Cognisance of Section 11D Research and Development Tax Incentive for the Construction Industry

The Section 11D Research and Development (R&D) Tax Incentive was included in the Income Tax Act in 2006.

For the purposes of the R&D Tax Incentive, R&D is defined as follows:

• to conduct a series of experiments to obtain results that can be used to establish a new finding or conclusion.
• to make a new scientific discovery or to discover new technology.
• to create or develop a new invention, functional design or computer program.
• to create new knowledge that is essential for the use of the invention, functional design or computer programme.
• to make a significant improvement that results in improved functionality, performance, reliability or quality of an existing product, design or computer programme.
• to create or develop a multi-source pharmaceutical product.
• to conduct a clinical trial with human participants.

The main aim of this incentive is to encourage South African companies to invest in scientific or technological research and development. However, many companies are unaware that the South African government offers a 150% deduction of expenditure incurred directly for R&D, and an accelerated depreciation deduction for capital expenditure incurred on plant or machinery used for R&D. Due to this lack of knowledge, many companies have not taken advantage of this significant tax incentive.

An industry that invests richly in R&D is the construction industry. It encompasses a large variety of architects, engineers, machinists and other artisans who spend a significant amount of time designing, planning, and developing projects. This allows them to be a competitive force in the market and keep abreast of technological, regulatory and environmental constraints and changes. What most companies don’t realise is this very process of engaging with each of their client’s unique project requirements, is in essence, engaging in R&D.

The ongoing enhancement and accessibility of new design techniques, materials, products and technologies provide the framework for R&D. Hence, the construction industry is involved in R&D in their daily operations, and it is important to not only recognise this but to also take advantage of the South African R&D Tax Incentive.

Who qualifies for the R&D Tax incentive?

Any business that is a tax resident in South Africa that:

• carries out eligible R&D activities within the Republic.
• and its R&D activities are approved by the Minister of Science and Technology.

How to apply for the R&D Tax incentive?

1. Company submits an application

• To apply for the R&D tax incentive, a company should visit the Department of Science and Innovation (DSI) website: https://www.dst.gov.za/rdtax/ The online application form must be completed and submitted.
• Once submitted, the DSI acknowledges receipt of the application.
• The application is then assessed.

2. Adjudication

• The assessment report and application form are presented to the Committee for adjudication.
•  Thereafter the Committee makes a recommendation to the Minister of Science and Technology.

3. Decision

• The Minister's decision letter on whether the R&D activities have been approved or not, is sent to the applicant.
•  This letter serves as proof to SARS that the company's R&D activities have been approved when claiming the tax deduction.

4. Progress reporting

• A company whose R&D activities have been approved must submit annual progress reports to the DSI, coinciding with its financial year-end tax reporting.
•  The company should keep records that support tax expenditure claims and progress with R&D.

If your company operates as a contractor in the construction industry, it is extremely beneficial to determine whether your projects and activities qualify for the R&D Tax Incentive.

Consult your tax practitioner for further information.

Reetesh Balgobind

Assistant Finance Manager

References

https://www.mondaq.com/southafrica/income-tax/1169148/reviewing-south-africa39s-research-and-development-rd39-tax-incentive-scheme, South Africa: Reviewing South Africa's Research And Development ("R&D') Tax Incentive Scheme, 08 March 2022, by Zanele Maringa and Khanyisa Cingo-Ngandu, SNG Grant Thornton

https://www.dst.gov.za/, Department Science and Innovation Republic of South Africa

https://www.sars.gov.za/businesses-and-employers/my-business-and-tax/research-and-development-incentive/ Research and Development Incentive, South African Revenue Services

https://www.taxincentive.co.za/, Vantage R&D Tax Incentive Consulting