The South African government, like in several other countries, has recognised the need for private sector research and development (R&D). This is evident from South Africa’s National Research and Development Strategy, which provides comprehensive reasons why private sector R&D should be stimulated by, amongst other, fiscal incentives. 

The South African Income Tax Act 58 of 1952 as amended (the “Act”), makes provision for a tax incentive scheme, commonly referred to as the Research and Development (R&D) tax incentive through section 11D. The R&D tax incentive is a highly valuable financial mechanism for businesses which conduct R&D, as it allows the deduction R1.50 from its taxable income for every R1.00 spent on R&D.

The process of obtaining approval to deduct eligible expenditures at the 150% rate starts off with submitting an R&D tax incentive application to the Department of Science and Innovation (the “DSI”) for a specific R&D project. The application is then evaluated to determine whether the specific project complies with the necessary requirements. If the application is approved the Minister of Higher Education, Science and Innovation will issue a letter of approval. 

Changes to the R&D tax incentive 

The Act originally stipulated that the R&D tax incentive would come to an end on 30 September 2022, but during February 2023, the Minister of Finance announced that the R&D tax incentive would be extended to 31 December 2033. 

A further noteworthy change to the R&D tax incentive, is the introduction of a six-month grace period prior to the date of the application. Previously, a successful applicant of the R&D tax incentive was only allowed to claim eligible expenditures which were incurred after the date on which the application was submitted. Now, the six-month grace period allows applicants to claim eligible expenditures which were incurred during the grace period, which starts six months before the date on which the application was submitted. As such, this change would undoubtedly be welcomed by most businesses which already make use of the R&D tax incentive, as well as those which will do so in the future.   

During October 2022 the R&D Tax Incentive Online System (“online system”), was launched. The online system is internet-based and can be accessed from any web browser at https://www.dst.gov.za/rdtax/index.php/submit-application. The purpose of the online system is to streamline the application and reporting processes, ease the administrative burden on stakeholders and to improve the turnaround time for responses to applications. As such, this is also a welcome change in respect of the administration of the R&D tax incentive.  

 What qualifies as R&D? 

The Act defines scientific or technological R&D as systematic investigative or systematic experimental activities aimed at resolving scientific or technological uncertainty and the resolution of which is not readily deducible by a person skilled in the relevant scientific or technological field for the purpose of: 

– discovering non-obvious scientific or technological knowledge; 

– creating or developing new or significantly improved products, processes or services;

– creating or developing a multi-source pharmaceutical product; or  

– conducting a clinical trial as provided for in the Guidelines for good practice in the conduct of clinical trials with human participants in South Africa. 

 Can R&D be outsourced? 

The Act makes provision for R&D to be outsourced, subject to thereto that the R&D is outsourced to: 

– an institution, board or body that is exempt from normal tax under section 10 (1)(cA) of the Act; 

– the Council for Scientific and Industrial Research; or 

– a company forming part of the same group of companies, and the company that carries on the R&D does not claim its R&D expenditure with the R&D tax incentive.  

This provides a practical alternative for businesses, that may not have the resources and/or facilities to conduct the desired R&D in house. 

Confidentiality of information – Subsection (18) determines that all matters must be kept secret by all employees of the Department of Science and Technology. Therefore, confidentiality is maintained and there is no risk of competitors acquiring sensitive information or that the matter disclosed in an R&D tax incentive application can be used in an attack against a patent, should the R&D lead to a patentable invention. 

KISCH IP has an excellent track record of successfully applying for the R&D tax incentive on behalf of clients. If your business conducts R&D and has not yet applied for an R&D tax incentive, you are welcome to schedule a consultation with a tax professional at KISCH IP here.