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Hello
Can anyone help explain to me how the tax shield was calculated in this question. I am having difficulty understanding how the subsidy comes into play here.
The way I understand it is that originally you had to pay 13 interest on the loan now you pay 6%.
So the tax benefit would be 6% x Loan amount x tax rate. The answer includes an amount for “Annual subsidy benefit” which confuses me since we already reduced the loan interest from 13% to 6%.
The logic is this:
If there was no subsidy, the benefit would be the tax saving at 30% on the full interest.
As it is, they are only getting the tax saving benefit on the lower interest actually paid.However the are also obviously getting the benefit of the subsidy, but losing the tax benefit that they would have had without the subsidy. So the overall benefit of the subsidy is only 70% of the interest they are saving.
@johnmoffat said:
The logic is this:If there was no subsidy, the benefit would be the tax saving at 30% on the full interest.
As it is, they are only getting the tax saving benefit on the lower interest actually paid.However the are also obviously getting the benefit of the subsidy, but losing the tax benefit that they would have had without the subsidy. So the overall benefit of the subsidy is only 70% of the interest they are saving.
Thanks, in the same question in year 1 there is a tax loss and we are told that tax losses can be carried forward shouldn’t they have carried the loss forward to offset taxable profits in years 2 and 3?
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