Tax incentives & savings: Opportunities in IP
How your technology-base is the key to substantial tax savings –
without having to change the way you do business
In these difficult economic times, there is increasing pressure to manage expenditure and improve cashflow. One way to accomplish this is by lowering your tax liability. While this might not be the most common way of achieving savings, the size of these savings make the idea well worth considering.
If a component of your business involves intellectual property ("IP"), or you've invested resources in the development or improvements of products & processes, you're likely to qualify for at least some tax incentives in a large basket of savings.
The Income Tax Act offers a number of IP-based tax deductions and allowances. You may be pleasantly surprised to see that what you're doing as part of your regular day-to-day activities might qualify for these deductions. These include:
• filing applications for trade marks, patents, designs or copyright – anywhere in the world;
• renewing any trade mark, patent or design registrations – again, anywhere in the world;
• acquiring any trade mark, patent, design or copyright;
• conducting research and development activities;
• paying license & royalty fees for the right to use any IP;
• making restraint of trade payments.
Each of these activities may give rise to a tax deduction or allowance, and it's often possible to claim a number of these deductions – simultaneously – in any one income tax return. The opportunity speaks for itself.
Since these savings all take the form of tax deductions and allowances, they are available automatically to taxpayers. This means that no formal application process is required before the savings can be utilised.
The Research & Development Tax Incentives
There is a pair of incentives that is particularly attractive, and deserves special mention. Section 11D of the Income Tax Act relates to research and development ("R&D") activities, and offers:
• a supercharged deduction of 150% of all qualifying R&D operating expenses. Essentially, for every R1m of qualifying spend, that amounts to R140,000
cashback benefit to you after tax; and
• an accelerated write-off period for qualifying capital expenditure for R&D. This allowance often amount to hundreds of thousands of Rands in tax savings
over other, conventional capital allowances.
More specific detail on the R&D incentives can be found here.
Risks & Other Important Considerations
The availability of these savings is certainly very welcome. However, there are a number of important aspects to bear in mind before claiming:
• each of the deductions and allowances has different legal requirements and peculiarities;
• each is available at different rates and over different time periods. It's extremely important to be aware of all the intricacies involved;
• well-prepared deductions demand a thorough assessment of both IP legislation and of the income tax legislation & guidelines;
• all sorts of limitations and technical exclusions are included in the legislation: claiming any deduction without knowledge & appreciation of these potentially
raises your risk exposure;
• a well-prepared claim is supported by well-prepared supporting evidence;
• certain incentives have unusual reporting requirements which must be met; and
• the legislation is extremely technical, and changes frequently.
When dealing with these sophisticated deductions and allowances, the need for skilled professional advice can't be overstated. This is an extremely important aspect of mitigating exposure to risk.
Some of these deductions are fairly closely-related to each other. For those taxpayers who already claim some IP-based tax deductions, it's often worth conducting a gap-analysis to assess whether the savings being claimed are optimal i.e.: whether other, more lucrative incentives shouldn't be claimed instead.
For more details on this topic, click here: IP-based Tax Incentives
If this has been of interest to you, and if we can be of assistance, you're very welcome to contact us.