Tax boost for software developers

South African software developers can claim back 150% of research and development (R&D) expenses against tax, thanks to an amendment to the Income Tax Act that makes it easier to qualify for the break.

The change, which clarifies the previous position, is expected to stimulate local innovation and create jobs among SA's estimated more than 1 000 software development firms.

While the provision allowing claims against R&D has been in effect since 2007, it previously excluded software companies creating management or internal business software processes, such as accounting packages, explains Catalyst Research Solutions MD Dov Paluch.

Paluch says the Act was amended in January and companies creating code to sell can now benefit from the tax break. He explains that, normally, business expenses can be claimed back at 100%, but the law allows for a “supercharge” of 150%.

Based on a tax rate of 28%, this amounts to an additional cash benefit of 14% on qualifying R&D spending, says Paluch. He says this will benefit all software companies, as they can claim against staff, materials and overheads, which will hopefully spur on development.

Previously, claiming back on R&D was too complex, and many companies were not aware of the provision, says Paluch.

Paluch explains that government aims to improve the percentage of R&D spend from less than 1% of SA's gross domestic product to 1.5% by 2014. “It's all part of a push to move SA to a knowledge-based economy.”

However, tax deductions on R&D spend first need to be approved by the Department of Science and Technology (DST), says Paluch. Previously, this was left up to the South African Revenue Service, which is less technologically inclined, he adds.

From April this year, companies will be able to apply to the DST to have projects approved, says Paluch. He explains that they do not need to wait for approval before starting R&D as - if approved - expenses will be allowed from when the application is lodged with the department.

Finance minister Pravin Gordhan proposed recently that the DST lead the pre-approval process to “prevent other activities from being dressed-up as research and development solely for the tax benefit”.

Draft regulations clarifying the approval process should be issued within the next few weeks, says Paluch.

Clifford de Wit, Microsoft SA's development and platform director, says the incentive will stimulate the emerging economy and benefit start-up software developers, especially in the mobile space, which is characterised by small teams.

De Witt explains that smaller firms cannot afford to second staff to development when they need to bring in sales. However, the incentive will lower the barriers to entry and should result in more jobs being created for developers and other staff, such as administration and sales.

Currently, the ICT sector employs about 160 000 people across all fields, according to recent research from the Joburg Centre for Software Engineering and ITWeb Skills Survey.

Independent analyst Paul Booth applauds any initiative that encourages local software development, He adds that more clarity is required before the benefits will become clear, and the DST would need staff that can evaluate bids.

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