Late Payment Fees in Australia: What You Need to Know

Late payments are one of the biggest headaches for Australian small businesses. According to the Australian Small Business and Family Enterprise Ombudsman, more than half of all invoices issued by small businesses are paid late. That is not just inconvenient. It is a threat to your survival.

One of the most common questions business owners ask is: "Can I charge a late payment fee?" The short answer is yes, you can. But there are rules, and getting them wrong can create more problems than it solves. This guide covers everything you need to know about late payment fees in Australia, from the legal framework to practical implementation.

Can you legally charge late fees in Australia?

Yes. There is no law in Australia that prohibits businesses from charging late payment fees on overdue invoices. However, for a late fee to be legally enforceable, it must meet certain conditions.

The fee must be agreed upon by both parties before the work begins. This means it needs to be stated clearly in your contract, terms of trade, or terms and conditions. Simply adding a "late fee may apply" line to the bottom of an invoice after the fact is not sufficient. The client must have had the opportunity to read and accept the terms before entering into the agreement.

The fee must also be a genuine pre-estimate of the loss you suffer from late payment. Under Australian Consumer Law (Competition and Consumer Act 2010), a penalty that is disproportionate to the actual loss can be struck down as an unfair contract term. This is the key legal concept that governs late fees in Australia.

What the law says

There are three main pieces of legislation that are relevant to late payment fees in Australia.

The Competition and Consumer Act 2010 (Cth). This is the primary consumer protection law in Australia. Schedule 2 of the Act, commonly known as the Australian Consumer Law, includes provisions on unfair contract terms. If your late fee is excessive or not a genuine estimate of your costs, it could be challenged as unfair. The key test is whether the term causes a significant imbalance in the parties' rights and obligations, and whether it is reasonably necessary to protect the legitimate interests of the party who would benefit from the term.

State and territory fair trading legislation. Each state has its own fair trading act that mirrors the federal law. For example, the Fair Trading Act 1987 (NSW) and the Australian Consumer Law and Fair Trading Act 2012 (Vic). These acts give state regulators the power to investigate and act on unfair contract terms within their jurisdiction.

Common law penalties doctrine. Even outside of statutory consumer law, Australian courts have long held that a contractual clause imposing a penalty for breach (rather than a genuine pre-estimate of loss) is unenforceable. This is known as the "penalty doctrine." In the landmark case of Andrews v ANZ Banking Group (2012), the High Court clarified that the doctrine applies broadly, not just to damages clauses but to any sum payable on breach of contract.

The practical takeaway is this: your late fee needs to reflect the genuine cost to your business of receiving payment late. Administrative costs, borrowing costs, and opportunity costs are all legitimate components. A flat fee that vastly exceeds these costs is unlikely to be enforceable.

How to set up fair late fees

Setting up late fees that are fair, enforceable, and effective is not complicated. Here is a practical framework that works for most Australian small businesses.

Choose your fee structure. Most businesses use either a flat fee (e.g. $25 per overdue invoice) or a percentage rate (e.g. 1.5% to 2% per month on the outstanding balance). Percentage rates are more common for larger invoice values, while flat fees work well for smaller, recurring invoices. Some businesses use a combination: a flat administrative fee plus interest on the outstanding amount.

Document it in your terms. Include the late fee clause in your standard terms and conditions, and make sure every client receives and accepts these terms before you start work. If you use contracts, include the clause there. If you use a proposal or quote, reference the terms and include a link. The client must have clear notice.

State it on every invoice. Every invoice you issue should include a line stating your late payment terms. For example: "A late payment fee of 2% per month applies to invoices not paid within 30 days of the due date." This serves as a reminder and reinforces the terms already agreed upon.

Be consistent. Apply the fee to every late invoice, not just some. If you selectively enforce late fees, it weakens your position and can create the impression that the fees are negotiable. Consistency also makes it feel less personal. It is a business policy, not a targeted decision.

Best practices for Australian businesses

Beyond the legal requirements, there are several best practices that make late fee policies more effective and better received by your clients.

Warn before you charge. Always send at least one reminder before applying a late fee. A client who receives a late fee without warning is a client who feels ambushed, even if the terms are in the contract. A simple email saying "Your invoice is now 7 days overdue. Please note that a late payment fee of 2% per month will apply from [date]" gives the client a chance to pay and preserves the relationship.

Keep the fee reasonable. A fee of 1.5% to 2% per month is standard in Australia and unlikely to be challenged. Anything above 3% per month starts to look punitive and could be questioned. If you charge a flat fee, keep it proportionate to the invoice value. A $50 late fee on a $200 invoice is disproportionate. A $25 fee on a $2,000 invoice is reasonable.

Automate the process. Manually tracking which invoices are late, calculating fees, and sending notices is time-consuming and error-prone. Use a tool like [ProductName] to automate the entire sequence, from the initial reminder to the late fee notice. This ensures consistency, saves time, and removes the emotional discomfort of personally chasing clients for money.

Consider waiving for good clients. Having a late fee policy does not mean you must apply it robotically. If a long-term client pays two days late for the first time, consider waiving the fee as a goodwill gesture. The policy serves as a deterrent. The fact that it exists is often enough to encourage prompt payment, even if you rarely need to enforce it.

Keep records. Document every late fee applied, every reminder sent, and every waiver granted. If a dispute ever arises, you need to show that your process is fair, consistent, and well-communicated. Good records also help you identify patterns. If a client is consistently paying late, it might be time for a different conversation about payment terms.

Late payment fees are not about punishing clients. They are about protecting your business. When implemented fairly and communicated clearly, they create a professional framework that encourages prompt payment and signals that you take your cash flow seriously.

Note: This article provides general information only and does not constitute legal advice. For advice specific to your situation, consult a qualified legal professional.