Tax Implication For "Profits" On Grant Funded Research

Can you make a profit on grant funded research? The short answer to this question is a simple "yes". If your research project finances result in a profit then the South African Revenue Services will certainly be interested as to the amount involved. With the financial year ending for most individuals on the 28th February annually, it presents an opportune moment for researchers to reflect on the finances of their projects.   

While the idea of profiting from funded research might be strange or even offensive for some researchers, consider the following example: 

A researcher receives R200 000 funding for a research project from Funder A and another R150 000 from Funder B. The funds are transferred to the research institution which holds it in trust on behalf of the researcher. It is quite normal for the research institution to make a number of payments into the researcher's personal banking account until the full amount has been exhausted. Amounts received by the researcher will be regarded as taxable income by SARS under certain conditions (listed further below). 

Getting back to the original question, the R350 000 received by our researcher in the example is regarded as income. Any expenses incurred in the fulfilment of the research project fall under the expenses column of the project's income statement. A simple income-less-expenses exercise will indicate whether the project resulted in a profit or loss. If there are no expenses recorded (highly unlikely), then SARS will regard the full R350 000 as taxable income in the hands of the researcher. It is thus in the interest of the researcher to keep accurate records of all legitimate expenses incurred in pursuit of the research objective. 

More importantly, it is prudent for the researcher to employ full economic costing techniques to ensure that all costs are covered and to prevent hidden costs from slipping through the net. Full economic costing of research is defined in the Intellectual Property Rights from Publicly Funded Research and Development Act (Act No.51 of 2008. Section 15(4)b) as "…the full cost of undertaking research and development as determined in accordance with international financial reporting standards, and includes all applicable direct and indirect costs…". In short, it is the total cost of the research project. The higher this cost, the lower the "profit" on the project and consequently the income taxable by SARS. 

So what are the full economic costing techniques" Firstly the researcher must be aware of and cover all direct and indirect cost categories. Examples of direct cost categories include personnel costs, fringe benefits, equipment, materials and supplies, travel, communications and consultants. Examples of indirect costs include facilities fees and secretarial services. These categories may seem obvious to most, but it is surprising how many researchers do not account for fringe benefits paid to resources on their projects. 

Secondly, use an appropriate unit cost basis to calculate the total cost for an expense line item. Use hourly rates for consultancy fees and multiply by the number of hours to calculate the cost related to the procurement of consulting services. Similarly, use monthly rates for expenses such as rent and daily rates for per diem payable to resources. 

Lastly, employ good record keeping practices, retaining all tax invoices as proof of expenses incurred. It is a legal requirement and it goes a long way towards easing the burden at the time of tax return completion. 

As stated earlier, not all research funding is regarded as taxable income by SARS. The conditions under which a researcher will be exempt from paying taxes on funding received are listed below: 

  • It must be a bona fide bursary or scholarship - financial or similar assistance granted to enable a person to study at a recognised educational or research institution;
  • The recipient must agree to reimburse the funder for the scholarship or bursary if he or she fails to complete his or her studies for reasons other than death, ill-health or injury; and
  • The grant does not exceed R60 000 during the tax year. 

It should be noted that, as a general rule, research undertaken by a person for the benefit of another person, e.g. an employer, a business or sponsor, is not regarded as "studies”. Also, no services are required of the successful candidate in return for the grant, in which can it is viewed as employment. Funding of such research will not constitute a bona fide scholarship or bursary granted to enable or assist the researcher to study. Also, most institutions assist researchers in establishing whether their projects are exempted from income tax or not. 

What about research projects operating in a team context and where team members receive bursaries or scholarships as part of the research grant" In such cases the income is taxable or exempt from taxes in the hands of the individual recipients of the bursary or scholarship. Each individual case has to be tested against the conditions outlined above. 

Finally, while society generally profits from research, it is possible for a research grant to show a net profit based on funds received minus project expenses. Noting that this profit is taxable by SARS under certain conditions, it is incumbent on the researcher to ensure that all project costs are fully accounted for, thereby reducing the tax obligation. 

Note: This article is presented from a research funder perspective and does not serve income tax advice normally given by certified financial advisors. Please consult your financial advisor/institutional financial office for detailed direction regarding your research project's tax status.