowed to acquire assets after approval has been obtained from the Department of Trade and Industry.

Section 11D

The current section 11D, dealing with researches and development (R&D) incentives is set to undergo wholesale changes according to the proposed amendments contained in the TLAB. For purposes of this article we have dealt with the more important aspects of the proposed amendments to section 11D.

R&D activity and R&D facility

It is proposed that R&D activities be formally defined. This formal definition will include all qualifying activities under the current Act and "the systematic investigation and experimental activities of which the result is uncertain...". As with R&D activities, R&D facilities will also obtain a formal definition which will include "any laboratory or similar structure which is expected to be used on a regular basis, designed solely for carrying on research into or development of new scientific technological processes or products".

R&D activities deduction

In terms of the current R&D legislation, 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. This position changes with the proposed legislation where taxpayers will only be able to claim a 100% deduction for R&D activities undertaken on or after 1 January 2012, unless the taxpayer applies and receives approval from the Minister of Science and Technology before R&D is undertaken, in which case the taxpayer will qualify for an additional 50% deduction.

R&D facility allowance

Currently, a deduction on a 50:30:20 basis is allowed for new and unused buildings or parts thereof, machinery, plant, implement, utensil, articles or improvements used in R&D activities. It is proposed to amend section 11D to still allow for the initial 50% deduction in the first year, provided that approval is obtained from the Minister of Science and Technology before the R&D facility is contracted for. The 30% and 20% deduction in years 2 and 3 will no longer apply. The proposed legislation does however allow for deductions under proposed amendments to section 12C and section 13, in addition to any deductions claimable for R&D facilities.

Non-qualifying R&D

The list of non-qualifying R&D activities will be further expanded.

The comparative table below shows the extent of the proposed amendments:

Current section 11D

  • Expenditure or costs relating to trade marks.
  • Expenditure or costs relating to exploration or prospecting.
  • Expenditure to acquire, or for the right of use of, any invention, patent, design, copyright, work or knowledge.
  • Expenditure incurred by any person carrying on any banking, financial services or insurance business.

Proposed section 11D

  • Expenditure incurred for the creation or enhancement of trademarks or goodwill.
  • Expenditure incurred in respect of oil and gas or mineral exploration or prospecting, except R&D carried on to develop technology used for that exploration or prospecting.
  • Expenditure incurred for the acquisition or use of pre-existing inventions, designs or computer programs.
  • Expenditure incurred for the creation or development of financial instruments or financial products.
  • Expenditure incurred for the financing and legal cost in respect of research and development.
  • Expenditure incurred for the routine testing, analysis, the collection of information and quality control.
  • Expenditure incurred for the overhead costs of research and development.

The amendments to section 12I are welcomed, however, it appears that section 11D has become more restrictive and more onerous to comply with. The intention of National Treasury with the overhaul of section 11D appears to be one of stating that the incentive is there and available, but good luck in getting it.

Ruaan van Eeden, Director, Tax and Mari Wichmann, Candidate Attorney, Tax

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