Question 4

Liquid Research Ltd (LRL) conducts testing and research related to all forms of liquids. The company has a 31 March year end. In the 2019 year of assessment, LRL entered into a research and development contract with FIN Ltd, a financing group company of a major oil and gas group, to find more efficient ways to extract the potential gas supply at the groups Brulpadda site. As the gas supply is in deep waters which experience high seas and rough weather, the extraction mechanism must be resilient. The contract value is R100,000,000 with payment spread over two years. In addition, certain costs incurred by LRL are reimbursed by FIN Ltd, such as exploration visits to potential drilling locations. Costs reimbursed in the 2019 year of assessment amounted to R13,000,000. LRLs other costs in connection with the contract include the following: scientific staff at R20,000,000 per annum. research equipment at an initial investment of R19,000,000. administrative staff at a cost of R8,000,000 per annum; and quality control staff costs at R5,000,000 per annum. Both LRL and FIN Ltd are resident in South Africa. LRL is not connected to FIN Ltd or any other customer.

Required:

(a) Explain how the R100,000,000 contract income for Liquid Research Ltd (LRL) will be treated for tax purposes and whether any tax relief is available. (4 marks)

(b) Calculate the taxable income of LRL in respect of the contract with FIN Ltd for the 2019 year of assessment.