The formula for late payment interest is principal x interest rate x days overdue / 365. That gives you daily simple interest on an overdue invoice in Australia. For a $50,000 invoice overdue by 30 days at 12% per annum, the calculation is $50,000 x 0.12 x 30 / 365 = $493.15.
The formula itself is straightforward. What makes it harder in practice is knowing which rate to apply, whether to use simple or compound interest, and how different legal contexts change the calculation. An overdue trade invoice, a delayed property settlement, a construction progress claim, and a QCAT tribunal matter each follow different rules.
This guide covers the formula, the rates, and the worked examples for each scenario. If you want to skip straight to numbers, use our late payment interest calculator. For teams looking to reduce overdue invoices in the first place, AP automation can help by enforcing payment terms and tracking due dates automatically.
The Formula: Simple Interest vs Compound Interest
Simple interest
Simple interest charges a flat rate on the original principal for the entire overdue period. Most Australian commercial contracts use simple interest.
Formula: Interest = Principal x Annual Rate x Days Overdue / 365
Worked example: A wholesale distributor owes $82,500 on a 30-day trade credit invoice. The invoice is now 45 days overdue. The supplier’s terms specify 1.5% per month (18% per annum) on overdue amounts.
Interest = $82,500 x 0.18 x 45 / 365 = $1,830.82
Compound interest
Compound interest charges interest on both the original principal and any accumulated unpaid interest. It produces a higher total than simple interest over the same period. You can only charge compound interest if your contract explicitly states it.
Formula: Interest = Principal x (1 + Rate / n)^(n x t) - Principal
Where n is the compounding frequency per year and t is the time in years.
Worked example: Same $82,500 invoice, 18% per annum, 45 days overdue, compounded monthly (n = 12).
Interest = $82,500 x (1 + 0.18 / 12)^(12 x 45/365) - $82,500 = $1,853.77
The difference here is $22.95. Over longer periods, the gap widens significantly.
Side-by-side comparison
| Days overdue | Principal | Rate (p.a.) | Simple interest | Compound interest (monthly) | Difference |
|---|---|---|---|---|---|
| 30 | $82,500 | 18% | $1,220.55 | $1,228.64 | $8.09 |
| 60 | $82,500 | 18% | $2,441.10 | $2,472.38 | $31.28 |
| 90 | $82,500 | 18% | $3,661.64 | $3,731.52 | $69.88 |
| 120 | $82,500 | 18% | $4,882.19 | $5,006.37 | $124.18 |
| 180 | $82,500 | 18% | $7,323.29 | $7,600.22 | $276.93 |
At 180 days overdue, compound interest adds nearly $277 more than simple interest on the same principal. For businesses managing multiple overdue accounts, the method matters.
What Rate to Use
The rate depends on what your contract says. If the contract is silent, the options narrow.
Contractual rates
Most Australian trade credit agreements specify a late payment rate, typically as part of their net payment terms. Common rates for industrial and trade credit:
- 1% to 1.5% per month (12% to 18% p.a.) - typical for manufacturing, wholesale, and distribution
- 2% per month (24% p.a.) - sometimes seen in construction subcontracting; enforceability can be challenged if it’s disproportionate to actual loss
- Reserve Bank cash rate + margin - some contracts reference the RBA cash rate plus a fixed margin (e.g., RBA + 8%)
If your rate seems punitive, a court may reduce it under the penalty doctrine. A rate needs to be a genuine pre-estimate of loss, not a punishment. Rates above 24% per annum attract scrutiny.
ATO General Interest Charge (GIC)
The ATO’s general interest charge applies to late tax payments, but it’s also a useful commercial benchmark. The GIC rate is the 90-day bank-accepted bill rate plus 7 percentage points, updated quarterly.
As of Q2 2026, the GIC rate is 11.36% per annum (daily compounding).
Some contracts specify “the ATO GIC rate” as the applicable late payment rate. This has the advantage of being an objectively published, regularly updated figure that neither party sets.
No contractual rate
If your contract doesn’t specify a rate, you can still claim interest - but only if you pursue the debt through court or tribunal. The court will apply its own prescribed rate, which is typically lower than a commercial rate. In practice, this means businesses without a rate in their terms are claiming less interest than those who specified one upfront.
Include a late payment interest clause in every set of trading terms. It takes one sentence and it makes the rate enforceable. Our collection letter generator includes interest calculations based on your stated terms.
Settlement Penalty Interest on Property Transactions
When a property buyer or seller fails to complete settlement on the contracted date, the non-defaulting party can claim penalty interest for each day of delay. Each Australian state prescribes a default rate that applies unless the contract specifies otherwise.
State-by-state prescribed rates
| State/Territory | Prescribed rate (p.a.) | Governing legislation |
|---|---|---|
| NSW | 10% | Conveyancing Act 1919, s 55(1) |
| QLD | 10% | Property Law Act 1974, s 59 |
| VIC | 8% | Supreme Court Act 1986, s 60(1) |
| SA | 9% | Supreme Court Act 1935, s 30C |
| WA | 6% | Supreme Court Act 1935 (WA), s 32 |
| TAS | 6% | Supreme Court Civil Procedure Act 1932, s 34 |
| ACT | 8% | Court Procedures Act 2004, s 245 |
| NT | 4% above RBA cash rate | Supreme Court Act 1979, s 84 |
Worked example: Delayed settlement in Queensland
A buyer is purchasing an industrial warehouse in Brisbane for $1,450,000. Settlement is delayed by 14 days beyond the contracted date.
Interest = $1,450,000 x 0.10 x 14 / 365 = $5,561.64
The buyer owes $5,561.64 in settlement penalty interest to the vendor. This is calculated on the full unpaid purchase price, not just the deposit balance.
For the Northern Territory, the rate floats with the RBA cash rate. At a cash rate of 4.10%, the NT settlement penalty interest rate would be 8.10% per annum.
Construction Progress Claim Interest Under Security of Payment
Construction progress claims have their own interest rules under Security of Payment (SOP) legislation. When a principal or head contractor fails to pay an adjudicated amount, interest accrues at rates specified in each state’s SOP Act.
Key provisions by state
NSW - Building and Construction Industry Security of Payment Act 1999. Interest on unpaid progress claims runs at the rate prescribed in the regulations. The current prescribed rate is the Supreme Court rate (10% p.a.). Interest accrues from the due date for payment under the construction contract, or if no date is specified, from 10 business days after the payment claim is made.
QLD - Building Industry Fairness (Security of Payment) Act 2017. Interest on adjudicated amounts accrues at the penalty interest rate under the Penalties and Sentences Act 1992 (Qld), which is 5% per annum. Interest runs from the date the amount became payable.
VIC - Building and Construction Industry Security of Payment Act 2002. Interest on unpaid progress claims accrues at the penalty interest rate prescribed under the Penalty Interest Rates Act 1983, currently 10% per annum. Interest starts from the date the amount was due.
Worked example: Unpaid progress claim in NSW
A subcontractor submits a progress claim for $127,000 to a head contractor. The adjudicator determines $112,400 is payable. The head contractor pays 38 days after the due date.
Interest = $112,400 x 0.10 x 38 / 365 = $1,169.59
The subcontractor can claim $1,169.59 in interest in addition to the adjudicated amount.
If you’re preparing a progress claim, our progress claim generator produces claims that reference the applicable SOP Act provisions. For broader context on construction invoice processing, see our guide on construction bookkeeping and invoice controls.
QCAT and Tribunal Interest
The Queensland Civil and Administrative Tribunal (QCAT) applies the prescribed interest rate under the Penalties and Sentences Act 1992 (Qld): 5% per annum simple interest.
This rate applies to:
- Minor civil disputes (claims up to $25,000)
- Consumer and trader disputes
- Residential tenancy bond claims
- Minor debt recovery
How QCAT calculates interest
QCAT calculates interest from the date the cause of action arose (typically the invoice due date or the date the debt became payable) to the date of the tribunal’s order.
Worked example: A supplier files a QCAT claim for an unpaid invoice of $18,200. The invoice was due on 1 February 2026. QCAT hears the matter on 15 May 2026 - 103 days later.
Interest = $18,200 x 0.05 x 103 / 365 = $256.77
QCAT would order $18,200 + $256.77 = $18,456.77 if interest is awarded from the due date.
The 5% rate is notably lower than most commercial contract rates. A supplier with 18% per annum in their trading terms would have accrued $955.07 over the same period. The difference - $698.30 - is interest you miss out on when a contract doesn’t specify a rate and you rely on the tribunal’s prescribed rate instead.
Other state tribunals
NCAT (NSW) and VCAT (VIC) apply their respective Supreme Court prescribed rates (10% and 8% p.a.). The rate QCAT applies is among the lowest of any Australian tribunal.
Does GST Apply to Late Payment Interest?
No. Late payment interest is classified as a financial supply under Division 40 of A New Tax System (Goods and Services Tax) Act 1999. Financial supplies are input-taxed, which means:
- You do not charge GST on the interest amount
- You do not issue a tax invoice for the interest component
- The interest is reported separately from the taxable supply in your BAS
If you invoice a customer $500 for late payment interest, you invoice exactly $500. Not $550.
This applies regardless of whether the original supply (the goods or services that generated the overdue invoice) was a taxable supply. The interest is a separate supply with its own GST classification.
Practical note for AP teams: When recording late payment interest received, code it to an interest revenue account, not to the original sales revenue account. Mixing interest with taxable revenue creates BAS reconciliation errors.
When you’re dealing with disputed invoices where interest is also accruing, our invoice dispute letter generator helps structure the communication so both the principal amount and any interest claims are clearly separated.
Putting It Into Practice
For accounts payable teams processing high invoice volumes, tracking which invoices are overdue and calculating accrued interest manually is time-consuming and error-prone. The calculation itself is simple. Doing it across 200 invoices at different rates and different overdue periods is where mistakes happen.
Three practical steps:
- Set the rate in your trading terms. Every purchase order and supplier agreement should state the applicable late payment interest rate. Without it, you’re limited to prescribed rates that are almost always lower.
- Track the overdue date, not just the invoice date. Interest accrues from the due date, not the invoice date. A 30-day payment term on an invoice dated 1 March means interest starts on 31 March, not 1 March.
- Automate the calculation. Use our late payment interest calculator for individual invoices, or let Pulsify’s AP automation track overdue balances and calculate interest across your entire accounts payable ledger automatically. Pulsify’s validation and exception review also flags invoices with mismatched terms before they become overdue.
Sources: ATO - General Interest Charge rates · NSW Legislation - Building and Construction Industry Security of Payment Act 1999 · QLD Legislation - Building Industry Fairness (Security of Payment) Act 2017 · QLD Legislation - Penalties and Sentences Act 1992 · ATO - GST and Financial Supplies
Further reading: Late Payment Interest Calculator · Collection Letter Generator · Construction Bookkeeping in Australia: Invoice Controls