How Much Can I Charge For Late Fees In Australia?

Updated on July 2 2024. This post has been updated to include new details. Originally posted in February 2022.

Overdue invoices pose a significant threat for Australian businesses, particularly those that fall into the category of SME (small-to-medium enterprises).

A recent study by Xero found that of 150,000 small businesses, 53% of all invoices were paid outside of the payment window.

On average, these invoices were paid 23 days late. With over half of invoices paid more than three weeks late, it’s a worrying time for Australian businesses.  

In Australia, a startling number of retailers close their doors each year due to cash flow problems. And let's be clear, poor cash flow doesn’t necessarily mean a lack of sales or clients.

The reality is that many businesses are bringing in more than enough total income, but the delays between invoicing and receiving payment can cause significant financial strain. While larger businesses have the resources to wait it out, one too many overdue invoices can spell bankruptcy for SMEs. 

Late payments not only have a financial impact on SMEs, but they also create many hidden costs, such as increased hours. Business owners, accounts receivable staff, bookkeepers and accountants around the country waste valuable time chasing late payments. 

Today, we’ll explore how charging late fees for overdue invoices can motivate your slow-moving clients to act and what you need to know about adding fees to your invoices. 

Please note that the information found in this blog serves to inform but does not constitute legal advice. For information specific to your industry, we recommend contacting a legal professional.

Is it legal to charge late fees in Australia?

Yes, businesses in Australia can charge fixed penalty late fees or interest on overdue invoices capped at around 10% annually.

We’ll break down how much you can charge in late fees shortly, but first, it’s important to stress that although businesses in Australia are legally entitled to charge a late fee, it’s not enforceable unless set criteria are met. 

Important: Your clients are only obligated to pay late fees charged on their invoices if they have previously agreed to your payment terms.

To make sure you’re in good legal standing and can enforce any late fees you charge, make sure you follow best practices for setting out your payment terms.  

What is the best practice for charging late fees?

Australia has a variety of best practices around overdue invoices and late fees, but specifically concerning contract terms, grace periods and when to charge (or waive) late fees.

Whether you’re a freelancer, SME or national organisation, these are a few of the best practices to follow:

Selecting reasonable contract terms

Perhaps the most important takeaway from this article is that in order to charge late fees, your payment terms must have been agreed to by your client. If you don’t already mention late fees in your payment terms, it’s too late to apply a fee to your existing invoices, but by putting new terms in place today, you can safeguard yourself in the future.

Tip: The easiest way to set payment terms is to include them in your contract when signing up new clients.

In order to charge late fees to existing clients who haven’t agreed to your new payment terms, you’ll need to send them your terms and have them agree either digitally or in writing. 

Read our Examples of Late Fee Policy Wording for more advice on this. 

Selecting a fair grace periods

In a tight-knit country like Australia, maintaining good relationships with your clients is essential. With that in mind, it’s usually considered best practice to pick up the phone and chase an overdue invoice before applying a late fee, especially if it’s the first time you’ll be charging it. 

In general, fixed penalty late fees can be applied the day an invoice becomes overdue, but it’s best practice to allow a grace period before applying interest.

Most legal experts recommend allowing 30 days of non-payment before interest is applied to the balance, but we recommend having a quick chat with a relevant lawyer in your state. 

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Waive the fees the first time as an act of goodwill

One thing you can be fairly certain of, is that when you first charge a late fee to a client’s invoice, they’ll get in touch.

Many clients become so used to paying late, they don’t think twice about the impact it has on other businesses, so getting a slap on the wrist oftens comes as a shock. 

Assuming they’re otherwise a good client and agree to rectify the oversight quickly, it’s good practice to waive any fees at this point.

This goodwill gesture keeps your relationship strong, and will often be the last time they get caught short. 

How much can I charge in Australia?

Now that we’ve covered some of the best practices around late fees let’s look at how much you can charge for late fees.

In Australia, you can charge a reasonable fixed penalty late fee or interest capped at around 10% annually (broken down to a monthly figure).

It’s best to start by keeping in mind that late fees are only there to encourage payment, not to generate any profit for your business.

So, when settling on a fixed late fee or interest amount, aim for a middle ground that will deter late payments without raising eyebrows. 

What late fee should I charge on low invoice balances

For balances that are lower than AUD $1000, it’s usually not worth charging interest on overdue invoices, but a fixed late fee instead.

Instead, for low invoice balances, we recommend setting a fixed late payment fee of approximately AUD $20-50 per invoice. 

What late fee should I charge on high invoice balances

For balances that are AUD $1000+, interest-based fees are the best way to encourage prompt payment. In Australia, late fee interest on overdue balances is capped at 10% per annum. 

To work out a monthly or daily interest rate, you can use online late fee calculators, but working out the percentage for each invoice is a long and drawn-out process.

In fact, the overly manual process is why many SMEs don’t routinely charge late fees - until now.  

How can I set up and automate late fees?

Late fees are a proven way to encourage the prompt payment of invoices, but over-stretched admin departments or accounts receivable teams seldom have the capacity to take on this extra work. 

Xero, which is one of Australia’s most used accounting software systems, lacks late fee automation completely, meaning you have to calculate and add each charge manually. Sounds like too much effort? We think so too. 

Paidnice is a Xero-compatible software plug-in that automates the entire late fee process. You have full control, with the flexibility to set fixed or interest-based fees and to group your clients based on payment terms or charge type. 

With minimal input and maximum output, Paidnice users get paid 40% faster than those using Xero alone. Here’s how it works:

How to setup and implement your late fees

Step 1. Work out the type of late fee you'll charge

Decide whether you’ll charge a fixed or interest-based late fee and at what rate you will set it at.

Step 2. Setup your late fee policy

Next, create a late payment policy and send it to your customers for them to agree to. For help with writing your policy, see our examples.

Step 3. Get started!

Then, implement your late fee policy by manually implementing your fee on overdue invoices each time they go overdue.

Optional: Automate your late fees with Paidnice!

Paidnice is a Xero app that will automatically detect when your invoices go overdue, and issue your customers a penalty, either a late fee or an interest charge, and either add this to your existing invoice as a line item, or issue a new invoice as a penalty.

Want to see Paidnice in action? Watch our tutorial video and learn more about getting started with Paidnice today. 

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Please note that the information found in this blog serves to inform but does not constitute legal advice. For information specific to your industry, we recommend contacting a legal professional.

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