The revamped R&D tax break: What your start-up needs to know

If you are a veritable fountain of ideas, you should be across the Federal Government’s R&D Tax Incentive, which returns up to 45 cents for every dollar spent on risky and experimental innovation.

Recently, the scheme was switched to a quarterly basis, with experts predicting that innovators should reap the benefits.

Last year 9,000 companies registered about $20 billion in R&D spending, according to AusIndustry general manager David Wilson, and the government provided about $1.8 billion in relief.

Big companies spent the most on R&D, while smaller companies made up the lion’s share of the numbers.

Wilson expects these numbers to increase as the 2012-13 financial year was the first year the government sweetened the R&D tax incentive for unprofitable small businesses with turnover under $20 million.

But, as is often the case, the devil is in the detail.

RSM Bird Cameron R&D adviser Stephen Carroll says that to access the quarterly credits companies must get a notification number from Innovation Australia.

This number is required to claim the quarterly credit and adds a significant burden to SME requirements.

“A company will still be required to make its annual R&D registration with AusIndustry and go through the existing registration and claim process,” Carroll says.

Additionally, first-time applicants can’t claim the quarterly credits in their first year, which is a huge disappointment for start-ups.

“The intention is to assist start-up business to access cashflow, but they are specifically excluded from the program,” he says.

So is the scheme really suited to start-ups? And how have innovators fared using the tax break up until now?

Achieving the impossible

Adioso co-founder Fenn Bailey is completing the R&D Tax Incentive application for 2012-13, after it successfully claimed a tax refund last year.

He and Tom Howard boast one of the few travel search websites powered by proprietary technology, distinguishing it from rest of the industry whose airfare search sites are powered by Google’s ITA software or the decades-old global distribution systems.

This seemingly impossible task – to develop a new technology for the travel industry – perfectly suits the R&D tax incentive reward of experimental and risky products.

“There’s no documentation as to whether it’s mathematically feasible to do what we’re trying to do,” according to Bailey.

“So we hit a lot of dead ends when we’re developing this sort of stuff, in terms of developing algorithms that are capable of answering the queries we’re trying to answer.”

One of those dead ends forced them to scrap an early version of the site, which couldn’t scale to handle their ambitious travel search goals – a search such as “Melbourne to Asia” for every flight ever scheduled and every combination of flight routes.

“I haven’t done the numbers recently but it’s in the realms of billions, if not trillions, of combinations that need to be evaluated to answer that question,” says Bailey.

“And our target is to be able to answer all search queries in under a second, so you need to be able evaluate a trillion combinations effectively in under a second.”

“A computer can’t do that naively by just considering all trillion combinations, so there’s some interesting algorithmic optimisations that allow that to be done to allow that to be feasibly answered in a reasonable amount of time.”