Can I Charge Interest on Overdue Invoices?

Interest is not automatic

Unlike the United Kingdom, which has specific late-payment legislation, Australia has no general law granting you interest on late commercial invoices. If you want to charge interest, you need a contractual right to do so — most reliably a late-payment clause in your terms of trade, but a signed contract or an accepted quote that includes the clause will also do. Without one of these, there is simply no automatic entitlement to interest, however overdue the invoice becomes. This is general information, not legal advice.

The underlying logic is fair to both sides: a customer who pays 60 days late has effectively borrowed from you, interest-free, for two months, and a properly drafted interest clause corrects that imbalance. The catch is that the clause has to have been in place before the invoice issued — you cannot decide after the event that you are now owed interest the customer never agreed to.

Establish the right properly

Put a clear interest clause in your terms of trade and have the customer accept those terms before you extend any credit — that acceptance is what gives the clause its force. A typical clause states the rate that applies, confirms that interest accrues daily from the due date, and makes clear that no separate notice is required for it to start running. Repeat a short reference to the clause on each invoice so the customer is reminded it exists.

You do not have to draft this from scratch. You can generate suitable wording with our payment terms generator, then have it reviewed by an adviser if the amounts involved are significant enough to warrant it. Getting the clause right once, at the start, saves a great deal of argument later.

Simple or compound

Your clause should spell out whether interest is simple — charged only on the original principal — or compound, charged on the principal plus any interest that has already accrued. Simple interest is easier to calculate and to explain to a customer, and it is what most small businesses use. Compound interest accumulates faster and can be appropriate for long-overdue debts, but it must be clearly authorised by your terms, because charging it without that authority is not enforceable.

Whichever basis you choose, calculate the interest from the day after the due date — not from the date you first chased payment, and not from the day you happened to notice the invoice was overdue. The customer had until the due date to pay, so the clock only starts once that deadline has genuinely passed.

Tax and tone

Interest you receive on overdue invoices is taxable income and should be recorded as such — typically by issuing a separate invoice or debit note for it and accounting for it in your BAS. Treat it like any other income that comes into the business, not as a windfall to be left off the books; the obligation to declare it is the same as for any other receipt.

In practice, the real value of an interest clause is often as a deterrent rather than a revenue line. A simple statement that overdue amounts accrue interest encourages customers to pay on time in the first place. That gives you room to be pragmatic: you can choose not to actually invoice small, first-time delays from otherwise good customers, while reserving the right to charge for repeat offenders or serious, drawn-out cases where a firmer signal is warranted.