Two important incentives are set to be extended beyond their current sunset dates.
During the 2023 Budget Review, the minister of finance, Mr. Enoch Godongwana, confirmed that government proposes to extend the sunset clauses on both the Urban Development Zone (“UDZ”) incentive and the Research and Development (“R&D”) incentive.
The UDZ incentive will be extended by two years to 31 March 2025 until the review of the incentive is finalised, while the R&D incentive will be extended to 31 December 2033.
The current legislation only allows for the R&D allowance in respect of expenditure incurred in respect of R&D costs incurred before 31 December 2023. With the proposed extension, taxpayers would therefore be able to claim an R&D allowance for qualifying expenditure incurred up to 31 December 2033.
The extension of the sunset clauses is most certainly a welcome proposal.
It is further proposed that the definition of R&D be refined to simplify the approval application process for the incentive, which has proven to be a challenge up to now.
Also, in order to claim the R&D incentive currently, the qualifying expenditure has to be incurred after the approval application submission to the Department of Science and Technology. This has proven problematic as some R&D is required before a qualification assessment can be made and hence it is proposed that such expenditure, incurred up to six months prior to the application submission, also qualifies for the allowance.
The incentive was always intended to apply only to ‘activities aimed at resolving a scientific or technological uncertainty’. Treasury provides the example ‘if a professional with appropriate knowledge and skills could resolve the uncertainty without R&D, then the incentive may not apply’.
This could be a very subjective consideration. What would constitute an ‘uncertainty’ and what degree of knowledge and skill must be provided to a professional to be able to resolve this ‘uncertainty’? Without properly defining the concepts, the proposed changes can potentially cause unintended uncertainty and confusion.
On a more positive note, Treasury proposes, subject to meeting all the requirements, for the inclusion of R&D activities undertaken on internal processes to qualify for the allowance. This would allow a taxpayer to qualify for the incentive whether the taxpayer plans to use the R&D inhouse or selling it to another unconnected party.
We are hopeful that these proposals will blow new life into this important incentive at a time when South Africa is desperate for solutions.