Applicable Federal Rate (AFR) in 2025: What Australians Should Know

When it comes to international finance, even the most local investors can feel the ripple effects of changes happening abroad. One such force is the Applicable Federal Rate (AFR)—a term that regularly appears in US tax law but has growing relevance for Australians engaged in cross-border lending, global investments, or family loans involving US connections.

What Is the Applicable Federal Rate (AFR)?

The AFR is the minimum interest rate set by the US Internal Revenue Service (IRS) for private loans. Each month, the IRS publishes short-, mid-, and long-term AFRs, which are benchmarks for fair interest on loans between individuals, companies, or trusts. If a loan is made below the AFR, tax consequences may arise—typically imputing interest income to the lender.

While the AFR is a US-specific concept, it has practical consequences for Australians, especially in 2025 as global financial integration deepens and more Australians have exposure to US-based family trusts, inheritances, or business ventures.

Why Should Australians Care About the AFR?

• Cross-Border Loans: If you or your business are lending to or borrowing from US-based relatives, partners, or entities, the AFR can determine if your arrangement is considered ‘arm’s length’ for US tax purposes.

• Tax Planning: The Australian Taxation Office (ATO) expects international transactions to be at market value. When the US requires AFR compliance, it can affect the documentation and reporting obligations for Australian residents.

• Estate and Gift Tax: For Australians with US assets or beneficiaries, the AFR sets thresholds for tax-free gifts or loans, impacting family wealth transfers.

2025 AFR Trends and Global Interest Rate Movements

This year, AFRs have tracked the broader global trend of rising interest rates. In June 2025, the IRS set the mid-term AFR at 4.32% (compounded annually), the highest since the early 2010s. This is significant for Australians because:

• Family Loans: A loan to a US-resident child to buy a Sydney apartment must now carry a higher interest rate to avoid US tax complications.

• Business Funding: Cross-border investments or debt arrangements between Australian and US businesses are now more costly, impacting cash flow and tax deductions.

• Documentation: The ATO and IRS expect robust records proving that any intercompany or family loan meets the prevailing AFR—failure to comply risks audits or double taxation.

As central banks in both Australia and the US signal a cautious approach to rate cuts in 2025, expect the AFR to remain elevated compared to pre-pandemic years. This influences not just the cost of borrowing, but also the attractiveness of using loans versus outright gifts in family wealth strategies.

Practical Scenarios: AFR in Action for Australians

• Scenario 1: Lending to Family in the US Jane, an Australian expat, lends her brother in California $200,000 to start a business. She sets the interest rate at 2%. Because this is below the June 2025 mid-term AFR, the IRS may impute additional interest income, and Jane could face US tax filings—even as an Australian resident.

• Scenario 2: Australian Company Loans to US Subsidiary An Australian tech company provides working capital to its US subsidiary. If the interest rate is below the relevant AFR, the IRS can recharacterize the loan, triggering transfer pricing adjustments and potential double taxation.

• Scenario 3: Estate Planning with US-Based Assets A family trust with Australian and US beneficiaries plans to distribute assets. Loans to US beneficiaries must comply with AFR rates to avoid gift tax implications, requiring careful structuring and documentation on both sides of the Pacific.

Key Takeaways for Australians in 2025

• Monitor monthly AFR updates if you engage in cross-border lending or gifting involving the US.

• Ensure all loan agreements with US connections are at or above the relevant AFR to avoid adverse tax consequences.

• Consult up-to-date resources and consider how rising rates may impact your international financing and estate planning strategies in 2025.