Quick fix for R&D tax relief

Amanda Visser

Johannesburg - The National Treasury has found a quick fix to assist taxpayers who have been prejudiced because of long delays with the approval of their research and development (R&D) projects.

Taxpayers, who have been denied tax deductions on their R&D projects because of the tax prescription rules, will now be able to reopen and amend their tax returns when they get approval after prescription.

Taxpayers have also been reassured by Treasury and the South African Revenue Service that the reopening of their tax returns will not trigger a wider audit that is not related to the R&D deduction.

Duane Newman, joint MD of Cova Advisory, says the continued disallowance of the deduction because of a tax technical prescription rule would further undermine the buy-in on the benefit.

“Once there is a disconnect between the tax incentive and the project, in terms of delays and complexities to navigate, it will become a self-fulfilling prophecy. The incentive will not have the impact on R&D the government anticipated.”

Although the quick fix to claim deductions has been welcomed by industry, the real elephant in the room remains.

The incentive has been in place for a decade, but a major policy change in 2012 introduced a pre-approval system where companies can only claim the 150 percent tax deduction for R&D expenses if they get approval from the Department of Science and Technology.

This introduced huge backlogs with companies waiting for more than three years to get approval. It has led to a dramatic drop-off in the number of claims.

Treasury reported a 70 percent reduction in R&D tax deduction claims in 2012/13, and 38 percent in 2013/14.

The government-industry task team, appointed last year by the minister of science and technology to recommend improvements blamed the administrative delays and backlogs associated with the pre-approval system.

As it is, the South African government is not topping the charts with its support for research and development. Government’s support amounts to 0.02 percent of gross domestic product (GDP). Russia is topping the charts with 0.4 percent of its GDP.


South Africa is the only jurisdiction in the world where one has to get approval to qualify for the benefit without having done the research yet.

Newman, who is also the chair of the South African Institute of Tax Professionals’ incentives committee, says most other countries have a preregistration process.

Companies register their projects and once the R&D is complete they can rely on the outcome to support their application for a tax deduction.

The preapproval system means companies basically have to determine the outcome of their projects before even embarking on the research.

“If you are unsuccessful and your project cannot be patented does this mean you are disqualified? This surely cannot be the intention of the legislation,” says Newman.

“We have been sitting with the preapproval system since 2012 and it is clearly not working. In my view it will be relatively simple to make legislative changes to fix that.”

The task team has recommended in its report to the minister that the preapproval system be reviewed to a more “refined retrospective method”.

“Such a new procedure would allow companies to register online to indicate that they intend undertaking R&D in the coming period, and then submit details of the R&D undertaken at year-end – at the claim stage. At the claim stage, the company would have most of the information required and it would be easier for the Department of Science and Technology to determine the eligibility of the activities,” the task team noted.

In Norway where there is a preregistration process 6,000 applications are being processed within six weeks. In Australia applicants have 10 months after their financial year end to submit retrospective claims to a division of the Department of Industry, Innovation, Science, Research and Tertiary Education.

The division undertakes a review of the claims on a sample basis meaning not all claims are reviewed.

Treasury last month held a workshop with industry players following the release of the task team report. It was noted during the workshop that the pre-approval process may be reviewed.

However, treasury noted that it wants to establish whether efforts already embarked upon by the science department will result in a “suitable level of efficiency” before redesigning the process and potentially causing more disruptions to the system.