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[FAQ] Research and development not approved by the Minister of Science and Technology
- 20 November 2020
- Individuals Tax
- Peter Surtees
Background
A company does research and development (internally develop software used to monitor equipment on mine process plants for example vibration on a mill motor before it breaks down completely). No approval has been obtained from the Department of Science and Technology therefore S11D (150%) claim is not an option. It is my understanding that the company can still claim the 100% deduction. S11(gC) refers to purchased items and is therefore not applicable either. The company capitalized the salary cost and amortized this over 3 years in line with the group's policies however they don't want to miss out on the deduction hence trying to claim in the year actually incurred.
Can the company claim a S11(a) deduction?
Answer
Income Tax Act
You can’t claim under S11D of the Income Tax Act, because the programme has not been approved by the Minister of Science and Technology as required by section 11D(9). You therefore need to go to the general deduction formula. The expenditure is being incurred in order to produce computer software. This is a capital asset, which means that the taxpayer fails the section 11(a) requirement that expenditure must be incurred “in the production of income, provided such expenditure and losses are not of a capital nature”. Therefore, we must have recourse to section 11(e).
S11: “For the purpose of determining the taxable income derived by any person from carrying on any trade, there shall be allowed as deductions from the income of such person so derived-
(e) …such sum as the Commissioner may think just and reasonable as representing the amount by which the value of any machinery, plant, implements, utensils and articles…owned by the taxpayer or acquired by the taxpayer as purchaser…for the purpose of his or her trade has been diminished by reason of wear and tear or depreciation during that year of assessment”.
Application of the principle
The first point we need to establish is whether the company is carrying on a trade. If not, the deduction is not allowed. I assume the company is charging customers, internal or external or both, fees for the use of the software. If so, section 11(e) is available.
In order to make life easier for both taxpayer and the Commissioner, SARS has published a list of the periods over which you may claim deductions of the value of an asset without having to obtain SARS approval. If you want to accelerate the period, you need to get SARS approval based on submissions supporting the application.
On the most recent copy of the list, self-developed software for main frame use may be written off over 5 years. Software for personal computers may be written off over two years; there seems to be a necessary implication that self-developed software will only be used in main frames.
Webinar Commentary
Further webinar commentary on Capital allowances claimable on intangible assets can be accessed here.