From 1 April 2012 Software Developers will be able to get a tax break of up to 150% on their income tax for “Research and Development”. This new tax break comes from an amendment to the Income Tax Act 58 0f 1962 that was promulgated (made law) on 10 January 2012.
So how does it work?
Basically you can deduct from your income (for tax purposes) a 100% any expenses that you have incurred solely for “research and development” provided that the expenditure was incurred in the production of income and in the carrying on of any trade.
What is important to note is the definition of “research and development”. The amendment defines research and development as:
(a) [the] systematic investigative or systematic experimental activities of which the result is uncertain for the purpose of—
(i) discovering non-obvious scientific or technological knowledge; or
(ii) creating—
(aa) an invention as defined in section 2 of the Patents Act, 1978 (Act No. 57 of 1978);
(bb) a design as defined in section 1 of the Designs Act, 1993 (Act No. 195 of 1993), that qualifies for registration under section 14 of that Act;
(cc) a computer program as defined in section 1 of the Copyright Act, 1978 (Act No. 98 of 1978); or
(dd) knowledge essential to the use of such invention, design or computer program; or
(b) developing or significantly improving any invention, design, computer program or knowledge contemplated in paragraph (a) if that development or improvement relates to any—
(i) new or improved function;
(ii) improvement of performance;
(iii) improvement of reliability; or
(iv) improvement of quality,
of that invention, design, computer program or knowledge.
In simple terms this means you can deduct any expenses you have incurred directly for the creating new software programs, or updating existing software provided you go on to sell that software or update. expenses would include things like:
- Staff salaries
- Licensing Fees, and
- Hardware
The Act however specifically excludes expenses incurred for :
- market research, market testing or sales promotion;
- administration, financing, compliance or similar expenditure;
- routine testing, analysis, collection of information or quality control in the normal course of business;
- development of internal business processes unless those internal business processes are mainly intended for sale or for granting the use or right of use or the grant of permission to use thereof;
- social science research, including the arts and humanities;
- the registration, creation or enhancement of trademarks or goodwill.
And the 150% ?
I mentioned previously that it was possible to obtain a 150% deduction. In order to get the extra 50% deduction you need to:
- Be a registered company or CC
- have your “research and development” approved by the Minister of Science and Technology
However you will only be able to claim the extra 50% deduction on any expenses from the date of application to the minister.
Can I claim this deduction for my current RnD ?
Unfortunately no. The Act is very explicit that you can only claim the refund for research and development expenses incurred after 1 April 2012. However if you have recurring licensing fees you will be able to deduct those in the future.
A Special Note for Game Developers
As I’ve mentioned before South Africa copyright law has treated “video games” as cinematographic films and not as computer programs, so ostensibly if the software you are developing is a “video game” then it looks as though you won’t be able to use the tax break as it only applies to “a computer program as defined in section 1 of the Copyright Act”. Do not despair though, even though the case serves as one interpretation of the law, at its core the case says that something can protected by under any of the categories for copyright, provided it simply meets the definition laid out by that category. It is an almost trite argument to say that video games of any nature, be they for console, PC or phone all meet the definition of a “computer program” as it is defined in the Copyright Act.
And no game devs, you will not be able to deduct the prices of games that you buy, even if it is for “research” purposes.
Going forward
Software developers need to jump on this opportunity to reduce their development costs. The Government hopes that this initiative will help develop the software development industry, and I’m almost sure it will.
