SILICON CAPE

Software Development Incentives Discussion24 July 2012

Introduction: Catalyst Solutions

Catalyst is a boutique grants and incentives

consultancy offering a focused, efficient, value adding

service offering

• 13 years combined experience

• assisted clients to get access to various grants and

incentives in excess of R3bn

• Part of a global organization that focuses on cost

saving solutions

Grants and Incentives: Introduction

Tax Incentives

Cash Incentives

S11D R&D Tax

Incentive

S11D R&D Tax

Incentive

SPII

TIA

R&D

R&D Tax Incentive

“To raise new questions, new possibilities, to regard old problems from a new angle requires creative imagination and marks real advance in

science.”Albert Einstein

Section 11D R&D Tax Incentive: Background

• Enacted in 2007 - backdated to November 2006

• Introduced to increase the amount of R&D

expenditure in SA

• Target for GERD as percentage of GDP of 1%

by 2008

• In first 2 years of the incentive, 80 submissions

with approximately R900 million of R&D

expenditure

• New target has been set of 1.4% by 2015

• Hence the change in legislation

Section 11D R&D Tax Incentive: Current Incentive

• Section 11D(1) – Operational R&D Expenditure

• 150% tax deduction on expenditure directly

related to R&D

• Bottom line additional tax saving of 14% of

qualifying R&D costs

• Section 11D(2) – Capital R&D Expenditure

• Accelerated depreciation of 50/30/20

• New and unused

• Solely used for R&D

s11D: Current Incentive - Qualification Criteria

• R&D must be conducted in South Africa:

• In the production of income

• For the purpose of:

• Discovery of novel, practical and non

obvious information; or

• Devising, developing or creating

• Inventions - patentable

• Designs - registerable

• Computer programs

• Knowledge essential to the above

s11D: Current Incentive - Software Development

• All coding is copyrightable and therefore

qualifies

• Despite the act not requiring it, SARS does still

like to see an element of novelty

s11D: Current Incentive - Relevant Exclusions

• Any software developed for Management &

Internal Business Processes (MIBP) even if for sale to third parties. For example:

• HR Packages

• Accounting / ERP packages

• Administrative packages

• Time sheet software

• Sales or marketing promotion. For example:

• Website development

• Internet Sales Systems

s11D: Current Incentive - Qualifying Costs

• Any costs incurred directly in respect of R&D

activities.

For example:

• Payroll costs – Developers

• Sub-contractor costs

• Overheads

Excluded:

• Rental

• Finance Costs

s11D: Current Incentive - Funding Issues

• Funder of R&D can make the claim

• Fundee can make claim if the Funder is unable

to. I.e.:

• Financial Institutions

• Foreign Funding

• Government Grants = 2 x Grant is excluded

s11D: Current Incentive – Administrative Issues

• Statistical form submitted to DST

• Can reopen tax returns for 3 years from date of

assessment

s11D: New Legislation – Why The Change

• Increase utilization

• Clarification of grey areas

• Better control of incentive

• Allow for better budgeting by companies

s11D: New Legislation – Main Changes

• Implementation date: 1 October 2012

• Pre-approval process through DST

• Improvements of previous software now eligible

• Only companies can claim

• No longer the ‘funder’ who can make the claim,

but rather the company which ‘determines or

alters the methodology of research’

• Govt. Grant = only 1 times grant is excluded

• MIBP is allowed if for sale to third parties

Support Program for Industrial Innovation

“Never before in history has innovation offered promise of so much to so many in so short a time.”

Bill Gates

SPII: Basics

Support Program for Industrial Innovation (SPII)

Intended to promote technology development in SA

• Product Process Development (PPD) Scheme

• Matching Scheme

• Partnership Scheme

Applicable scheme is determined by the size of the

company and the funding required

SPII: Basics

• Taxable non-repayable cash grants of 50 - 75%

of qualifying costs incurred in ‘pre-competitive’

development activity

• Maximum grant = R5m

• Funding is provided on a per-project basis (only

1 project at a time)

• 2 – 3 months approval time

SPII: Qualification Criteria

• At the discretion of IDC (as opposed to s11D

which is law)

• Intended to lead to commercialization of the

developed product

• Major portion of the project must take place in

SA

• IP must remain in SA registered co. for 3 years

post development

• Cannot be developed for a single client

• Project must not be more than 50% complete

SPII: Qualification Criteria

What is the committee looking for?

1) Technological Innovation

2) Economic Merit – is the solution commercially

viable

3) Team capabilities – to perform the project

4) Financial Ability – to complete the project &

raise the rest of the finance

SPII: Technological Innovation - Software

• Global technological advance

• Functionally unique and advanced

• More efficient / lower cost / easier to use /

faster

• Innovation should be the result of technical

development

• New and unique product - attributes that

have never been seen before

• Enhancements – new features added so the

entire product is seen as innovative

SPII: Technological Innovation - Software

• Global technological advance (cont)

• Innovation that is not available in other

products on the market

• Integration may be innovative – if

components have never been combined

before and if it results in significant

functionality improvements not currently

available.

SPII: Technological Innovation - Software

• Only costs from commencement date

• Salary and Labour (timesheets)

• personnel directly involved

• Management costs – directly involved

(technically)

• Project Management

• Material

• Sub-contractors

Technology Innovation Agency

“I have not failed, I’ve just found 10,000 ways that wont work.”

Thomas A Edison

TIA: Basics

Technology Innovation Agency (TIA)

• Established in 2008

• Promote development of technology – ICT is a

focus sector

• From proof of concept to early commercialization

• Looking for ‘high social impact’ projects

TIA: Basics

3 main programs for commercial entities:

• Idea Development Fund

• Industry Matching Fund

• Equity Fund

Each deal is unique and is structured on an

individual basis

TIA: What’s available?

• Funding from R100k - R50m (matching finance)

• Repayable as a soft loan or royalty (from

revenues)

• Each deal is unique

• IRR required by TIA is dependent on social

impact

• No collateral required

• Access to TIA advisors incl. – Patenting /

Certification

TIA: Requirements

• Global Innovation

• Does not need to be radical or novel

• Must create a competitive advantage

• Must be a market need for the invention

• Majority local shareholding

• IP to remain in SA

Dov Paluch 011 555 8339082 773 7947dovp@catalystsolutions.co.za

Michael Wingrin011 555 8434072 297 3867

michaelw@catalystsolutions.co.za

www.catalystsolutions.co.za