- by Justin Shein | Director, Catalyst Solutions
The 150% deduction on qualifying Section 11D expenditure is a meaningful tax reduction that is a result of research and development undertaken by a company. Once that expenditure has been properly identified, the benefit is often substantially larger than a company expects.
Claiming it happens in two stages, firstly, the DSTI approves the project , confirming the work qualifies as research and development. Once approved, the second step is the financial claim which forms part of the company’s tax return. As is standard with a tax deduction, the costs claimed must be correct, properly apportioned, and supported well enough to withstand a SARS audit.
The cost categories themselves are familiar to any finance team. What takes judgement is the line between expenditure that qualifies and expenditure that does not, often within a single project, and how shared costs are apportioned to the R&D. That is the work that ensures the claim is both maximised, as well as compliant with the Income Tax Act.
Companies ordinarily deduct their operating expenditure under section 11(a). Section 11D adds to that: once the DSTI approves a project, the qualifying expenditure attracts an additional 50% tax deduction, bringing the full deduction value to 150%, rather than the 100% that would ordinarily be deducted.
That additional 50% is the incentive. At the current 27% corporate rate, it equates to a 13.5% reduction in tax on the qualifying expenditure. On R1 million of qualifying R&D, the extra deduction is R500,000 and the tax saved is R135,000.
How that benefit reaches a company depends on its tax position. It can come through reduced provisional tax payments, a smaller final assessment, or a refund where provisional payments have exceeded the final liability. It holds value even where a company is in a loss position. Under the assessed loss rules which limit the utilisation of your brought forward assessed loss to 80% of the current year’s taxable income, the s11D deduction reduces current-year taxable income, and it increases the value of the assessed loss carried forward to future years.
The 150% deduction primarily applies to operational expenditure: the direct costs of the R&D, such as staff time, materials and consumables, and amounts paid to contractors. Specific requirements must be met for Capital expenditure to qualify. Capital spend on a pilot plant or prototype that is not intended for commercial use can fall within the qualifying expenditure, depending on the circumstances. It is one of several points where the treatment turns on the specifics of what was built and why.
The DSTI requires qualifying expenditure to be reported under four categories, the same four a company reports against in its annual progress reports once a project is approved.
The cost of the people doing the R&D: the time that engineers, scientists, developers, technical staff etc. spend on the qualifying work. For most companies this is the largest category, and the easiest to get wrong by overstating or understating how much of someone’s time was genuinely spent on qualifying R&D.
What gets used up in the R&D itself: the inputs consumed in building and testing, the materials that go into a prototype, the substances used in trials.
Qualifying work the company pays an external party to carry out. There are limits on what counts, and where the subcontractor is based affects whether the cost qualifies at all.
The shared, indirect costs that support the R&D without being incurred solely for it. Overheads are easy to underestimate, because a portion of this indirect expenditure can only be claimed once it has been tied to the qualifying work.
The categories themselves are not difficult to understand. Identifying which costs belong in them, and how much of each cost qualifies, is where the work sits. A R&D tax advisor will do this by working through a company’s financial records, trial balance, general ledger, payroll and timesheets where they exist, to find the qualifying costs and place them correctly.
It’s not often that R&D sits in a sealed-off part of a business. The engineers working on a qualifying project also handle production problems. The materials budget covers both experimental work and routine output. The overheads keep the whole operation running, not just the R&D. Very little of it arrives neatly labelled.
The qualifying expenditure must be separated out of costs that were never incurred solely for the R&D. How much of an engineer’s year went to the qualifying work? What proportion of a shared materials cost belonged to the trials rather than to production? Which overheads supported the project closely enough to be claimed at all? Each of these is a judgement, and each one must be defensible.
This is where claims go wrong in both directions. A company that takes a cautious view and claims only the costs it can see plainly leaves part of the benefit behind. A company that takes the whole project cost and works backwards arrives at a figure it cannot support when SARS asks how it was reached. The first understates the claim. The second creates an exposure that an audit can pick up after the return was filed, by which point the basis for the split is harder to reconstruct.
The figure that withstands a SARS audit is the one built from the records as the work happened, traced to the qualifying activity, and supported well enough to stand on its own when someone outside the business examines it. Getting there is less about knowing the categories than about knowing where the lines fall, and that is a matter of judgement applied to a specific set of accounts.
Some costs are excluded even when they were central to the R&D, and a claim that sweeps in the full project cost without accounting for them will not survive a SARS audit.
Interest and other financing costs are excluded. If a company borrows money to fund the R&D, the interest on that borrowing is a cost of the financing, not a cost of the R&D, and it cannot be claimed.
Capital expenditure is excluded from the 150% and is dealt with under its own provisions.
Subcontracted R&D carried out by a party based outside South Africa does not qualify. The incentive is aimed at R&D activity in the country, so the location of the subcontractor decides whether the cost is claimable, however integral the work was to the project.
The activity-level exclusions apply too: routine testing and quality control, market research and sales promotion, and work in the social sciences, arts and humanities all fall outside qualifying R&D.
The costs that catch companies out are the ones sitting close to the qualifying work without being part of it. A claim built on the whole project cost, rather than the part that qualifies, is one SARS can take apart when it asks how the figure was reached.
Section 11D is a lucrative tax incentive, designed to incentivise companies to take on the cost and risk of genuine research and development. A 13.5% saving on qualifying expenditure, on work a business is already funding, is a meaningful return, and for most companies the qualifying spend reaches further than they expect. Capturing that value depends on being clear about what qualifies and what doesn’t, and on apportioning shared costs in a way that can be supported.
Catalyst Solutions takes a compliance-first approach to claim maximisation. We identify everything that genuinely qualifies, trace each cost to the work behind it, and build the claim so it returns the full value of the R&D and answers SARS if the expenditure is ever reviewed.
If you are claiming under Section 11D, or want to know whether a claim already underway is being built to that standard, speak to the Catalyst Solutions team
Justin Shein CA(SA) CFA is a director of Catalyst Solutions and leads the firm’s financial and reporting team. A chartered accountant and CFA, his focus is on maximising claim value while managing compliance and risk across every submission. Every cost in a claim Catalyst Solutions builds has been traced, tested, and supported by the technical analysis behind it.
© 2026 Catalyst Solutions – Alle Rechte vorbehalten | Allgemeine Geschäftsbedingungen
